Newell Brands held its second quarter earnings conference call, during which Sofya Tsinis, the Vice President of Investor Relations, informed participants that forward-looking statements would be made. Chris Peterson, President and CEO, then took over the call, announcing that the company had met or exceeded all key metrics for the quarter.

In the first quarter, Newell experienced pressured top line results due to normalizing category trends, constrained consumer spending, and retailer inventory destocking. Despite this, operating margins, earnings per share, and cash flow exceeded expectations due to productivity initiatives and working capital reduction. Newell recently created and deployed a new corporate strategy with five key priorities for fiscal 2023 including improving operating cash flow, gross margin performance, and driving operational efficiencies. Project Phoenix is on track to deliver pre-tax savings upon its full implementation.

Newell is reducing its SKU count from over 100,000 to less than 25,000, transitioning to a new operating model and focusing on its top 25 brands and 10 countries. To support these changes, Newell is upgrading its consumer and customer understanding, innovation, brand building, brand communication and retail execution capabilities. They are also revamping their innovation process and focusing on fewer, bigger and longer lasting innovations.

Newell has implemented a project tiering system and biannual innovation process to drive alignment and prioritize resources, a centralized tracking system to enable multiyear technology platforms, a comprehensive brand management function, and an improved retail execution to pursue new distribution opportunities. Leadership has visited 6 of the top 10 countries to ensure the strategy is being executed, and they have revised their top line estimates for the second half of the year.

Newell is taking cautionary steps to adjust their financial modeling due to the resumption of student loan payments, revised shipping terms from major retail customers, and the bankruptcy of Buybuy Baby. They are continuing to work on inventory reduction and taking bold actions to drive stronger productivity in the supply chain by consolidating their supply chain into a centralized organization structure and benchmarking indirect overhead at key facilities to right size the company's manufacturing labor force.

The new CEO of Newell has thanked the employees for their strong endorsement of the new company strategy, which focuses on improving consumer-facing capabilities and investing in the most attractive value pools. The company is also working to optimize its plant network by transitioning to more regionalized multi-source plants with upgraded automation and digitization capabilities. Despite the current challenging macroeconomic backdrop, the company is confident in its ability to accelerate its financial performance over the long term.

In Q2, Newell's net sales contracted 13% and core sales declined 11.9%, but interventions to improve the underlying structural economics of the business and strengthen operating cash flow are working as intended. Gross margin and operating margin improved sequentially, but the normalized operating margin contracted 490 basis points year-over-year. Net interest expense increased and the effective tax rate was slightly lower, resulting in $0.24 normalized diluted earnings per share, better than the previously provided outlook of $0.10 to $0.18.

The planning team did a great job managing inventory levels and increasing fill rates, resulting in $277 million of positive operating cash flow year-to-date. The company's leverage has increased to 6.3x, but is expected to drop to 5x by the end of the year. However, sales compression and lower inventory levels will impact second half gross and operating margins, and the company is investing in capability building and brand support to implement and accelerate their new corporate strategy. For the third quarter, net sales are estimated to be between $2.11 and $2.16 billion with core sales down between 7% to 5%.

In the third quarter, gross margin is expected to be an inflection point due to productivity gains and pricing activity, while SG&A will be higher due to increased brand support and investments in data analytics and retail execution. Operating margin is expected to be in the range of 8.5%-9.4%. Interest expense is forecast to be higher year-over-year, while the full year normalized effective tax rate is expected to be close to zero. The full year normalized diluted earnings per share are now expected to be $0.80 to $0.90.

Newell Brands is expecting to see an improvement in their operating cash flow by more than $1 billion year-over-year, with free cash flow productivity comfortably above 100%. They anticipate top line pressures to persist throughout the year but expect their top line results to improve on a relative basis. They also expect to see a significant improvement in their normalized operating margin in the second half of the year, despite a $1.2 billion drop in net sales and a 20-25% drop in production volumes. These cost takeouts should provide positive financial leverage once the macroeconomic environment stabilizes.

Newell has identified a need for standardized processes and approaches to marketing, merchandizing, and other frontend capabilities in order to unlock the full potential of its portfolio of leading brands. This unified corporate strategy is based on a comprehensive companywide capability assessment and includes investments in marketing and merchandizing. The goal is to increase operating cash flow by at least $1 billion.

Mark Erceg explains that the company has seen pockets of good performance, such as growing market share on brands like Sharpie, Rubbermaid, Expo, and Crockpot. However, they are not growing market share broadly across the company due to a lack of capability in consumer and customer understanding, innovation, brand building, brand communication, and retail execution. He believes that if they can standardize and build this capability more broadly, they can have a meaningful inflection point in terms of sustainable top line growth. He then provides a breakdown of how the changes in terms with retailers in terms of inventory is negatively impacting the guidance for the top line for the year.

Chris Peterson discussed three factors that will lower sales in the back half of the year: student loan repayment, more conservative stance on discretionary products, and the direct import to domestic shift. Chris also mentioned that Buybuy Baby is a smaller factor. Bill Chappell then asked about gross margin, which has been showing sequential progress.

Mark Erceg explains that gross margin has improved from 27% in the first quarter to 29.8% in the most recent print. He is confident that the second half gross margin will be 300-400 basis points higher than the first half due to the fuel productivity program, consolidation of the supply chain, and DC consolidation. Inflation will be negative in the second half, and the four wall cost assessment will save an annualized $50 million.

Chris Peterson explains that the company is spending more money on A&P and is disproportionately focused on their leading brands. He believes they are well-positioned for the back-to-school season as customer service results have improved, core sales have increased, and their share of retailer assets is better than last year.

Chris Peterson answers a question from Olivia Tong about the company's focus on the top 25 brands out of 80, saying that they are de-prioritizing spending on the bottom 55. Andrea Teixeira then follows up with a question about divesting some of the brands and the writing category's immunity from retailer destocking and consumer discretionary pullback. Peterson responds that the writing category is much more normalized.

The company is confident that they will gain market share during the back-to-school period, depending on the projections. The 55 brand question, which represents 10% of sales and profits, will be divided into three categories. The largest bucket will be brands that will be supported less in terms of innovation resources. The second category will be brands that will be proactively discontinued. The third category will be brands that may be divested or licensed. M&A divestitures will not be a major strategy.

Chris Peterson and Andrea Teixeira discussed the potential headwinds from delisting or selling certain brands, with Peterson expecting low single digit headwinds. Peter Grom then asked for clarification on the implied operating margin expansion in the fourth quarter, with Peterson and Teixeira noting that they are optimistic about gross margin and that the exit rate could be ahead of the 12-18 month timeline they mentioned in June.

Mark Erceg explains that the company expects gross margin to increase sequentially throughout the year, with operating income percent of sales following along as well. The increase is due to fuel productivity efforts, pricing effects, normal business seasonality, and easier comps. Additionally, the company is making investments in talent upgrades, change management capabilities, process improvements, data and technology enhancements to further improve cost.

The company is planning to increase A&P spending by 50% in the second half of the year, with focus on their top 25 brands to offset any potential drag from smaller brands. The next 12 to 18 months will include external challenges such as inflation and destocking, but the company will be investing in capabilities and brand rationalization. Core sales will be below their evergreen target, but free cash will be at or above 100, and operating margin expansion is expected to reach the evergreen target of 50 basis points.

Chris Peterson of the company discussed the current visibility challenges due to the pandemic, inflation, and retailer inventory patterns, but noted that the company had hit its Q2 top line growth guidance. He also discussed the investments the company was making to increase marketing support and improve capabilities, such as bringing in new talent and changing leadership in the outdoor and recreation segment.

The speaker is asking about the company's long-term goal of 50 basis points of average margin expansion, as well as the necessary reinvestment in the business and the expected timeline for the completion of such investments. They are also interested in what the benchmark level of proper investment in the business should be in 2024.

Chris Peterson provides a few reasons why operating margins should be higher in 2024 than in 2023. These include inflation, fixed cost absorption, productivity, inventory levels, and retailer inventory destocking. He also believes that margins have potential for growth over the next three to five years.

Chris and Mark Erceg discussed how the company's strategy of developing category driving innovation for the MPP and HPP segments, as well as putting front-facing capabilities in place, will lead to better category growth, market share gains, and gross margin improvement. They also noted that the second half of the year will have a significantly higher gross margin, and that they have the opportunity to take out costs and increase A&P spending. This will allow them to monetize the business over time and expand their operating margins.

Chris Peterson explains that the company is in a turnaround situation and that the macro environment is a headwind, but that they are confident that the capability investments they are making in Project Phoenix will show up in the financial results two to three years from now. However, it is hard to predict exactly when the investments will start to show up.

The company is prioritizing cash flow and operating margin expansion as its top priorities in the next 12-18 months, with sales being a challenge. A scorecard and internal scorecard have been put together to track progress and communicate it to the public.

The company is accelerating its pace of change by taking on multiple capability improvement projects. These projects have different timelines and involve changing people, processes, and technology. The projects have been charted with aggressive timelines and owners.

Chris Peterson has stated that the strategy for Newell Brands has been set and now the focus is shifting to executing it. He explained that this requires communication of the strategy throughout the organization and ensuring that it is incorporated into individual work plans. This process will take time, but will ultimately change the direction of the enterprise.

The speaker is concluding the conversation and wishing everyone a good day.

This summary was generated with AI and may contain some inaccuracies.