The operator welcomes participants to the Newell Brands Third Quarter 2023 Earnings Conference Call and introduces the speakers, Chris Peterson and Mark Erceg. Sofya Tsinis, Vice President of Investor Relations, discusses forward-looking statements and non-GAAP financial measures. Chris Peterson then begins the call by acknowledging mixed results in the third quarter.

The company has made significant progress in delivering on their five priorities and implementing their new corporate strategy. However, they were disappointed with a 9.2% decline in core sales during the quarter. They have seen improvements in operating cash flow, gross margin, and organization design changes, and are on track to achieve savings and reduce SKU count. The new operating model is also in place and showing positive results.

In the third quarter, Newell has taken actions to right size its manufacturing labor force, resulting in $50 million in cost savings. The company continues to face challenges due to the macroeconomic environment, including soft demand for discretionary products and inflation. To address these challenges, Newell has developed a new strategy focused on improving consumer-facing capabilities and investing in top brands and markets. This strategy has been put into action since June.

Newell has made significant changes to their consumer insight function and innovation process, focusing on creating fewer, bigger, and more profitable innovations. They are also streamlining their brand portfolio and setting high performance standards for brand managers. Changes have been made to their marketing and digital organizations to improve decision-making and drive stronger purchase intent. Additionally, the sales team is focused on new business development while maintaining partnerships and increasing distribution with existing customers.

The leadership team at Newell has visited top countries and decided to bring in new talent for crucial roles. The back-to-school season saw a decline in categories where Newell competes, but some major brands gained market share. The company is already incorporating learnings from this season and plans to use leading brands to drive category growth next year. While there are parts of the portfolio where Newell is gaining share, overall sales performance is below target and the company is making changes to its front-end strategy.

The company is committed to returning to top line growth and has made progress in strengthening cash flow and improving gross margin. They are confident in their new strategy and believe it will improve the company's financial performance. The company has been focused on implementing changes to improve consumer-facing capabilities and harnessing the power of One Newell. Despite challenges, they remain confident in the company's future and thank their employees for their hard work and dedication. In the third quarter, net sales and core sales both declined by approximately 9% due to macroeconomic factors.

In the third quarter, Newell made positive strides in improving the company's financial performance. Gross margin increased by 170 basis points, driven by fuel productivity savings and pricing actions. However, operating margin decreased by 220 basis points due to higher incentive compensation charges. Net interest expense also increased, but a discrete tax benefit in the third quarter helped drive a significant upside in normalized earnings per share. The company also saw a strong improvement in operating cash flow compared to the same period last year, thanks to progress in inventory management.

The operating cash flow for Newell increased by $1.2 billion in the first nine months of 2023, thanks to the efforts of the planning, sourcing, and production teams. The company's leverage ratio improved in the third quarter and is expected to continue improving in the fourth quarter. The company is committed to achieving investment-grade status and targeting a leverage ratio of 2.5 times. The fourth quarter is projected to see a decline in net sales and core sales, but gross margin is expected to be higher due to targeted interventions. SG&A expenses are expected to decrease in dollar terms, but increase as a percentage of sales. The fourth quarter is expected to see a significant improvement in operating margin, with a forecasted growth of 50% compared to last year.

The company's forecast for the fourth quarter includes higher interest expense and a tax rate in the high-teens, resulting in a normalized earnings per share range of $0.15 to $0.20. For the full year, net sales are expected to be between $8.02 billion and $8.09 billion, with a core sales decline of 13%. The operating margin is expected to be 7% to 7.3%, with increased interest expense and a tax benefit in the teens. The company has raised its cash flow outlook for the year, with operating cash flow expected to be $800 million to $900 million. Next year, there is expected to be an improvement in the top line, but core sales are still expected to be down due to economic challenges and rebuilding of capabilities.

The company has provided a preliminary sales commentary that is consistent with previous statements, stating that core sales growth is expected to be below the evergreen target and that currency and brand exits may lower net sales. However, they also expect strong gross margin improvement and operating margin expansion due to productivity savings and other factors. Interest expense is expected to increase and there may be a higher effective tax rate, but cash remains a major focus for the company. The company is making progress on their new strategies and is delivering on their financial priorities for 2023 despite macro-driven pressures.

Newell's underlying structural economics are being strengthened, with gross margin expanding and operating cash flow improving. Despite a challenging macroeconomic environment, the company is focused on unlocking the full potential of its leading brands. In terms of managing the business, there is currently a focus on free cash flow and the balance sheet, but over time there may be a shift towards delivering earnings. The current performance is a result of decisions made in favor of the balance sheet and cash flow.

The company has made strategic choices to improve their financial performance, including reducing inventory and increasing gross margin. They have implemented a price increase for unprofitable businesses and are focused on improving consumer understanding, brand building, and innovation to drive market share growth. Their goal is to have a stronger portfolio of leading brands that will perform well in the future.

Chris Peterson, a representative from a company, discusses the decline in core sales and how it is affected by market contraction and retailer inventory actions. He also mentions that the company is investing in capabilities to improve this situation and expects it to turn into a positive in the next 12-24 months. He also mentions that the category growth dynamic is hard to predict, but that retailer inventory destocking is mostly over. A question is asked about growing share, to which Peterson responds that it is not enough to grow share in a declining category and that the company is considering selling some businesses.

The speaker discusses the company's strategy of divesting certain brands and SKUs in order to improve profitability. They mention that they have already divested 80 brands and have made progress in streamlining their supply chain and back office. They believe that they are the best owners of the remaining brands in their portfolio.

The company is considering breaking up its portfolio to unlock value, but believes that the costs and tax implications would outweigh any potential benefits. They plan to prioritize their top 25 brands, which represent 90% of sales and profits, and have already reduced the number of brands from 80 to 60. This is being done by converting shelf space from smaller brands to larger, more profitable ones. The company is working on a plan to continue reducing the number of brands over time. The analyst asks about the recent cuts to the company's top line and the company explains that their outlook has changed.

The speaker discusses the challenges of forecasting in the current volatile macro environment and explains the various changes and projects the company has implemented to improve its capabilities for when the market turns. They acknowledge the difficulty in predicting post-pandemic recovery but believe it is necessary to make these changes in order to be prepared for a better macro environment in the future.

The company acknowledges that the current macro environment is difficult to forecast, but they are still moving forward with their business plans and initiatives to improve capabilities. These initiatives were determined through a comprehensive capability assessment and have not changed since they were announced in June. The company believes that these actions are necessary regardless of the macro environment. In regards to the Writing instruments category, the company has seen low to mid-single-digit growth in the past, but the pandemic has affected this trend. As things return to normal, the company is evaluating whether this category will continue to have mid-single-digit growth or if it has become more mature.

The speaker discusses the growth of a particular category and predicts that it will continue to grow at a low-single-digit rate. They also mention the expected margin expansion for the following year, which is expected to be substantial due to improvements in gross margin and fuel productivity savings.

The company's strong financial performance is attributed to the decisions made in Project Phoenix, including restructuring the supply chain and procurement processes. This has led to opportunities for growth, as evidenced by the expected increase in gross margin and operating margin in the fourth quarter. The weaker third quarter was mainly due to market contraction and trade destocking, with September being the weakest month. The company expects to continue making progress in gross margin next year and anticipates meeting or exceeding their target of a 50 basis point increase in operating margin.

The company's sales in the first part of October are in line with their fourth quarter guidance. The core sales in Q3 were down by 9%, and for Q4, they are expected to be down between 14% and 11%. This is due to the continuing market contraction, trade destocking, and a 1 point share loss. However, the company took pricing action on 07/01, which may result in a loss of 1-2 points of distribution in Q4.

The company is currently experiencing economic indifference due to poor structural economics and pricing actions. They are making tough decisions now to set themselves up for success in 2024, which may result in less deep discount promotions in the fourth quarter. The company expects to see top line growth in 2025 due to their multiyear strategy and capability improvement actions.

The speaker expresses satisfaction with the progress made in the last four months since announcing the strategy. They acknowledge the current market contraction and retail inventory actions, but believe they will improve in the future. They predict a decline in core sales next year, but expect it to be better than this year. They also mention plans to discontinue, license, or sell some of the 20 brands they will lose by the end of the year.

The company is focused on cash flow and has reached a sale agreement for a brand in Italy. They are committed to maintaining a 30-35% dividend payout ratio and have paid down a significant amount of debt. They expect to have drawn down inventory by $1 billion by the end of the year and have incurred inflation costs due to inventory costing methods.

The company has been facing challenges due to high inflation rates, which led to the suspension of inflation charges into their inventory balance. They have been bleeding out this value over the past three quarters, resulting in a decline in cash and gross margin. However, the company feels confident about their cash position and is making difficult decisions to set the business up for success in the future. They plan to invest in innovation to drive sales recovery and are focusing on back-to-school categories. The recovery path for different businesses within the company may vary, with some recovering faster than others.

The company is making significant changes to their front-end capability in order to drive market growth and share gains. This includes implementing an innovation process, brand management structure, new selling capability, and measurement system. They are also focusing on pillars of competitive advantage and have set KPIs across the front end of the organization. These changes are expected to improve distribution, retail execution, and value for their products in the market.

The company's new innovation ideas will take 18 to 24 months before they are ready to launch. Some improvements, such as new distribution opportunities, can happen faster. The turnaround strategy will take 4 to 6 quarters to come together. The capability of each business unit varies, with some starting from a strong position and others needing more improvement. The Writing business is an example of a strong business, while the Outdoor & Rec business needs more work. The company is also reducing money-losing promotions, which will result in a 2 point decrease in the fourth quarter. The analyst asks about the company's dialogue with retailers.

The company has had successful meetings with top retailers and their relationships have significantly improved due to the implementation of Ovid and simplification work. They now interface with retailers using one legal entity and vendor number, and have improved their shipping methods. Retailers recognize the improvements and want the company to succeed.

The speaker discusses the company's efforts to improve their structural economics and how they have open dialogues with retail customers to avoid surprising them. They also mention that their largest customers are supportive of these changes. The speaker then answers a question about inventory levels, stating that they measure weeks of coverage at top retailers and have seen a decrease in weeks of cover, indicating that they are at the tail end of inventory reductions. The speaker also mentions that delivery times have improved, allowing for even lower weeks of cover. The final question is about pricing and the speaker mentions that their price actions were justified and that competitors may not have followed suit.

The speaker responds to a question about the potential for further inventory reduction due to decreasing consumption. They also mention that they have led pricing in their market but are monitoring instances where competition has not followed suit. The conference call ends with a reminder of the replay availability on the company's website.

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