Good morning and welcome to the Newell Brands Third Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. The live webcast of this call is available at ir. newellbrands.com. I will now turn the call over to Sofya Tsinis, Vice President of Investor Relations. Ms. Tsinis, you may begin.

Thank you. Good morning, everyone. Welcome to Newell Brands third quarter earnings call. On the call with me today, are Ravi Saligram, our President and CEO, and Chris Peterson, our CFO and President, Business Operations. Before we begin, I'd like to inform you that during the course of today's call, we will be making forward-looking statements which involve risks and uncertainties. Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I'll refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q, and our SEC filings available in our Investor Relations website for further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those who referred to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures, and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables, as well as other material on Newell's Investor Relations website. Thank you. And now I'll turn the call over to Ravi.

Thank you, Sofya. Good morning, everyone. And welcome to our call. We delivered solid results in the third quarter, which reflects the effectiveness of our strategy, as well as the resilience and agility of our operating model and portfolio. Yesterday, core sales grew 15.2% versus 2020, as each business unit contributed to such a terrific outcome. Normalized operating profit improved over 21% and normalized earnings per share increased about 14%. We further strengthened our track record as the third quarter marks the 5th consecutive quarter of core sales growth and 6th straight quarter of domestic consumption growth for the Company. Core sales in the quarter increased 3.2%, driven by excellent performance across 5 business units: Writing, Baby, Home Appliances, Home Fragrance, and Outdoor & Recreation. This was no small feat. Given the difficult year-ago comparison of 7.2% core sales growth, which embedded a recovery across the majority of Newell's business. To normalize for pandemic related shifts, we think it's useful to compare this year's top-line to 2019. On a two-year stack basis, Newell's core sales grew low single digits in the third quarter. We also saw strong domestic consumption, relative to 2019 across each of our business units. A terrific results and a testament for the significant progress, that we've made in forging stronger relationships with shoppers, as the leveraged consumer insights and foresight, in new product launches. The resurgence in our writing business continues. Bradford's team has done a superb job during the important back-to-school season, with outstanding performance in consumption and share momentum as anticipated. Top-line trends moderated against elevated year-ago results in our food and commercial businesses. However, sales as well as domestic consumption for both business units remained about 2019 levels. Consumer behavior will undoubtedly evolve and categories will continue to normalize. But we believe that…

Thank you, Ravi. And good morning, everyone. During the third quarter, we delivered solid results as we continued to drive our strategy into action. Strong operational execution, coupled with financial discipline, enabled us to generate better than anticipated operating profits and sustained progress on the cash conversion cycle. We accomplished this in the context of a choppy operating environment as our teams did a terrific job navigating through a myriad of supply and logistical bottlenecks. Before getting into the details, I want to provide a little color on the current operating environment and proactive choices we are making. Similar to other companies, throughout the third quarter, we continued to experience significant inflation and supply chain disruption. Escalation in costs has been an ongoing dynamic throughout 2021. While inflationary pressures have been broad based, the largest impact for us has been around commodities, particularly resin, ocean freight, sourced finished goods, and labor. The expected headwind from inflation on 2021 cost of goods sold, is now forecast to be about $40 million worse, relative to our expectations last quarter. We currently expect inflation to represent 9% of our full year cost of goods sold, as compared to our expectation of about 3% at the start of the year. We have taken numerous actions to alleviate the headwind from inflation, including leaning in on our productivity initiatives, implementing price increases across all of our businesses with some announcing multiple rounds, continuing to exercise disciplined control over expenses, driving efficiency from promotional spend, and leveraging strong top-line growth. The full benefit from the mitigating actions to offset the unprecedented inflationary pressures will not flow through until next year given the timing lag on pricing. We do expect that Q3 represents the largest gap between the pricing and inflation impact to the P&L and expect…

Thank you. [Operator Instructions]. Will pause for just a moment to allow everyone an opportunity to signal for questions. Your first question comes from Bill Chappell with Truist Securities.

Thanks. Good morning.

Good morning, Bill.

Just a question on writing in particular. I mean, how that played versus your expectations in the quarter. whether there's still some carryover as you move in to next year. And how much that may be contributed to the upside. I know you had a muted outlook, we're really sure on the tail of back-to-school and back -to-office. So, any color there would be great.

Sure, Bill. Good morning. How are you? This is Ravi.

Hi, Ravi.

Look. I think writing performed very well. I think the big thing was we weren't sure when we went into their quarter, we knew we'd have a good back-to-school, but there were the worries about the Delta Variant. I think what became evident was, this is one of the issues keeping the schools open for impacts and learning was a fairly bipartisan view. So, we watch it, we can see that super majority of schools opened, and so that was great. But also, credit to our team, because they really hit the ball out of the park on merchandising, on e - commerce, on getting distribution, on innovation. They just had the whole package, and this is, as we have said before, one of the businesses. [Indiscernible], because we manufacture most of our products except for Dymo, which comes from China in Tennessee. And so, we were able to have good supply. So, I think that really helped. And this is still in the backdrop because we had expected maybe offices to start opening up, but because of Delta, they didn't as much. Despite all of that, the fact that the business did extremely well, I think it's positive and we're seeing that positive momentum continuing. We're very pleased. And yes, it did probably a bit better than our expectation. But look maybe not the highest margin business, we will take that any day.

Sure. No, absolutely. And then it can all not seem, in terms of supply chain, as -- I don't think you really said anything there, but as you looking on Home Appliances and getting things from Asia going into the holiday season, are you -- is it any concerns you don't have enough inventory for what looks to be a pretty strong upcoming holiday season? I know Home Fragrance, you make it all here, but thinking more of anything that you're bringing overseas.

Yeah. Bill, on that one, we're actually in very good shape. One of the things that we did early on when we saw the supply chain pressure starting to build, and particularly with ocean freight, is we adjusted our planning process to add expected lead time to the planning process. We did that probably about 6 months ago, 4 to 6 months ago. As a result, we early ordered a bunch of our top selling skus. That's why if you look at our balance sheet, part of the reason why our inventory levels are significantly higher than they were last year, and we've used cash to build inventories. So, we feel particularly in the appliance category, that we are well-positioned to meet strong demand from an inventory standpoint.

That's great. Thanks so much.

Thank you, Bill.

Your next question comes from Andrea Teixeira with JPMorgan.

Thank you. And I wanted to just go back to what you just said, Chris, on building inventory ahead of the holidays. And you had done it, I mean, a fantastic -- working some of getting market share in small appliances, but we also have to be cognizant of this cycle of these products, right? And some of these have been bought and I would say household penetration probably increased. I was wondering, what is your take on that and what are your customers saying in terms of demand ahead of the holiday? And I also wanted to double check when the cadence of pricing, and what is the carryover that you mentioned before into 2022. And you said that you want to take additional actions into 2022, so I'm hoping to see the cadence of your gross margin progression as we enter 2022.

Andrea, we'll split the question into 2 pieces. I'll have Chris answer the pricing piece and I'll just give you a view on appliances. Clearly, the number 1 business for us when you go into holiday, the Superbowl is for Home Fragrances. And we believe we are well poised on the Home Fragrance side, not that's all our customers, but also in our own retail stores. As far as small appliances go, they've been very -- I'm very pleased to see the progress, the team has been making, and that we've had so many quarters of growth, yes. Clearly, as we look down the future, you have to say, has there been some acceleration of consumer purchases. But having said that, I think there are several categories within appliances, and we're driving a lot of innovation. So, with the old Mr. Coffee Iced, we now have ice coffee pulp, we've got Hot and cold. So, we got a lot of new innovations coming into the market there, that will help us sell. We've actually brought in new users, so I think in the main, I feel we're in a good place, but the end of the day -- look, you have to view Newell not -- you can't look at it just as one particular business, but the entire portfolio. And that has been the beauty of how we manage the portfolio in entirety to work each quarter and to work the long term to say, how do you drive growth as a whole?

On the pricing front, let me try to provide a little bit of perspective. At this point, we have announced pricing on every single one of our business units. The inflation impact is affecting our business units a little bit differently. The two most significantly affected business units are the Commercial business and the Food business. And then there are other businesses like Writing and home fragrance, for example, that are much less affected by inflation. But everybody is affected. Because of that difference in terms of how the inflation is impacting the business units, and because the inflation picture has continued during the year to get significantly more of a headwind, we've announced pricing on different timings. And so, the first set of pricing broadly that we put into place -- went into place kind of in the April, May, June time period. The good news about that pricing is that pricing is now fully reflected in retails. And at least to date, we have not seen any negative reaction to consumer demand from the pricing that we put in so far. And so that -- we take that as a very positive sign. There is a second round of pricing, broadly, that's going into effect that we've already announced that largely is going into effect in either November or beginning of January. And so, when you look at the pricing impact in the P&L, the pricing impact in the P&L is going to get significantly bigger as we go forward sequentially from here. So, pricing will be a bigger help in Q4 than it was in Q3. In Q1 of next year, pricing should be largely implemented and will be a bigger help in Q1 of next year than it is in Q4 of this year. At the same time, inflation, we think Q3, if spot right -- if spot rates stay where they are, Inflation will have been the biggest impact for us in Q3 of this year, and will begin to mitigate as we lap base periods. So that gap if you will, between inflation pricing and productivity, we think Q3 was the biggest delta of that gap. And we think that gap starts to close, and reduce sequentially each quarter going forward.

That's great, super health focused on. Best of luck.

Your next question comes from Olivia Tong, with Raymond James.

Great. Thank you. Good morning. My question first around project of [Indiscernible]. I know this was planned before the global supply chain challenges start, but can you just talk about why now is the right time for presumably there likely be some disruption as you do switchovers and consolidate. So, continue to expand a little bit more on that and if you had to expand the plan more recently, given all the logistics challenges [Indiscernible]

Yeah. Let me try a couple of things. We kicked off project COVID about 10 or 11 months ago. We didn't announce it until Barclays, but we kicked it off 10 or 11 months ago. And the reason why we thought now is the right time, is because we've made a lot of progress on SKU rationalization. So, if you recall, at the end of 2018 when we started with the turnaround plan, the Company was trying to sell over a 100,000 SKUs. We've now reduced that through last year to 47,000. As of today, we're at 42,000 and we're on our way down to 30.000. And so, because we've taken that SKU count reduction out, and improve the fundamentals of the operation, we believe we're now at a point where we can take the next step, which is to go from 23 unique supply chains into a single integrated supply chain. We think this is going to allow us to move from shipping less than truckload shipments in small quantities, enforcing our retailers to order from us 23 different ways into the ability to order from us in a single way and ship full truckloads. From both a service and a cost stand point, we think that this is going to be a major step forward for the Company, and really leverage the scale of Newell going forward. Now, when we kicked project on and off, the supply chain constraints, were not how they are today. We kicked the project off without that external backdrop in place. I think the team has done a pretty amazing job of keeping on track. Unfortunately, we secured the two big new mixing distribution centers, prior to the current supply constrain dynamics. And so, we're monitoring it. We're going to be prudent on the implementation dates that we go and make sure that we execute the transition with excellence. But if anything, the savings from the project have only gotten bigger as transportation costs have gotten bigger. In fact, we think the project is likely going to generate more value to us today than when we first started the project 9 months ago or 10 months ago.

Chris, if I could add some context. Olivia, we have to think about the new journey. I've been here 2 years, Chris, close to 3. And we've embarked on -- we've started it as a turnaround, but we're really talking about a transformation of the Company in terms of capabilities and looking at the long term while making sure that the short-term is healthy. If you think about the first year, we spent a lot of time on stabilizing the organization, getting the culture, revving up the people, bringing the team in, the hybrid structure, etc. Next, our next phase was all about innovation, about brands, about e-commerce, and really getting the top-line, which is why you're seeing that momentum. The next one is really all about how do we get our gross margins and in addition to the pricing, the supply chain, whether it's automation or [Indiscernible] we think are critical because we have to be easier to do business with our customers. This has been going on for years and years. We have to make it easier for our side of the Company. With that -- and then the next one is, Button will be international. All of this is about a journey of driving shareholder value, and we obviously managed very carefully the execution of burden on our teams, and make sure that we don't slip up. But I think these have been managed to a good cadence. And we're very confident that all of these will go along quite well as we progress followed.

Very helpful, thanks. If I could just ask a follow-up on sales. So, you mentioned this in the first quarter where, every sub-segment was about 2019. Do you think this is the right base now off of which to grow over? Are there any comp issues that make this not the right way to think about it? Then just specifically for Q4, the sales outlook assumes a pretty big deceleration on the 2 years stack. Is this more the uncertainty in the environment, or on relative to success of recent pricing, or is there something else going into that?

Let me just give a quick view on that Olivia. First 2019 is a good where we think about that as pre-pandemic and that serves as a good guide. But over time, that will change. But 2009 [Indiscernible] good base. So having said that [Indiscernible] as we approach Q4 recognized couple of things. One is that we've had a Baby business that has just been growing, and has [Indiscernible], like in the teams. And for all the reasons I mentioned in the prepared remarks. But one of the things that's happened, the stimulus did end, and so -- and without a huge rise in birth rates, there's only so many how -- and there's a huge comp last year in the Q4, which is also very strong. So, we're -- the Baby business is comping very high on Q4, so that clearly -- we don't have that. We still have Writing, which is growing in pretty well and so far, the businesses. I think we shouldn't get hung up about any particular quarter or business because we've got puts and takes. The overall thing is -- what we're striving to do, Olivia, is to get to sustainable, profitable growth over time. And I really think that we're well on our way to do that.

The only thing I would add to that, Olivia is that last year in Q4, there was Amazon Prime Day, which moved to Q2 of this year. And so, we are in Q4 lapping the loss of Amazon Prime Day.

Thank you.

Your next question comes from Peter Grom with UBS.

Hey good morning, everyone.

Morning.

Just wanted to ask around the phasing of margin progression as we think about next year. Because when I look at the guidance, you are still kind of exiting this year with operating margins down north of 200 basis points year-over-year. Chris, like I totally understand the commentary that the pricing benefit productivity will ramp in Q1. But is it still fair to assume that you think margins will be under pressure in the first half of the year, and I guess going back to Ravi 's initial comments around 2022, being the year of margin expansion. How should we think about your ability, to hit your long-term target of 50 basis points for next year? Thanks.

Yeah. I think it's the time for the question. I think it's premature for us to give quarterly guidance for next year, but what I would say is that we certainly believe that next year is going to be a year of margin growth for the Company. And the reason for that is what I said earlier, which is a lot of the inflation impact that hit us this year, there's a timing lag between pricing and inflation. And even if you look at the 2 business units that we have suffered the most inflation, which are commercial and food. We're on [Indiscernible] accounting, which means in those businesses that the inflation hits us immediately, in those businesses, and those have been the two biggest impacts. We've probably taken the -- a big inflation impact from the move in resins already in the P&L. The lag and pricing create a drag in the short-term. But when we get into next year, we're expecting the benefit of carryover pricing plus productivity to be higher than the inflation impacts next year. If based on our current forecast, which is based on spot rates going forward. By the way, we are also -- as we think about the planning for next year, we're not assuming that inflation is going to be transitory. We're assuming that inflation is going to be significantly above normal next year. And we're building our plan assuming that and we're still confident despite that, that we're going to have significant margin growth next year.

[Indiscernible] one quick adds and Chris did a great job of giving you a view on that. When we started this process, I'm taking price increases stroke when way back when I think the whole world, including us, thought that inflation was going to be concentrate. So [Indiscernible] by initiative pricing moves we're more on that because we thought, hey, those productivity and pricing, we may not have tried to cover it. Over time as we've seen this will become very realistic, and now our pricing posture is very clear. We are going to recoup inflation and that stand continue introduce that in 2022. And so, I think that should give some reassurance on the margin front.

Great. Thanks.

Your next question comes from Chris Carey with Wells Fargo Securities.

Hi. I guess it's still morning on the East Coast, good morning. So just -- I just wanted to follow up on that pricing commentary, if I could. Pricing and productivity will be higher than your forecast for inflation next year, and you expect significant margin progression. When you say margin progression, you're speaking about the full-year, [Indiscernible] the cadence will grow over time. This is more just a clarification question that I have a follow-up.

Yeah, that's right. I think it's pretty mature for us to give quarterly guidance for next year, as we were just in the middle of our budget plan. But for the full year that's what we're expecting.

Okay. Alright. Thanks for that. And then it's connected to the prior questions, but I guess that historically, a criticism or perhaps an observation of the business is that it's quite disparate. Clearly, that's improved with SKU rationalization and some business es that have been sold. I guess with this Project Ovid is the idea that these businesses can all actually make sense together to create a more scaled, efficient platform, or the historically this combination of an [Indiscernible] and platform Company come together creating a more scaled organization that makes sense together over time, or are there still going to be decisions that need to occur over time about pruning and improving the portfolio, which I suppose is always an observation, but more in the context of the supply chain initiative that you're doing to try and create a more scaled organization of Walton I suppose.

Yeah. I think that's exactly the vision and it's well said in your question. If you look at our businesses, the 8 businesses we have today, the place where we have a lot of commonality is in the top retailers. And so, if you look at the top 4 retailers that the Company does business within the U.S. Walmart, Target, Amazon, and Costco. Those top 4 retailers are pretty consistent across every one of our business units. And the thing that's good about that is that's why this integrated supply chain network makes a lot of sense. Because we're shipping to the same customers, the same locations. And instead of forcing those retailers to give us 23 separate orders and then we ship from 23 locations and we have 23 invoices and we're shipping 23 small part -- less than truckload shipments, if we can have them give us one order on one set of terms and ship one full truck, that is a huge efficiency for both us and for the retailer, and I think it allows us to create a competitive advantage versus many of our sub scale competitors. So that's largely the thinking behind that. On the portfolio pruning point, I think we've been pretty consistent there. Which is why we think we've got strong organic growth opportunities, in both top and bottom line, and each of our business units. It doesn't mean that we're not going to do some portfolio moves in the future, but we're likely going to be more on the tuck-in, or acquisition or tuck-out divestiture side. We're going to be driven by a shareholder value creation, as we think about any portfolio moves. One connection that we think about it under pandemic has helped, that truly Newell is all about the home. Both indoors and outdoors of any products really cater to that. So, whether it is

the mom, whether it is the kitchen, there lot of connections. And we've just not -- in the past, there was more for holding Company approach, now we're really integrating the back-end that Chris said, but also the front. You'll see us do more connections between our brands, more promotional opportunities, because we think that there's a lot of connections, which we have just not exploited. And I think we're going to do that as we become more and more mature on the turnaround and go-forward.

Okay. Thanks so much.

Your next question comes from Kevin Grundy with Jefferies.

Great. Thanks. Morning everyone, two for me this morning, if I may, the first one on [Indiscernible] for Chris. Can you comment now on the margin in working capital opportunity there, but particularly within the context of what you've already outlined, Chris, so that will be the gross margin benchmarks and the overhead benchmarks, which in aggregate are some 500 to 700 basis points of opportunity. Can you just comment on, while [Indiscernible] be incremental to that, or do you see it more as an accelerant to reaching those targets over time? So that's the first question and then just the second question. I didn't hear any commentary, I guess on share repurchases. I think you guys have left the door open for that in the past. I think your updated thoughts to the board's updated thoughts there and whether Chris, the small tweak your capital structure target now down to 2.5 from 3 if that changes your thinking at all with respect to returning cash to shareholders. So, thank you for both of those.

Very good. Thanks, Kevin. So on [Indiscernible] certainly we expect [Indiscernible] to be a significant contributor to gross margin improvement. I think that we view it not incremental to the 3738 target that we had put out previously. I think we view it as a building block to getting to that target over time. On the overhead part, we do not expect [Indiscernible] to have a material impact on overhead. What I will say is that embedded in this year's guidance as a pretty significant overhead investment that we've made in the team and consulting costs, etc., for the [Indiscernible] project, but that's already embedded in our existing guidance. And when we actually complete the project, that cost will come out. And so eventually that sort of above the going costs that we've got built in this year on overhead is likely to go away as we get to 2023. On the share repurchase question, just to be clear. As I mentioned in the prepared remarks, we retired about 300 million Euro of debt in Q3. In Q4 we've called our June 22 notes of 250 million, which we expect to retire in Q4 of this year. As we go into next year, we do not expect any more reduction in the level of our gross debt. We think that as we move into next year, we're going to move to our leverage target through EBITDA growth, not through debt reduction. As a result, we think that as we move into next year, it's going to open up the opportunity for share repurchase, as we expect to generate more than enough cash to cover investment in the business, and the dividends fully and so we are moving into a period next year where the capital allocation begins to get freed up.

Very good. Very clear. Thank you, guys. Good luck.

The final question comes from Lauren Lieberman with Barclays.

Great. Thank you. And I just had one question on your relative competitive positioning because I think the fact that you were so forward thinking in building inventory ahead of the holiday season, knowing what you know about the length of your supply chain and ocean freight, etc. I was just curious how your in-stock positions are comparing in key categories to competitors. I know market share is a very tough thing to measure in a lot of Europe businesses. But just even qualitatively, how would you describe that environment, the degree to which you're picking up, whether it's share or it's already enhancing your relationship with retailers because of your service levels during the upcoming holiday season? Thanks.

I think -- let me give that a shot. I think it really varies, it's smaller one size fits all. Because despite building up the inventory for the businesses, where we're importing that has an impact, but I'll just tell you on shares. The Writing business as I mentioned, really big winner on the share from not distant fans but overall. We think throughout the year, this year, on a year-to-date basis, our Candle business, I hate to use the word saying has been on fire. But it's been doing amazingly well. we do believe that we're making a lot of traction. The Baby business, we've been gaining share. I think we've got different businesses where we are gaining share. And the -- but there's some businesses where the demand has been so high and unexpected that -- and also it depends on the price points we play at. Like in appliances, while we've had terrific growth, we operate more on the opening price points and so there were -- saw on a dollar basis. Even though we've had good growth, we may not be seeing the share improvement. I think it varies outdoor where we bring stuff. I mean, we're really pleased to see the good growth that is happening. And I think we're beginning to really get supply right. We had some issues during July, August, but I think we're now back on track there and the outdoor -- the beverage side, especially, we are getting back on track. I think it varies. Our Food business, some of the demand has been so high on things like Ball. Certainly, that has been a challenge for us. But Ball, that is really the very -- the -- it's got such a dominant share of that business. So that has…

That's great. Thank you for such a thorough and candid answer, have a great weekend.

You too Lauren.

Thank you, Lauren.

This concludes our call today. A replay of the call will be available later today on our website, ir. newellbrands.com. Thank you. You may now disconnect.