Good morning, and welcome to Newell Brands' First Quarter 2024 Earnings Conference Call. [Operator Instructions] Today's conference call is being recorded. A live webcast of this call is available at ir.newellbrands.com. I will now turn the call over to Sofya Tsinis, VP of Investor Relations. Ms. Tsinis, you may begin.

Thank you. Good morning, everyone. Welcome to Newell Brands' First Quarter Earnings Call. On the call with me today are Chris Peterson, our President and CEO; and Mark Erceg, our CFO. Before we begin, I'd like to inform you that during the core 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 refer you to the cautionary language and risk factors available in our earnings release our Form 10-K, Form 10-Q and other SEC filings available on our Investor Relations website for a 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 we refer 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 that were furnished to the SEC. Thank you. And now I'll turn the call over to Chris.

Thank you, Sofya. Good morning, everyone, and welcome to our first quarter call. Newell's turnaround gained momentum during the first quarter with results ahead of plan across all key metrics. Core sales performance improved sequentially and versus year ago, gross margin increased for the third consecutive quarter. Normalized operating margin nearly doubled with normalized EBITDA growing over 30% and we meaningfully increased operating cash flow. We made excellent progress on the 5 major operational and financial priorities that we established for the year. First, during the quarter, we operationalized the new operating model and continue to execute our strategy, which focuses on disproportionately investing in innovation, brand building and go-to-market excellence in our largest and most profitable brands and markets while driving further standardization and scale efficiencies across the supply chain and back-office functions. We are seeing stronger cross-functional partnerships, which enable more agile and efficient decision-making, streamlined ways of working and a greater sense of ownership and accountability from Newell's teams, all of which are critical to our transition to a high performing, innovative and inclusive organization. Second, during the quarter, Newell's top line performance improved sequentially as core sales declined 4.7% versus 9.3% in the fourth quarter with 3 businesses: Baby, Writing and Commercial returning to core sales growth. We are seeing green shoots from the decisive actions we are taking to strengthen Newell's front-end commercial capabilities as we are beginning to bring consumer-driven innovation to market. The new business development team is gaining momentum and the international business is outpacing North America. Let me provide you with a few tangible examples on these 3 elements. Upgrading Newell's consumer insights function to unlock actionable insights and proprietary consumer understanding so that we can develop and launch superior new product innovation has been an integral area of focus for…

Thanks, Chris, and good morning, everyone. While we're still writing the first several chapters of Newell's turnaround story, we're pleased to report that core sales, normalized operating margin and normalized earnings per share were all better than the guidance we provided on our fourth quarter call. We believe this is further evidence that the interventions being made to operationalize Newell's new corporate strategy and improve the structural economics of the business are beginning to take hold. Core sales at minus 4.7% represented a nearly 50% improvement on a run rate basis when compared to a 9% decline in the back half of 2023 and was the best core sales performance posted since the second quarter of 2022. As expected, pricing in international markets particularly Latin America, which was largely in response to currency movements in inflation was a meaningful contributor to core sales performance. Investments in Newell's front-end commercial capabilities, particularly innovation and the new business development as well as the more streamlined organizational structure following our organizational realignment also positively contributed to the company's top and bottom line results. A 3% headwind from currency, largely driven by hyperinflationary conditions in Argentina accounts for most of the difference between core and net sales, which contracted 8% year-over-year to $1.7 billion. We offset the bulk of this currency headwind with pricing in the market. Perhaps even more encouraging than the sequential improvement in Newell's core sales trend the 410 and 220 basis point expansion in normalized gross margin and normalized operating margin versus a year ago to 31.2% and 4.6%, respectively. This was the third consecutive quarter of normalized gross margin improvement and the second straight quarter of normalized operating margin expansion year-over-year. Savings from best-in-class productivity, Project Phoenix and organizational realignment along with favorable mix and pricing were the largest…

[Operator Instructions] Our first question comes from Lauren Lieberman with Barclays.

I wanted to ask about outdoor & rec. I feel like we're always asking about this division, but it seems to get worse and worse. And I know that this business probably started from the lowest point and had the most work to do. But I was curious if you could maybe give us a bit of an update on portfolio work, how much of that is kind of driving the drawdown that we're seeing in the core sales? And when we can start to think about the business stabilizing and being from a point at which you can grow.

Thanks, Lauren. Yes, as we've said in prior quarters, each of our business units was starting from a different starting point. And as we did the capability assessment and put the new strategy in place, we have created a consistent end point that we're trying to achieve relative to the front-end commercial capabilities. The largest gap from the starting point to that endpoint was and continues to be in the Outdoor & Recreation business. To that end, we've made a number of choices in the Outdoor & Recreation business to improve that business over time. So as an example, on the Coleman business, we have pivoted our focus from exclusively focusing on camping to now focusing on outdoor activities, which is a significantly bigger addressable market than narrowly focusing on camping. On the beverage business, we have pivoted our focus from focusing primarily on thermal to focusing on hydration, which again is a significantly bigger part of the market. We have also turned over the entire leadership team of the Outdoor & Recreation business starting with a new segment CEO, who we hired Nico a few months ago, including the entire marketing department, the sales department, the R&D team and the finance leader. And we now have what I believe is a terrific team on the field. We were starting from an innovation pipeline that really was vacant of anything meaningful. We now have an innovation pipeline that we're pretty excited about that we're working on. Most of that innovation is slated to come to market in 2025. So we do have a little bit of time until it will show up in the market. We have begun to show some of that innovation to top retailers and are getting very strong feedback from the direction that we're taking. So although the outdoor & rec business currently is the laggard in the portfolio, we are very optimistic about the future of this business because the trends from a consumer standpoint to spend more time outdoors are certainly over time in our favor, and we believe that we're on the right course to get this business corrected over time.

Great. That's super helpful. And if I can sneak in one more. So just looking back, and I know we're now it feels like things are inflecting, and like Mark, you pointed out the gross margin progression in the last couple of quarters. But in '22, you took down guidance a few times. Same thing happened last year, usually comes kind of mid-year. Just sitting here right now, I'm curious what you'd say is different about your degree of visibility or planning so that you feel more confident presumably in the outlook today than kind of what's happened in the last 2 years.

Yes. I think the biggest difference is that we unveiled a new strategy in June of last year that was fundamentally different than what the company was doing previously across a whole variety of levels. And if you look at the results that we're delivering this quarter and that we've delivered since we unveiled that strategy, we've seen a significant positive inflection in the areas of gross margin, operating margin and cash flow. And we're starting to see improvement in the rate of core sales. Each quarter, the rate of core sales has gotten better over the last 3 or 4 quarters since we put the strategy in place. There is still more work to do. We're very encouraged by the start that we're off to in the first quarter. It came in above, as we mentioned, above our expectations on really all of the key metrics, but we're being prudent in our outlook because the first quarter is our seasonally smallest quarter. I think the external environment that we're facing, as I mentioned in the prepared remarks, is about what we expected when we gave guidance for the year. So we expected the market this year in our categories to be down low single digits. And I think our outlook on that has not changed as we sit here today versus what we thought 3 months ago.

And the one thing I would add is just from a planning standpoint, we put a lot of additional processes in place. So we now have very detailed sales walk bridges on every single business that we review regularly that goes down over the course of the entire year. We've centralized more of our customer teams and have a very rigorous catchball process back and forth between those customer teams and the business teams. We've been using more system structures like Anaplan and other things to help us as it relates to that. And then the work that we've been doing with brand P&L is in place and put brand managers in place who are accountable for their brands results are also driving a lot more accountability through the entire forecast process.

Our next question comes from Bill Chappell with Truist Securities.

On the 3 businesses that have returned to growth. Can you give us some more color, I mean, in terms of -- do you think that's here to stay as we go through this year? Or was that more of a kind of a timing of comps? How are the categories faring? Are they growing as well? Or is it more of just kind of shelf space distribution gains? Just any more color kind of on the 3 businesses that are at least [indiscernible].

Yes, sure. Yes. So let me take them each in turn. So the Writing business, we feel the Writing business, we are set up for market share gains this year. driven by the strong innovation. I went through in the prepared remarks with Sharpie Creative Markers and Paper Mate InkJoy Gel Bright! pens. We also are doing a lot of base marketing work. So for example, we've done a Sharpie Rookie of the Year, which is sort of timely last night was the NFL draft. We had 2 of our spokespeople, Michael Penix, Jr. and Rome Odunze were drafted #8 and 9 in the first round. They both are going to use Sharpies to sign their contracts and we're activating marketing against that, which is fantastic. And so we feel like as we head into the back-to-school season, we're well positioned from a sell-in for the back-to-school season on writing to gain market share have a lot of activity going on not just from a marketing, but from a go-to-market and a new distribution standpoint in that business. So I expect that we will grow that business this year even if the market is likely to be closer to flat. On the Baby business, I also think that business is positioned for growth this year. We have a stronger innovation funnel planned for the back half of this year. We have a lot of momentum from new distribution and we are lapping a challenging base period from last year with buybuyBaby having gone out of business. And then on the commercial business, that business is also going sort of from strength to strength. We've got some good innovation on that business. It's hard to say on any given quarter, will that be growing or slightly declining, but we feel like that business also is positioned well for consistent growth over time. So that's sort of a quick run-through of the 3 business units.

No, that's helpful. And it's obviously getting a lot more, but I guess, two, just maybe would you say all 3 of those categories are the categories are healthy again and then on the cash flow, I understand that you're just kind of maintaining guidance across the board. But is it safe to say that there is some upside potential to your cash flow forecast for this year? Or had you always expected to be I guess, cash flow positive or this cash flow positive in the first quarter?

Yes. So cash flow came in significantly better than we expected in the first quarter. We were planning for a cash conversion cycle improvement, but we did better than we expected, and it was largely working capital driven. We do think that there is potential for upside to our cash forecast versus the guidance that we put out. But given that it's early in the year, we didn't want to change the guidance at this point. We think we're being prudent but we certainly are driving a stretch plan that is higher than what our guidance is. We want to get further in the year before we look to adjust that guidance. And then on the categories, to your point, I think writing and commercial categories are relatively flat at this point. Baby is still a bit of a headwind from a consumer offtake standpoint, but we are doing better, I think, from a selling perspective.

Our next question comes from Andrea Teixeira with JPMorgan.

Chris, I think you spoke a little bit of the outdoor, but if you can also talk about consumption trends within your low single-digit category decline outlook, right? And now talking about more of the negative impact that you saw in kitchen and home fragrance, which offset the commercial solutions side and the positive performance there. When should you think this business could potentially inflect either by having the easier comps as you called out, for example, for Baby. Now you've been in a very long journey of SKU rationalization? Or you'd think that it's a category that given the COVID bump, you're still going to see tough comps as we navigate through 2024. And that is the main assumption that you're seeing within or if you can explain to us how much of that overall low single-digit category growth -- I'm sorry, category decline, how much of decline you're expecting this business to have from a category standpoint?

Yes. So let me try to parse that out. So if you look at our expectation for the year of the categories in total, in which we compete to be down low single digit. That is relatively consistent in each of the 4 quarters this year. So we are expecting the categories to decline. They declined in the first quarter. We expect them to decline in Q2 and Q3 and Q4. And we're not expecting the categories to return to growth in any of the 4 quarters this year as a starting point. That being said, we are expecting our core sales to improve in the back half of this year versus the front half of this year. And that's largely as a result of the front-end capabilities coming online. I mentioned the first of our 8 Tier 1 and Tier 2 initiatives that we've launched, which was the Writing one in my prepared remarks. We have a number of the other 7 that are launching in the back half across other businesses, and many of those are launching in the kitchen business specifically. So I'm expecting that the kitchen business trend will improve in the back half of this year versus the front half of this year, driven by capability investments and innovation launches that we expect in the back half. I think the home fragrance business will see. The big quarter there is the holiday period. We're a little bit away from the holiday period. So I don't want to guide specifically on that. But we are working on innovation in that business as well. And we've got a lot of good things happening on new -- from the new business development team there as we head towards later in the year.

And Chris, if I can just pick back on what you just said. Is there any, I think, way or perhaps getting some of these brands, you called out, of course, exiting some of these businesses from a basically organic standpoint, just not investing as much. But is there any way you can perhaps monetize some of these brands? Or that's wishful thinking at this point, you would have to -- you're happy with having those businesses, they are as you already took out a lot of SKUs and rationalized your commercial campaigns on those?

Yes. So just on that, maybe a couple of statistics to help. When we put our strategy in place in June of last year, recall that we said we were going to focus on the top 25 brands out of at the time, 80 brands that we were selling. In those top 25 brands, we said accounted for about 90% of the company's sales and profits. As we sit here today, we have already rationalized about 20 tail brands. So we now are operating with about 60 brands down from 80. So that is a good thing because the quality of our portfolio is getting stronger as we sort of reduce these tail brands. The second thing I would say is we -- when we gave guidance for this year, we purposely walked away from structurally unattractive parts of the business, which we said was going to account for about a 2-point headwind to core sales growth. Most of the -- that 2-point headwind is a little bit more front half loaded than it is back-half loaded because some of those businesses we walked away from -- we walked away from last year, and we will begin to annualize that. And so that is embedded in our guidance. And that's one of the reasons why you see our core sales trend. I'm saying our core sales trend is going to improve in the second half versus the front half. It's also one of the reasons why you see our gross margin inflecting so positively because we're driving mix improvement across the portfolio. So I think as we go forward, one of the big tenets of the strategy was to fundamentally improve the quality of the portfolio by reducing the number of tail brands and reducing the amount of business that we were operating in that was structurally unattractive. And I think we're making good progress on both fronts.

Our next question comes from Peter Grom with UBS.

I actually just wanted to follow up on that. Just considering that you expect sequential improvement in the back half versus the first half? And just kind of looking at the performance in the first half, that's largely within kind of the guidance range for the full year, which I think is different than what we were all expecting. Are you expecting less sequential improvement versus maybe what was contemplated in the original guidance? Or do you feel like you have greater visibility in hitting the higher end today? And then just maybe a follow-up. Apologies if I missed this, but sometimes you can have some timing-related shifts as it relates to back-to-school between 2Q and 3Q. So can you maybe just remind us what's kind of contemplated in the 2Q guidance at this point?

Yes. So the Q2 guidance, you're right that on back-to-school, there can be timing shifts between Q2 and Q3, depending on when retailers want to take the back-to-school set. What's contemplated in the guidance is really not a significant change versus the timing of shipments in total last year. So there is no timing shift that's contemplated in the guidance. Although there are some retailers that are taking inventory a little later and some that are taking inventory a little earlier, they effectively offset and are relatively neutral year-on-year is what we believe is going to be the case as we sit here today. On your first question, you're right that we did better on core sales in the first quarter versus our outlook, and that was largely driven by the new business development activity which came in higher than we expected relative to sell-in and sell-through as a result of that new business development activity. I think we're not changing our outlook really for Q2. We -- or for the back half of the year, we just think because it's a seasonally smallest quarter of the year, it's prudent at this point not to change the year outlook. But we are still committed to core sales improvement in the back half of the year versus the front half of the year.

And I think it's fair to say, based on the guidance we provided for Q2, that we expect Q2 from a core sales standpoint to look roughly similar to Q1, right, so it's really kind of more of a step-up when you think about the second half versus the first half as it relates to the current fiscal year.

Our next question comes from Olivia Tong with Raymond James.

Just continuing on sort of the outlook and your level of visibility into the rest of the year given that the Q2 guide calls for declines to accelerate again after decelerating this quarter -- sort of getting under all the commentary so far. If I remember correctly, some of the new product launches are usually skewed towards Q2 to Q3. And then you've discussed pricing as well in learning and development. So it's not something we talk about frequently, but maybe can you talk a little bit about pricing plans for the year or 2, given that call out on the Writing division and the growth in that division. So 2 questions. One around the cadence of the year and then also on pricing.

Let me try to take pricing first. So we are pricing -- 2 things. We have a little bit of carryover pricing from the pricing action that we took in the U.S. from July 1 last year to address the structural structurally unattractive parts of our portfolio that is providing a benefit in the U.S. in the front half of this year from a pricing perspective, from a carryover standpoint. We are not planning and have not announced major new pricing actions this year. Although we still are experiencing sort of low single-digit input cost inflation, largely driven by labor, overhead and resin primarily. In the international markets, it's a bit of a different story. We have seen FX -- the FX headwind and step up. And we're now expecting in our guidance about a 3-point headwind from foreign -- 2- to 3-point headwind from foreign exchange because of the strength of the U.S. dollar in a number of countries around the world. And as a result, we are taking pricing in some of the international markets to offset that FX headwind. And that is new pricing. In the first quarter, I think pricing was about a 3-point contribution to core sales growth in total and we expect it to be probably a 2- to 3-point impact as we go through the year.

And then as it relates to your first portion of the question, I mean I think you saw that we guided core sales for Q2 to be somewhere between minus 6% and minus 4% decline. We basically just posed at minus 4.7% in Q1. So effectively, it's exactly the same. As far as getting within that a little bit more, the only real differential is we still expect gross margin to move forward meaningfully in the second quarter. But unlike the first quarter, there's going to be a few additional items coming into play. A&P spending is something that we believe we need to increase, right? So you're going to see a meaningful increase in A&P spending in the second quarter as we get support behind all those innovations that Chris alluded to. We're also comping a base period on the overhead side, where there was a significant lower revision for the management incentive cost. So those are the 2 reasons why we're guiding to a much lower normalized operating margin progression in Q2 versus the 220 basis points we put on the board in Q1 despite gross margin being very strong in both quarters.

Our next question comes from Chris Carey with Wells Fargo.

I'm going to use the visibility word, again, I apologize, but maybe from a little bit of a different angle. So you've said in recent public remarks that one of the challenges has been -- or had been that there was a pull forward of demand during COVID of categories that might have 3, 4-year purchase cycles and that getting beyond that dynamic has been a challenge for top line. It's also been a challenge for inventories at retail. I fully appreciate the comments around improve execution behind a refresh strategy and that seems to be coming through. What are you seeing from this purchase cycle dynamic? Are you seeing a return of consumers to these more durable, long purchase cycle category yet? And secondly, what are you seeing from an inventory standpoint at retail in these categories? Is inventory finally at a point where you can call your shots a little bit better from a shipment standpoint. So any comments on the sort of purchase cycle dynamics in some of these categories and perhaps relate that to where you see inventory and how that's helping visibility.

Yes. Good question, and it's one that we ask ourselves continuously. Let me start with -- from a retail inventory perspective, we believe that retail inventories are rightsized. So we're not seeing any significant impact from retail inventory changes to our top line, and we don't expect any significant retail inventory headwinds or tailwinds as we go through the balance of the year. So that dynamic, I think, is now no longer a major driver of our top line performance. On the other 2 drivers, which are pull forward in long purchase cycle categories, we do believe that in some of our categories, that is still with us, it's hard to parse out how much is that driving the category dynamic versus how much is pressure on the consumer from inflation in food, housing and energy which is putting pressure on discretionary spending driving the category dynamic. I think both of those are factors that are driving our outlook for the categories to be down low single digits. And as I said, our forecast for the year effectively assumes that down low single digit is true in each of the 4 quarters. The good news is we are seeing that begin to stabilize. It's not bouncing around the way that it was over the last couple of years. And so we're monitoring it, but it's hard to parse those 2 out from each other.

Okay. That makes sense. One follow-up. One of your strategies to improving gross margins over the longer term, obviously, includes productivity and operational execution. But one is also, I guess, prioritizing medium price point and high price point offerings, your point just there on the consumer, are you starting to see any consumption challenges to that strategy today or perhaps we're just too early in the importance of that part of the gross margin strategy over time. And today is actually much more about the first phases of execution on gross margin. So just that balancing like a premiumization strategy with what we're seeing in the macro.

Yes. I think the -- so actually, if anything, we're seeing more encouragement for that premiumization strategy. If you think about the Sharpie Creative Markers and the Paper Mate InkJoy Bright!, those are MPP/HPP products, but they represent a terrific consumer value. And so the thing that we're focused on is innovating in those spaces with proprietary technology and have it via a terrific consumer value because most of the products that we sell are not large cash outlay products and can represent a superior consumer value even in the MPP/HPP space which enables us to have a much higher gross margin, which enables us to spend advertising dollars behind those innovations and enables us to mix the whole company up. And if you look at our starting point in many of the categories in which we compete, we have a lot of room to move higher and still represent a superior consumer value. So that's what we're seeing so far. If you look at the year of creativity launch that I referenced, the gross margin on those products, which are now in the top 3 selling SKUs in the Writing category is ahead of the Writing gross margin and almost double what the company gross margin is, and so it's a material improvement when we get it right, and that's what we're working on across the innovation portfolio, which if we get right, I think, has a long runway for us to really improve the margins in this business going forward.

Our next question comes from Filippo Falorni with Citi.

I wanted to ask question on the cost environment. We've seen reinflation in some commodities, particularly the oil complex, the resins, can you remind us what are your expectations for cost inflation, particularly as you get into the second half? And also any sense of your hedging and how much visibility you have in the cost outlook?

I would say that right now, we continue to expect low single-digit inflation. That is pretty much balanced throughout the quarters of the year as we sit here today. One of the things that we haven't talked as much about today is just the fabulous work that our supply chain organization is doing on cost takeout. If you look from 2019 to 2022, as an example, they were taking out roughly 3% of COGS each year. With Phoenix, we centralized the supply chain, and that brought everything under the auspices of a world-class supply chain organization that had been built up over that course of time. We also took the procurement organization and took certain businesses like kitchen and outdoor & rec that had otherwise been kind of managed on their own and Centralized that as well. So with those movements, we've now seen our cost takeout or roughly 3% from '19 to '22 to 6% if you look at last year and this year. So we've literally doubled the rate of cost takeout from some of those moves that we've affected. So we feel really, really good about where we are from a cost standpoint. The teams are doing a fabulous work. And right now, we see that low single-digit inflationary environment across our collective pools.

Got it. That's helpful, Mark. And then if I could follow up, Chris, you mentioned there's no plan for further price increases in the U.S. granted the international market is still pricing, but what are you seeing from a pricing environment in the U.S.? Are you seeing some competitors increased promotional activity? And any sense from a retailer feedback, any pushback on potentially lower pricing or increasing promotional activity would be helpful.

Yes. I think what we're hearing from retailers is they're asking us about, hey, is there a chance to roll back pricing and that type of thing. And our response has been that we're still seeing inflation in low single digits. And so we've generally said we're going to offset that low single-digit inflation with the productivity that Mark just talked about, which more than offsets it. But our plan is not to reduce prices in the market. We have not seen the promotional pressure really ramp up or change meaningfully this year versus last year. There are some categories that you might see us move one way or the other relative to that. But when you look at the company as a whole, I would say there's not really that much of a movement in pricing in the U.S. market. We are absorbing that low single-digit inflation this year without pricing for it, but we're more than offsetting it with productivity with the mix benefit that I talked about and with the carryover inflation from last year.

Our last question comes from Brian McNamara with Canaccord Genuity.

Chris, we're coming up on a year since you took over as CEO, a very busy year at that. And I'm curious your opinion of the progress the company has made relative to your initial expectations last May. Where is the company today relative to where you thought you'd be at this point? And what's been easier or harder to accomplish in implementing your new strategy?

Yes. Thanks, Brian. I would say we've had 3 quarters since I've come in and we've reconstituted the leadership team. During that period of time, we completed the full capability assessment as we've talked -- we rolled out a new strategy last June. We've cascaded that strategy to each of the different business units, each of the brands, each of the geographies. We've now built that strategy into individual work plans for 2024 for every professional and clerical employee in the company. We've changed the operating model and changed how we're working and how we're executing and how we're focused. And so a lot of that foundational work, I think, has been put in place and as we turn to this year and as we said in our priorities, this is really the year where we're focused on executing against that given the foundational work that we put in place and beginning to show progress as a result of the strategic choices that we've made. So I think it's been a lot of work to put the foundation in place with the new strategy, the new operating model, the new work plans and the new organization structure, but I'm very excited about some of the results that we're starting to see early results from the strategic choices. And I'm very optimistic about where we're headed over the next couple of years here. All right. Thanks, everybody, for joining. We will leave it there, and I'm sure, talk with many of you in follow-up conversations shortly.

Thank you. This concludes today's conference call. Thank you for your participation. A replay of today's call will be available later today on the company's website at ir.newellbrands.com. You may disconnect, and have a great day.