Newell Brands Inc. Q1 FY2020 Earnings Call

Good morning, and welcome to the Newell Brands First Quarter 2020 Earnings Conference Call. As a reminder, today's conference is being recorded. A live webcast of this call is available at ir.newellbrands.com. I will now turn the call over to Nancy O'Donnell, Senior Vice President of Investor Relations. Ms. O'Donnell, you may begin.

Thank you. Good morning, everyone. Welcome to Newell Brands First Quarter Earnings Call. On the call with me today are Ravi Saligram, our President and CEO; and Chris Peterson, our CFO and President of 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. I refer you to the cautionary language and risk factors available in our press release and our Form 10-Q for a further discussion of 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 reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as on Newell's Investor Relations website. Thank you. And now I'll turn the call over to Ravi.

Thank you, Nancy. Good morning, everybody, and welcome to the call. We hope you and your families are safe. These are indeed extraordinary times. I want to recognize and thank my Newell colleagues who stepped up as we battle COVID-19. I'm proud of our frontline workers in our manufacturing and distribution facilities as well as our associates who are working from home. The teams have done a tremendous job of supporting those in need during this trying time and have donated a large variety of products globally, including gloves, masks, wet wipes, baby gear, heat blankets, water bottles, food containers, and writing and craft products. In fact, one of our teams designed face shields used by doctors and nurses. We're in the process of donating 30,000 units to hospitals in the communities in which we work and lead. I'm impressed and humbled by the entire Newell family efforts. On our call today, I'll share how the COVID-19 crisis is impacting our business as well as the actions we are taking to adapt to the current environment and to position ourselves for success as the country and world begin to reopen. Chris will discuss our first quarter results, provide a supply chain update, and share some observations on our financial strategy. We have developed three key priorities to position Newell for success as we manage through these turbulent and uncertain times. The first is, unequivocally, a focus on the safety and well-being of our employees. Our people are being asked to work differently, and they're rising to the occasion. We have implemented a mandatory work-from-home policy for professional, clinical, and administrative employees. All noncritical business travel is prohibited. We've temporarily closed all our Yankee Candle retail stores. To support our frontline workers, we have implemented a temporary hourly pay increase, a weekly bonus program for supervisors, and additional emergency paychecks in the U.S. and certain geographies. We've instituted more rigorous hygiene and cleaning protocols across all our manufacturing plants and distribution centers, including the provision of face masks and shields, temperature checks, and the implementation of social distancing protocols where possible. Through these practices, we are striving to ensure that our Newell associates are safe and that we're able to deliver our products safely to the customers and consumers who need them. Our second priority during the crisis is working diligently to keep our manufacturing facilities operating where possible. Across the globe, many of our factories and distribution centers have been deemed essential and remain open. However, we've had to temporarily suspend operations in 20 facilities, notably Yankee Candle in Massachusetts, the Writing plant in Mexicali, and Sistema in New Zealand to comply with local government guidelines. Supply disruptions have been a significant factor contributing to our April sales declines. We are working diligently to reopen all our plants and distribution centers as shelter-in-place orders are lifted. Our third priority is business continuity and sustaining the company's financial vitality with a laser focus on maximizing cash flow and ensuring strong liquidity. Let me provide some context for you. We began the first quarter with good momentum, coming off strong progress against our turnaround plan in 2019. Through February, we were ahead of plan on all key financial metrics and even recorded modest store sales growth. As the shelter-in-place practices increased rapidly around the globe beginning in March, we began to see both significant pressures on our retail customers and changes in consumer purchasing patterns. The biggest impact has been the sweeping change in the retail landscape. On the positive side, our largest customers in mass and online channels are actually seeing a surge in sales as their retail locations remain open for the most part, and the shift to e-commerce has accelerated dramatically. Our own sales through many of these customers are benefiting from these trends. Our global e-commerce penetration went up from 13% in the first quarter of 2019 to 17% in Q1 2020. Our online POS penetration in Q1 was up to 30%, up 500 basis points versus the prior year. These trends have continued into the second quarter. We estimate that April penetration reached approximately 37%, up 900 basis points, and that April online sales are up approximately 30% versus the prior year. Year-to-date through April, online sales were up an estimated 20%. The strength we have built in e-commerce is allowing us to leverage the accelerating channel shift to online post-COVID. However, on the negative side, most secondary and tertiary customers, especially specialty retailers and department stores, have closed their brick-and-mortar doors, which has translated to a sharp decline in retail orders, more than offsetting the growth in mass and e-commerce. At the same time, consumer purchase patterns were significantly disrupted, shifting towards categories that support stay-at-home consumer use occasions. Some of our brands have benefited, including fresh preserving, food vacuum sealing brands, some of our small appliances, and more recently, Rubbermaid food storage. Rubbermaid Commercial Products also saw an improved top-line trajectory in the first quarter with strong demand for washroom and commercial hand sanitizer products as well as cleaning and maintenance equipment. But customers are not shopping as frequently in the Writing, Outdoor & Recreation, Home Security, and Baby categories, resulting in some cases, declines in double digits. To illustrate this point, sales of cordless car seats are down because people are not driving as much. In the month of April, the supply chain disruptions, retail closures, and changes in consumer purchase patterns contributed to an estimated sales decline in the 25% range, which has informed the call-out for a challenging second quarter. That said, we have seen that overall, new POS declines have been sequentially reducing every week over the last four weeks. In fact, this week, our POS grew in the low teens. This week's trend may also be related to the issuance of federal stimulus checks. While there's much uncertainty out there, our expectation is that the second half of the year top line will be much improved versus current trends as our manufacturing facilities reopen, countries around the world begin to lift restrictions, and consumers return to more normal purchase behaviors. Why do we believe that to be the case? First, a meaningful portion of the sales decline is due to the supply chain disruption. For example, shipments in the Home Fragrance category were significantly curtailed in April, in large part due to supply chain constraints caused by the closure of our Deerfield Yankee Candle plant and distribution center, as well as the closure of our retail stores. However, POS for our Yankee Candle offerings at the retailers who remain open is growing dramatically, and in some cases, more than doubling, indicating that consumer demand for products is increasing in this period of nesting. Our social listening platforms indicate that many consumers are burning candles for a lot longer to create a soothing environment. Retail.com across most retailers and our own site is also growing significantly. So we're optimistic that as the country begins to reopen and we return to production, our Home Fragrance sales trends will improve sequentially versus a challenged second quarter. A similar dynamic is playing out in Writing, where early Q2 sales suffered due to shortfalls caused by school, university, and office closures. This was further exacerbated by the closure of our Mexicali Writing facility. As we gradually are able to come back to full capacity in that facility, the supply chain constraints will be lifted. The big sales season for Writing is still ahead of us. All of our retail customers are currently planning for back-to-school and have already placed orders. Unless there's a major second wave, we should expect students to return to school in the fall and workers to return to offices sometime this summer. And they want to stock up on supplies as they normally do. We are seeing another encouraging data point in our Appliances & Cookware business. In past economic downturns, we've seen consumer spending on food shift from out-of-home to in-home, which has driven growth in small kitchen appliance categories, particularly value offerings. Since mid-March, we have seen six straight weeks of sequential improvement in our U.S. Appliances & Cookware POS trends with growth in Mr. Coffee, bread makers, air fryers, heating mats, etc. This is an encouraging trend, which we hope is an early sign. This dynamic may be playing out again. Lastly, in the past week or so, we are seeing stay-at-home restrictions lifting in the U.S. and internationally, and many businesses beginning to plan for reopening. We'll see how it plays out, but we're encouraged by these early signs of a return to somewhat more normal times. While we're optimistic for sequential improvement in top line trends in the back half, we're nevertheless aware that there remains a lot of uncertainty about the strength and pace of an economic recovery. Therefore, in light of that uncertainty, we're planning prudently. We're implementing strict cost-control measures to protect profitability. Approximately 5,000 of our employees have been furloughed, primarily in retail operations and in areas of the supply chain that have been disrupted. We've instituted a hiring freeze for noncritical roles. We're tightening control over indirect and bot costs and are benefiting from reduced spending as employees work from home. On the supply chain front, we're moving ahead full force on Project FUEL to drive productivity savings. Importantly, we're applying even more rigorous discipline to conserve cash with the processes put in place last year as part of our turnaround plan, serving as a solid foundation to build on. We believe we have a strong financial position and sufficient liquidity and flexibility to navigate through this volatile period. In times of crisis, we have to act swiftly. We have to be agile and nimble. To that end, we have identified five levers to protect and bolster the company's financial vitality in 2020 despite the challenges and to position the company to emerge from this crisis as a stronger organization. The first lever is that we are working diligently to maximize revenue in the retailers and categories that are growing. For example, our Food business has been the fastest-growing category for the company over the past several months. Specifically, estimated year-to-date sales are up mid-teens, and POS is up approximately 29%. This momentum should continue in the second half as a result of significant distribution wins at several major retailers where we have expanded pacing. We also have significant new products in Food launching in the second half, supported by direct TV, online video programming, and social media. Our commercial business is also poised to have a strong second half. We have a strong order book, and we believe we'll be able to fulfill these orders in Q3 and Q4 as supply constraints ease. We just learned that our plant in Ipoh, Malaysia, which produces our products, is about to reopen. Our second lever is adjusting and optimizing our advertising and promotion spending. We will cut spending in categories that are not growing, shift spending to later quarters, and transfer ad spend to online, digital, and social vehicles. The third lever is scrutinizing our overhead spending and strictly controlling expenses. We've already implemented a hiring freeze, canceled our internship programs, and will evaluate ways to get closer to overhead benchmarks we mentioned at CAGNY faster. Fourth, we are fast-tracking Project FUEL initiatives in 2020. In an environment where sales are pressured, improving productivity becomes paramount. We are laser-focused on executing against existing plans to make our manufacturing plants, procurement, and distribution centers even more efficient. Lastly, we are currently assessing ways to better leverage our already robust e-commerce capabilities where we believe we have a lot of room for growth across our portfolio. We believe we have a strong opportunity to grow with Amazon, where we're gaining market share, increasing penetration at key retailer websites, and expanding penetration into various specialty retailers online. Let me now share news of a new executive appointment that is important to our long-term agenda. Mike Hayes has joined us as Newell's Chief Customer Officer. This is a critical role I've been looking to fill since I arrived at Newell. With Mike, I think we have found an ideal candidate. Mike joins us from Georgia Pacific, where he served as Senior Vice President of Sales Strategy. As Chief Sales Officer of the consumer business, he managed a $6 billion consumer POS business, comprising brands such as Angel Soft, Quilted Northern, Brawny, Vanity Fair, and Sparkle. Mike has a track record of strong leadership and driving significant sales and market share growth in highly competitive categories. These near-term priorities are: first, to create a more unified enterprise go-to-market approach with our top customers and cement top-to-top relationships; second, to create an enterprise team to rapidly close distribution gaps in the important dollar stores, club, grocery, and drug channels; third, to take omnichannel skill sets to the next level with our sales force; and fourth, to increase the use of data analytics. In conclusion, we have signaled a challenging quarter ahead. I believe that we will sequentially improve in the second half of the year. Our brands hold leading positions, are trusted by consumers, and performed well during the last recession. Our newly formed executive team is extremely capable and is committed to effectively leading Newell through the COVID crisis and its aftermath while positioning the company for long-term success and rebuilding shareholder value. With that, I'll now pass the call on to Chris.

Thanks, Ravi, and good morning, everyone. I would like to join Ravi in expressing gratitude to all of our employees, particularly those on the front lines who have demonstrated courage, extreme resilience, and dedication in these unprecedented times. Before discussing Q1 results, I want to provide additional color on the company's supply chain. I'm proud of the job our teams have done in keeping facilities open where possible, shoring up additional capacity where needed, putting in place rigorous cleaning and safety protocols, to keep our employees safe, and ensuring continuity of supply on direct materials and sourced finished goods as well as protective gear for our employees. As it relates to China, following a slower startup in factories after the Chinese New Year, we are pleased to share that Newell suppliers in the region have rebounded nicely and are now almost back to full capacity. While the company's supply chain is largely operational, we have been experiencing considerable disruption toward the end of Q1 and thus far in Q2. Newell Brands operates 135 manufacturing and distribution facilities around the world, of which 20 were or are temporarily closed due to government guidelines, with another 11 experiencing high levels of disruption. The most significant of these temporary closures include our Home Fragrance plant and distribution center in South Deerfield, Massachusetts, which has been shut down as of late March; and our Mexicali Writing facility, which shut down about three weeks ago and is now on a phased reopening schedule. While a diversified global supply chain helps to lessen the risk posed by these disruptions, unfortunately, this does not fully eliminate the impact. To mitigate supply chain risk and better meet the needs of our consumers, we have taken a number of significant actions, including improving employee safety in our facilities by restructuring workspaces to ensure social distancing, enhancing cleaning and safety protocols, temperature monitoring, revised sick pay policies, and increased use of personal protective equipment, engaging with local jurisdictions on all available options for factories and distribution centers that have been impacted by shutdowns while adhering to the guidelines, pivoting our supply chain to consumer and customer demand shifts by ramping up manufacturing capacity and inventory build on high-velocity A and B SKUs while simultaneously reducing supply on lower-velocity C and D SKUs to minimize working capital tied up in inventory while improving customer service on the most in-demand items and activating plans for accessing alternate sources of supply to ensure fulfillment of critical material needs. Based on what we know today, we expect supply chain disruptions to have a material short-term impact on Q2, particularly in the Writing and Home Fragrance businesses. Now let's switch gears to Q1 results. Despite a more significant headwind from COVID-19 than we anticipated, the company's first-quarter performance was in line with or ahead of guidance across all key metrics. Q1 was truly a tale of two cities. Through the end of February, we generated positive core sales growth due to a stronger-than-anticipated start to the year. In March, as the COVID-19 pandemic spread globally, countries increased social distancing and shelter-in-place mandates. This significantly impacted the company's business in three primary areas: supply chain disruption, retail store closures, and consumer and customer demand shifts. Net sales for the quarter declined 7.6% versus a year ago to $1.9 billion, driven by a 5.1% reduction in core sales and unfavorable currency. We estimate COVID-19 to have negatively impacted core sales growth by about 3.5%. There were some bright spots in the quarter. Three business units, Food, Commercial, and Baby, grew core sales in the quarter versus the prior year. We drove strong double-digit growth in e-commerce as consumers shifted purchases online. Normalized gross margin improved 110 basis points year-over-year to 32.8% as cost savings from productivity initiatives and pricing more than offset headwinds from mix, tariffs, inflation, and foreign exchange. A disciplined focus on productivity, overhead cost savings, and complexity reduction more than offset planned higher advertising spending, driving a better-than-expected normalized operating margin in Q1, which contracted 10 basis points versus last year to 6.0%. Debt paydown over the last 12 months has reduced the company's net interest expense by $17 million versus last year. The normalized tax rate was 7.1%. Normalized diluted earnings per share from continuing operations improved by $0.01 year-over-year to $0.09. Since we completed the divestiture program in 2019, there was no contribution from discontinued operations this quarter as compared to $0.04 in the year-ago period. Now let's move to segment results. Core sales for the Learning & Development segment declined 5.5% as growth in Baby was more than offset by a reduction in core sales for Writing, which was one of the hardest-hit businesses in March. Performance for the Food and Commercial segment was quite strong in Q1 as core sales increased 5.2%, with both business units driving this result. Food came into Q1 with solid momentum and experienced heightened demand, particularly within the fresh preserving and vacuum sealing categories as the shelter-in-place measures started to take hold. The Commercial business was also a beneficiary from increased consumption of sanitizing and cleaning supplies. Core sales for the Home & Outdoor Living segment declined 11.3%, reflecting challenges across all three businesses. The Home Fragrance unit was significantly impacted by the temporary closures of Yankee Candle stores effective March 17, as well as many specialty retail customers. Consumption behavior for Connected Home & Security and Outdoor & Recreation businesses was meaningfully disrupted in the first quarter and weighed on the performance of each business. Core sales for the Appliances & Cookware segment declined 8.5% as a recent pickup in U.S. consumer demand to help meet amplified at-home cooking needs was more than offset by a pullback of orders from customers whose brick-and-mortar doors have been temporarily closed and international markets where shelter-in-place orders were mandated. Now let's switch gears to cash flow, which is one of the highlights during the quarter as a result of our rigorous focus on all aspects of working capital management. Newell Brands generated positive operating cash flow of $23 million in the seasonally slow first quarter, which represents a $223 million improvement versus last year with progress across receivables, inventory, and payables. This represents a 27-day improvement to the company's cash conversion cycle compared to the year-ago period and is the first time in a decade the company delivered positive operating cash flow in the first quarter. While last year as part of the turnaround plan, we put in place a disciplined and methodical approach to reducing the company's cash conversion cycle, these efforts have never been more imperative than they are now. Cash is king, and we are doubling down on our actions to reduce complexity, shrink working capital, and enhance free cash flow across the organization. In the first quarter, we took another 5% or about 4,000 SKUs out of the system, ending at less than 70,000 or about a 31% reduction from the starting point in 2018. We have tasked the teams to push much harder on this going forward. With a significant change in the demand profile across the businesses early on, we modified our planning processes to ensure we're being agile in optimizing inventory purchase and build plans, focusing production on high-velocity SKUs. We are also looking at opportunities to more aggressively liquidate excess and obsolete inventory. These efforts should help us more effectively manage the supply chain and drive cash. We are continuing to push on extending payment terms with our suppliers. We have taken decisive actions in terms of cost structure, cash generation, and complexity reduction to position Newell Brands on a stronger footing as we emerge from the pandemic. Newell Brands ended Q1 in a strong liquidity position with $476 million in cash and cash equivalents, an increase of $127 million from last quarter end. In addition, the company has a revolving credit facility with $1.2 billion of untapped capacity as of quarter end. Together, this gives the company about $1.7 billion of short-term liquidity. Thus far in the second quarter, the company remains in a strong liquidity position. We have preemptively drawn $125 million on the revolver, with remaining capacity of $1.1 billion, and continue to hold an above-average level of cash and cash equivalents. We are focused on maintaining Newell's strong liquidity position and believe we have sufficient flexibility to manage the company's cash needs in these unprecedented times. Given the wide range of possible outcomes from the pandemic, we think it's prudent to regularly evaluate the company's capital structure and capital allocation strategy. Our objective is to maximize value for shareholders while ensuring the safe continuous operation of the company in a range of potential scenarios. We plan to maintain the dividend for the upcoming quarter. We remain committed to deleveraging the company's balance sheet over time, although COVID-19 will put short-term pressure on the company's leverage ratio. The company has withdrawn its previously announced guidance for 2020 as there are simply too many unknowns at this time surrounding the severity and duration of COVID-19 as well as the trajectory and pace of economic recovery. We currently expect a material negative headwind from COVID-19 in the second quarter, both on the top and bottom line. For context, in April, we estimate that sales were down approximately 25%, with Writing, Home Fragrance, and Outdoor & Recreation being the most significantly affected. A little more than half of this decline was due to supply chain disruption and retail store closures. On the bottom line, an expected sharp revenue decline in the second quarter will put significant negative pressure on operating margins due to fixed cost deleveraging despite the proactive actions we are taking to reduce costs. We expect results to improve sequentially following the second quarter as plants, distribution centers, and retail stores begin to reopen. While consumer shopping patterns have certainly been disrupted in recent months and continue to evolve daily, we have noticed a sequential pickup in demand for more discretionary products in recent weeks. It is too early to call this a trend, but we are cautiously optimistic. Although the world has changed in recent months, we are staying close to our consumers and customers to ensure we meet their needs. At the same time, we are taking significant and decisive actions to safeguard the health and well-being of our employees, maintain business continuity, and emerge from the crisis as a stronger company. Nancy, please open it up for Q&A.

Okay. Thanks, Chris. And operator, we are ready for the questions.

Your first question comes from Bill Chappell with SunTrust Robinson Humphrey.

Just, I guess, breaking down the near-term weakness and then kind of how you look at it going forward, I mean, can you parse how much was supply disruption versus how much was retail closure? And then on the retail closure, do you see any risk? Are you factoring any risk of some of those smaller tertiary retail outlets maybe going under over the next six months? And just kind of any exposure there?

Chris, why don't you take that?

Sure. So I would say what we saw in the month of April and what we're seeing since the pandemic started is, as I mentioned, a little more than half of the impact of the more recent revenue trend is really as a result of the supply chain disruption and the retail store closures. Within that, the retail store closure impact is slightly bigger than the supply chain disruption. I think we view these both of these as temporary dynamics in nature because if you look at the underlying consumption trend, it is a much stronger picture than the shipment trend that we're seeing. The other thing I would say is that although we expect these two impacts to have a material negative impact on Q2, we do expect to improve sequentially as we get to Q3 and beyond. And so we think that the impact that we're seeing, it's hard to predict the duration, which is why we pulled guidance. But we do believe it's temporary, and we think that we're well positioned to come out of the pandemic on a stronger footing.

And Chris, the retail...

There was a follow-up Bill had on specialty retailers. Do you want me to take it? Or do you want to go ahead?

Yes. On the specialty retail side, the specialty retail channel for us represents about a mid-teens percent of our total revenue. What we're seeing is that business at our largest retailers is up as consumers are shopping more in those categories, and we're growing in those categories. However, the order patterns at the specialty channel are down dramatically as many of them have had closed stores. But we think our brands are strong enough where the consumer has plenty of access to our brands across the multitude of channels in which we operate. We also, as Ravi mentioned, recently hired a Chief Sales Officer. We think we're under-penetrated and have distribution opportunities in some of the channels like dollar and drug stores, etc. We don't believe that we have significant receivable collection risk from the specialty retailers that we're in, and we're monitoring that very closely. Typically, our business is with the specialty retailers that are the strongest capitalized within that sector.

Your next question comes from Steve Powers with Deutsche Bank.

Great. I guess stepping back from the here and now, I would think a lot of what you're doing, things like leaning into online initiatives, simplifying SKU sets, accelerating the focus on cash and costs, all of those things seem very consistent with what your long-term strategies and prioritizations are. So I guess to the extent that we hopefully bounce back from this on the faster side of expectations, is there a scenario where you can actually emerge from this ahead of where you might have otherwise been operationally, if not financially? Again, talking about '21, '22. If so, is there a way you can put any parameters around that?

So let me kick that off. So Steve, absolutely. So look, in fact, first thing is I think we're going to be able to better navigate through this crisis because of all the foundational elements that we've put in place in the turnaround plan. Second, we have created an absolutely terrific leadership team, and every one of them is used to turnarounds. That was part of the criteria for selection, but also people who could build for tomorrow. They're all here to leave a legacy of taking Newell to the next level. So the crisis, though, what it does is brings even more sense of urgency to the decisions that we are taking. It gets you very focused, and you have to be very decisive. At CAGNY, you may recall, Chris applied some parameters on how investors can expect Newell in the long term. We still remain committed to that. The fundamental tenets that inform that framework remain in place. We are going about this. So we're addressing every aspect: the P&L, the balance sheet, cash flow. Yes, temporarily, there are some COVID-related issues that are out of our control. But we are putting a lot more focus on everything that we can control and going after them. The last thing I would say is if there is one redeeming feature of this crisis, it has brought the Newell employees together. There were culture and engagement issues, but we see that as bygone days. Our team, our employees have gotten unified. We've galvanized them, and there's going to be a great source of strength in order for us to drive innovation, cost savings, and drive cash flow.

Your next question comes from Rupesh Parikh with Oppenheimer.

So Chris, I guess, just going back to your comments just on operating margins, significant impact potentially in Q2. Is there a better way to frame the impact on operating margin if sales are down, let's just say, 25% for the quarter? I guess I'm just trying to get a better sense of fixed versus variable costs, more so in your gross margin line?

Yes. Just maybe to help on that. We view all of our costs as variable in the long term. But obviously, in the short term, they're not variable. To sort of help as a generic modeling exercise, about 15% of our cost of goods are fixed in the short term. It varies a little bit from category to category, but 15% is a pretty good rule of thumb to use. About two-thirds of our SG&A costs are fixed in the short term. If you use those as sort of the fixed numbers and flex the balance with the sales line, that will get you pretty close to a margin impact associated with different revenue scenarios. One additional thing that may help in this exercise is since we gave guidance at the beginning of the year, foreign exchange has gotten worse. The dollar has strengthened by about 200 basis points versus the guidance we provided at the beginning of the year. The difference between core sales growth and all-in sales growth that we expected at the beginning of the year of about 100 basis points is now down to 300 basis points. However, we don't expect that this will have a material impact on the margin line because although the FX impact has gone negative, it's largely been offset by a reduction in inflationary and commodity prices. Thus, that impact is more of a top-line impact than a margin impact.

Your next question comes from Joe Altobello with Raymond James & Associates.

I wanted to go back to the commentary regarding January and February and core sales being up modestly through Feb. I'm trying to understand what businesses were doing well pre-COVID as opposed to post-COVID? And then maybe secondly, Ravi, you mentioned earlier that you are planning for a hopefully successful back-to-school season. I'm just curious how your retailers are thinking about back-to-school? Is it their assumption that all schools in the U.S. will be opened this fall?

All right. So let me address the two questions. But the January and February were the continuation of the turnaround plan. We also got significant growth online, and we started mitigating declines in other areas. For larger retailers, we were seeing some traction. January and February was the continuation of turnaround; the Food business was doing extremely well for us. And it has been a real source of strength, recording strong growth. Baby also recorded strong growth in January and February. Those were factors that really contributed positively, leading us to believe that the turnaround is having a positive impact. As we go towards the end of the year, we have innovations planned across many of our businesses. We are prioritizing them, and our teams are continuing to drive various line reviews for top retailers, and they're doing it online. So now, let me answer your question about back-to-school. We have been in touch with all our major retailers regarding back-to-school. The big issue for everyone is when will schools reopen? There seems to be general cautious optimism that key schools will go back. In fact, I think California has recently communicated that they may even reopen early. The universities pose a different challenge because we heard that Harvard may start virtually. The majority of our back-to-school orders are driven by schools. The good news is that retail orders are in place. Given some uncertainty regarding opening, the distribution of orders might be delayed a bit. So we expect shipments that would have come in April may now happen in July. Right now, retailers and ourselves are hopeful that schools will reopen, but that's the key question.

No, absolutely. As a father to two boys, I certainly hope you're right. Appreciate it.

It's not that I want to be right, but I think not only from a business standpoint, you just want normalcy to return.

Your next question comes from Lauren Lieberman with Barclays Capital.

I would like to discuss the Appliances & Cookware segment further because the comments regarding point of sale compared to shipments are quite intriguing. This situation seems more influenced by retail closures rather than supply chain disruptions. It appears that there is a significant amount of inventory at retail. Considering your innovation pipeline, you mentioned that rebuilding this business would take longer. How do you assess your performance in relation to the category, even though measuring market share directly is challenging? Are there any online initiatives you're launching to adapt to changing consumer behaviors? Additionally, we didn't address the outdoor segment, which during the 2008-2009 period, performed well under the previous management of Jarden as consumers favored vacations and simple outdoor activities. Are there any steps you're taking to support that segment or any innovation strategies aimed at promoting it?

Sure, Lauren. Let me separate the two questions. On Appliances & Cookware, a couple of factors are at play. It's really a tale of two geographies. The good news is the U.S., which was our most troubled business, historically, has really picked up. The consumption, the POS that we talked about, the six consecutive weeks of improvement in the U.S. POS is very encouraging. The data we see shows that we are beginning to start getting into the double digits in U.S. POS growth. That is heartening and being driven by certain categories within the U.S. — smaller appliances. We have brought value brands like Mr. Coffee, which has done well in recessionary times. Oster is doing well as well, including bread makers and heating blankets. Where we are suffering and why shipments have lagged is really that it’s a tale of two geographies, where international is facing challenges. In the past, we doubled business in Latin America, but currently, we are seeing a decline as countries like Peru and Brazil are closed, and part of Mexico is facing challenges too. The good news from Australia is that we recently received word of improvement. On outdoor, we currently see struggles due to three businesses in this sector: technical apparel, camping-related items, and containers. The apparel business has seen a strong decline due to stay-at-home measures. Coleman has also faced significant declines since people are unable to leave their houses for camping. The momentum on the Contigo brand has stalled since people are at home. Additionally, many of the retailers serving this sector have closed, which has impacted sales. Moving forward, our aim is to drive penetration in the e-commerce areas and to the specialty retail sections.

Your next question comes from Kevin Grundy with Jefferies.

Chris, question for you relating to your debt covenants and to the dividend. I wanted to congratulate you and your team on the improvement in your cash conversion cycle. I'm glad you guys are capitalizing on that because I think it's long been an opportunity since the merger. So congrats on that. So we can appreciate you withdrawing your own guidance. But can you comment on your level of comfort with your debt covenants? I think there are two regarding interest coverage ratio and debt to capital ratios. Without guiding, can you comment on your level of comfort as you think about most likely scenarios? And also, you mentioned your commitment to the dividend for the second quarter; can you give more clarity around your commitment for the balance of the year and how you're thinking about cash flow priorities?

Yes, no problem. So I'll start with debt covenants. You’re right; there are two primary debt covenants, the interest coverage ratio of 3.5x and the debt to total cap of 0.6. The debt to total cap does allow an add-back for goodwill. We ended the first quarter in compliance with both covenants with significant headroom against both. We have done a significant amount of modeling. We sort of internally refer to it as an alphabet soup; we're looking at the V, the U, the W scenarios, etc. Looking at all these scenarios, we're confident that unless something unforeseen happens, we have sufficient flexibility to navigate and comply with the debt covenants going forward. We are very confident in the company's liquidity position. The debt covenants only apply to the revolver and the accounts receivable facility, which are the short-term liquidity facilities. They don't apply to the unsecured notes. Regarding the dividend, as I mentioned in the prepared remarks, we plan to maintain the dividend at the current level for the current quarter. As you know, the dividend is a quarterly decision made by the Board. Based on the scenario modeling we've done, the free cash flow expectation for the company is more than enough to fund the dividend and reduce debt, annually going forward, including this year. Given the uncertainty regarding the severity and duration of the crisis, we believe it's prudent to evaluate the company's capital structure and capital allocation strategy, given the range of possible outcomes. That’s the plan at the moment going forward.

Your next question comes from Olivia Tong with Bank of America Merrill Lynch.

Great. I just wanted to see if you could talk a little bit more about the divergence in growth across your portfolio because businesses where demand in some cases is up, and somewhere, we probably don't see a ton of impact from what's going on. And then, somewhere, obviously, it's quite difficult to drive growth right now or to migrate your businesses online. So if you could just talk about the divergence in terms of that minus 25 from top to bottom. And then, overall, are you seeing any shifts yet in terms of price points? Is there a downshift in terms of what consumers are buying to the extent that they are buying right now across your portfolio of brands, whether it's Rubbermaid, whether people are downshifting Graco as well? I know it's not the same as 2008, but if there's anything you can provide in terms of comparisons to 2008 to help provide some color.

Okay. Let me kick that off, and then Chris, if there's anything you want to add. You talked about how the divergence in our portfolio, particularly related to April. I think I talked about quite a bit of this in the prepared remarks, but I'll reiterate some of those. The outright winner for us has been Food. That has done extremely well throughout, both on POS and on shipments. POS is ahead of shipments, and those trends continued in April. If anything, we're beginning to see growth picking up for Rubbermaid food storage as well. Commercial was a big winner, generating a positive top line and a very full order book. The brands we have do well where they are present, indicating growing consumption; however, the access challenges remain critical. This is where the home fragrance offerings are significantly impacted as our retail operations are closed and specialty retail customer sales have been affected by store closures. But as we come out of this, they still have strong brand recall. Baby has also seen some fluctuations, but we're beginning to see an uptick over the last few weeks due to stimulus checks. Writing has faced challenges, and I’ve spent a lot of time discussing this in our remarks. At this moment, it’s primarily about finding our footing while navigating supply constraints. On the price comparison, we don’t yet see any significant downward shifts. Step back positioning has provided us a buffer, as observed during the previous recessionary years, where strength in established brands provides an opportunity.

Ravi, let me just add one thing, which is we did go back and look at and we spent a lot of time in the scenario analysis going back and looking at the 2008 recession. We looked at, obviously, the Newell business and the Jarden business during that time. What we saw was that during that time period, both companies were able to gain market share. It gets to your question on price points because generally, the company is pretty well-positioned with opening price point and mid-price point products. If you believe that the company is headed into a more recessionary time period, we tend to be well represented in the pricing ladder for where consumers may trend to. We have not yet seen — I think it’s too early to call any kind of trend with consumers changing relative to price point. But we believe we are well positioned. The other thing notable about the 2008 recession was that stronger brands tend to do well in that time. As mentioned at CAGNY, about 80% of our business is either #1 or #2 in the category. We are well positioned from both a market-leading brand perspective as well as from a price positioning standpoint to capitalize on the environment going forward.

Thanks, Chris. One thing I forgot to mention concerning the portfolio is that the Outdoor & Recreation business saw a notable decline as it impacted both this quarter and April. Our Connected Home business faced access challenges, combined with fluctuating consumer interest. However, we are optimistic about the coming months.

Your final question comes from Andrea Teixeira with JPMorgan.

I appreciate the visibility on the April and also the commentary about half of it being supply chain. So if you can kind of break down a little bit of the consumption and shipping trends that you're seeing in price low teens impact in April, and if that could normalize? I'm not saying it's going to go positive in May or June. So why are you thinking of consumption trends in Food, Baby, and small appliance? And should we expect those to remain elevated in the medium to long term as we get out of COVID and feedback from you're having from your panels and customers that are open? Do you think that in the medium term could offset the Writing supplies that are either going to the offices? Or you should be seeing that business remain under pressure? Also, just as a clarification to Lauren's question before about the retail inventory and receivables. I understand that Chris had said you're not seeing any major issues. Obviously, again, congrats on your cash conversion. But I wanted to drill down if Chris can comment on that as well.

Okay. We really can't give you specifics on May and June. I think we've given you a sense that we think the overall quarter will be challenged, based on the April trends we've been transparent about. However, we are also seeing positive sequential improvements on POS. It’s the uncertainty surrounding the pandemic that defines attributes that change how we operate. Our core values came from employee safety and brand loyalty. Moving towards the second half, we're focusing on improving our success alongside. With the quarter facing challenges, our eyes are set on securing better positioning going forward, collectively determined by performance and consumer momentum. Chris, maybe you can answer the question on cash conversion.

Yes. I think the question was on the receivables. We are monitoring our receivables much closer. I've actually had meetings twice a week on this topic. What we're seeing is that we're collecting receivables actually better than our forecast, and part of that is due to process improvements we made. You can see that progress has been consistent with our swift 27-day reduction in our cash conversion cycle. That trend is continuing in April. We continue to collect receivables at or ahead of forecasts while monitoring credit risk tightly. The majority of the company's business is with well-capitalized retailers; thus, we have not seen any slowdown in our receivables as an aggregate company. So we are managing this closely as the situation evolves.

I also want to thank the analysts and investors who are on this call. We appreciate your support for Newell during these difficult times. We truly pray that you and your families stay safe. Thank you for being on the call. We look forward to chatting with you next quarter. Onwards and upwards. Thank you.

A replay of today's call will be available later today on our website, ir.newellbrands.com. This concludes our conference. You may now disconnect.