Newell Brands Inc. Q4 FY2021 Earnings Call

Good morning, and welcome to Newell Brands Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we’ll open up the call for questions. In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. 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 Sofya Tsinis, VP of Investor Relations. Ms. Tsinis, you may begin.

Thank you. Good morning, everyone. Welcome to Newell Brands fourth quarter and full year 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 refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Forms 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, as well as in other materials on Newell 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 year-end call. We continued our growth momentum from the past five quarters into the fourth quarter, which helped us achieve an important milestone in 2021, as we return the company to core sales growth with strong results across each business unit and geographic region. Despite a challenging and disruptive operating backdrop, as well as significant inflationary pressures, we delivered over 12% growth in both core sales and normalized operating income in 2021, with further progress in complexity reduction, productivity, cash conversion cycle and a robust innovation pipeline. Let me share some highlights from fiscal 2021. Core sales increased 12.5%, as each business unit grew versus last year and on a two-year stack basis. This was fueled by strong consumption in the U.S. relative to both 2020 and 2019. Domestic consumption increased across all eight business units relative to 2019 with Writing, Food, Baby, Commercial, Home Appliances and Home Fragrances in the double digits. Even as mobility is returning and some trends are moderating from peak levels, we are seeing stickiness in consumer behavior versus pre-pandemic levels. We believe that the strategic work we've done to rejuvenate our iconic brands, sharpen brand positioning, strengthen our marketing and innovation muscle while leveraging consumer insights and foresights is enabling us to better capitalize on consumer trends. Our major brands are healthy. And in 2021, each of our top 10 brands grew with Graco, Oster, Coleman, Yankee Candle, Sharpie and Paper Mate, each registering double-digit growth. 2021 was also a stellar year for all our regions, as each one delivered double-digit top line growth with international outpacing North America. We continue to believe that the international markets abound in opportunity, and we just appointed María Fernanda Mejía as CEO International. María Fernanda has three decades of international CPG experience at firms such as Kellogg and Colgate, and has a track record of accelerating growth and profit. She will join Newell at the end of this month, with the goal of fully unlocking international's growth potential and accelerating profit by leveraging scale, reducing fragmentation and building up brand franchises outside of the US. Strong omni-channel execution allowed us to attract shoppers across all channels despite consumers returning to brick-and-mortar stores through the year. Newell's Global e-commerce sales grew at a low double-digit pace in 2021, as digital penetration for the company remained at about 22% of net sales, similar to 2020 and significantly ahead of prior years. Our go-to-market strategy is yielding strong results and enabling us to forge stronger connections, both with our consumers and customers. Although our service levels were challenged due to the supply environment, we saw excellent growth at our top customers and developed strong joint business plans. We're also building momentum on our innovation operating model, with tighter integration of consumer insights and foresights into the process. This is yielding more impactful launches. Not only are innovations becoming a larger contributor to sales, we also see opportunity to continue to scale many of the franchises such as Sharpie S-Gel, Mr. Coffee Iced, FoodSaver VS line and Rubbermaid Brilliance. In 2021, although renewals normalized, operating margin declined about 10 basis points to 11%, normalized operating profit grew more than 12%, despite approximately a 700 basis point inflationary headwind, which was 9% of comps. Offsetting levers were strong fuel productivity, pricing and tight cost control. Normalized earnings per share grew nearly 2% versus 2020. On a tax adjusted basis, that would represent over 20% increase in normalized EPS, a remarkable result, particularly in this environment. Our cash conversion cycle improved by five days year-over-year to 68%, from a high of 115 in 2018. Strong cash generation, despite strategic inventory build, allowed us to delever our balance sheet to 3.0 times. As we focus on driving sustainable and profitable growth, we're placing significant emphasis on building operational excellence throughout the organization with Project Ovid and automation being two major initiatives that we are implementing. We also significantly improved our employee engagement. Based on a Glint employee survey, the company's engagement score moved up significantly to 75 as benchmarks indicating that culture is becoming a competitive advantage for us. We continue to strengthen our commitment to corporate citizenship, sustainability as well as diversity, inclusion and belonging, guided by our core values of truth, transparency, teamwork and trust. I am pleased to share that Newell has been named one of Fortune's 2022, World's Most Admired companies. The company was also recognized on several other lists, such as the Wall Street Journal Management's Top 250 Best Managed Companies of 2021, Forbes' World’s Top Female-Friendly companies in 2021, Forbes' Best Employers for Diversity in 2021, and Newsweek America's Most Responsible Companies in 2022. Last year, we also continued to give back to our communities, donating products worth nearly $17 million. Let me share some insights on 2021 results for each business unit. Writing had a terrific year with double-digit growth, almost double the rate of the total company and market share gains across each geographic region as schools came back to a more normal cadence. We saw strong domestic consumption relative to both 2020 and 2019. On a two-year stack basis, Writing core sales grew despite the delayed return of the commercial channel as new variants continued to disrupt back-to-office plans. The rebound in the Writing category in combination with excellent market share gains in the US, Canada, UK and Australia drove excellent results for the business in 2021. In the US, Newell outpaced the market, delivering a seven-plus year high in market share and over two points in share gains in writing instruments. Sharpie S-Gel continued to turbocharge our share in pens for the second straight year, resulting in US share gains of nearly 500 basis points in this important category. Newell's share of the Writing category also improved by more than two points in Australia and Canada and almost one point in the UK. We're confident Writing is well positioned for a great 2022, when we expect more of a rebound in the commercial channel. 2021 was a solid year for the Baby business, both on the gear and the care sides as core sales grew at a low double-digit rate due to distribution gains, innovation, increased stimulus and child tax credit funding, and continued strength in e-commerce. We saw strong momentum in domestic consumption. There were lots of great innovations throughout 2021, and I'm pleased to share that Newell baby gear won four awards at the annual Juvenile Products Manufacturing Association Awards, the most of any company, including the Tried & True award for the Graco forever and environmentally friendly for Century. Along with Writing, Home Fragrance was the best-performing business unit during 2021 as consumers' focus on their well-being in homes drove strong double-digit core sales growth supported by healthy consumption relative to both 2020 and 2019. Net sales for the Home Fragrance business reached record levels in 2021, despite closure of underperforming retail locations and exit from the fundraising business in 2020. We saw really strong performance from Yankee Candle retail stores this year with positive comps as consumers returned to in-store shopping. The 2021 launch of the Yankee Candle Signature Collection, as well as added distribution points helped drive modest share gains in the candle category in the track channel. In EMEA, we delivered strong growth across all territories, leveraging e-commerce and added distribution points. Moving on to Food. 2021 was another strong top line year for the Food business, even as performance moderated in the second half against very challenging comparisons, and we experienced supply challenges across some businesses. Domestic POS was significantly ahead of 2019 and slightly below elevated year-ago levels. In 2021, two of our brands, Ball and FoodSaver achieved record sales, and Ball continues to drive significant share gains in the canning category, benefiting from the 2021 launches of all storage latch pantry jars as well as the nesting jars. We also saw share gains in the Rubbermaid brand growing upon the successful expansion of the Brilliance line into glass and pantry categories. Our products are also getting external validation as Good Housekeeping named Calphalon best nonstick cookware, Rubbermaid Brilliance Glass was named best food storage, and FoodSaver was recognized as best vacuum cleaner for 2021. We continue to believe that in hybrid work environments are likely to prevail, at-home cooking and food consumption occasions will remain at about pre-pandemic levels and have an exciting lineup of new products for 2022. In 2021, core sales growth for home appliances accelerated relative to already elevated 2020 levels led by Latin America, North America and EMEA. Domestic consumption was up significantly ahead of 2019 levels and up modestly versus 2020. Due to strong demand, we hit an all-time record production of blenders as Oster blenders celebrated the 75th anniversary in both the US and Latin America. In 2021, our Outdoor & Recreation business grew core sales in each quarter demonstrating momentum and the strength of the turnaround strategy we began 18 months ago. For the full year, core sales improved across all regions with robust growth driven by Japan, US, Europe and Latin America. The iconic and largest brand in our portfolio of Coleman led this growth, showing our lifestyle brand-building focus is working. We also saw strong results from our portable beverage category with both Contigo and Bubba drive growing double digits. Key product innovations in Outdoor & Recreation include the Coleman Peak 1 Platform, Coleman 1900 Collection, Contigo Hydration and a new camping gas grill in Europe. Our global marketing campaign with Coleman, 'The Outside Is Calling,' is resonating well with our outdoor enthusiast consumers, as brand sentiment and brand health scores continue to rise and helping us win new distribution for 2022 across various channels, including outdoor specialty. In beverage, the Contigo Streeterville desk mug, which was introduced in '21, has become the number one mug in the coffee mug category and Contigo is restoring its leadership position. I'm also encouraged by the progress in margins, both in Outdoor & Recreation and Home Appliances. In 2022, we will exit some lower-margin categories, such as beddings, pans and airbeds, which will be a headwind to top line but will help make further inroads on improving profitability. From a top line perspective, 2021 was another solid year for the commercial business as core sales grew on top of very difficult comparison fueled by consumption growth. We saw strong consumption performance across major categories with the exception of washroom, which surged a year ago due to the pandemic. While the business has been amongst the hardest hit by inflation, the team has done an outstanding job in implementing a series of price increases to help mitigate the impact, given our expectations that resin prices have stabilized, we're confident that we will restore gross margins and drive strong operating growth in 2022. Lastly, core sales for Connected Home & Security increased in 2021 driven by strong domestic consumption. Earlier this week, we announced an agreement to sell the CH&S business to Resideo Technologies, and it is consistent with our strategy of tuck-out divestitures. We're confident that Resideo is the right strategic owner for this business and believe this transaction will enable CH&S to realize its full potential. At the same time, it allows us to bring even greater focus to our core businesses where we see the highest potential for value creation. Since CH&S was not integrated with the rest of Newell, we do not expect this transaction to be disruptive. We're exiting 2021 from a position of strength and I am confident that the strategic investments behind brand rejuvenation, omni-channel and social media listening capabilities as well as supply chain resiliency position us well for driving sustainable profitable growth. As we look to 2022, an overall theme is that in 2021 was a year of top line growth, 2022 will be a year of margins. We are focused on five key priorities. First, laser focus on improving gross margins as we double down on our efforts to mitigate the significant inflationary pressures and supply chain challenges, while improving customer service levels. The strength of our brands has allowed us to take the appropriate pricing actions on all our businesses while ensuring they remain a good value for consumers. In addition, we will continue to optimize promotional spend, price the innovations to be gross margin accretive, direct A&P spend towards higher gross margin categories and drive productivity. Second, we'll continue to drive core sales growth and innovations, focus on mastering the 360-degree consumer journey and delight consumers at each touch point with compelling storytelling and joyous brand experiences. I genuinely believe we are making the shift to becoming a consistent growth company. Third, turbocharge International to accelerate growth in profits. Fourth, continue investing in transforming our supply chain through Project Ovid automation. Fifth and last but not least, continuing to strengthen the One Newell culture and build on our employee engagement momentum. Folks, it is a new Newell. Our Candle teams delivered over 12% core sales growth and normalized operating profit growth in 2021. In 2022, we are committed to rebuilding gross margins and delivering top and bottom line growth despite a tough macro environment. I'd like to express my sincere gratitude to our employees, whose grit, hard work and agility make it possible for us to deliver on our commitments and pivot as necessary. I continue to believe that Newell's best days are ahead of us and that our focused and deliberate actions will drive sustainable and profitable growth, achieve strong shareholder returns while being a force for good, onwards and upwards. And now I'll turn it over to Chris.

Thank you, Ravi, and good morning, everyone. The decisive actions we have taken over the past three years as we have executed on Newell's turnaround, in combination with strong financial discipline and consumer demand, have driven more effective and agile operations at the company. This has enabled Newell to successfully navigate the current environment and deliver full year top and bottom line results that are well ahead of the outlook we shared a year ago, despite significant escalation in inflation and ongoing challenges across the supply chain that are impacting all companies. Before discussing fourth quarter results, let me provide some insights into the operating environment, as we expect many of the dynamics from 2021 to persist in 2022. In 2021, Newell experienced unprecedented inflationary costs, largely driven by resin, ocean freight, source finished goods and labor costs. Inflation accounted for about 9% of cost of goods sold. To mitigate these inflationary headwinds, we accelerated our productivity initiatives, which accounted for close to 4% of cost of goods sold; successfully implemented price increases across each of our business units with six of our business units communicating several pricing rounds; continued to maintain tight cost controls; optimize the effectiveness of promotional spend; and leverage strong top line trends. While these actions helped to mitigate the impact from inflation in 2021, Newell has not yet realized the full benefits from them, particularly as it relates to pricing, which lags inflation. In addition to the carryover impact from last year's pricing actions, each of our business units are implementing further pricing increases in 2022, as we expect this to be another year of high inflation. While prices for some commodities, such as resin, came off their peak, we expect sourced finished goods, ocean freight and wages to be major sources of inflation this year. At this point, we forecast inflation to account for about 8% of cost of goods sold in 2022. Importantly, we plan to more than offset this through pricing and productivity, with gross margin expected to bounce back from 2021 levels. The supply chain backdrop remains challenging, and we expect the disruption from longer lead times for sourced products, port congestion, limited container availability, as well as shortages in components, labor and truck drivers to continue throughout 2022. To deal with this, we continue to implement a number of offsetting measures that enabled us to deliver a $1.2 billion increase in net sales in 2021 and secure supply in constrained markets. These actions include enhancing the forecasting process and extending planning windows to account for longer lead times, building an inventory on top-selling and high-priority SKUs, diversifying our supplier base and qualifying alternatives to critical components where possible, accelerating automation across our facilities, diversifying ports of entry through Project Ovid and enhancing compensation benefits, training opportunities and working conditions for our frontline employees. Although we expect supply bottlenecks to persist, we remain confident that we are taking the necessary actions to both effectively manage them and create more agility within our supply chain in the future. In 2021, we kicked off Project Ovid, a major supply chain initiative, which we expect to transform Newell's go-to-market capabilities, enhance customer service levels and drive operational efficiencies. We are planning to optimize the company's distribution network in the U.S. by consolidating 23 business unit-centric supply chains into a single integrated supply chain. In 2021, we completed the detailed concept, design and build phases of the project. This year, we have shifted to the testing, refining and implementation stage and recently completed the first round of systems integration testing. I'm very pleased to share that our new distribution center in Newville, Pennsylvania is on track to start receiving initial shipments in March. This summer, we plan to stand up Newell Brands' distribution company, which will allow us to accept one order, send one invoice and receive one payment from customers, while shipping our products on one truck. Ovid will enhance Newell's supply chain resiliency and agility. As we build operational excellence throughout the organization, it's important to recognize the meaningful progress we have made on the operational front, which has considerably simplified our way of working and put us in a stronger position to manage through this challenging environment. For example, we ended 2021 with about 36,000 SKUs, representing a 65% reduction from 2018, with plans in place to continue to simplify our SKU portfolio in 2022. We completed another four ERP conversions in 2021 and now expect 95% of Newell's sales to be on two platforms going forward. Let me now move to fourth quarter results. In Q4, net sales increased 4.3% to $2.8 billion as core sales grew 5.8% on top of 4.9% a year ago. This was partially offset by unfavorable foreign exchange as well as business and retail store exits. Core sales increased in six of eight business units and across every major geographic region. On a two-year stack basis, core sales increased in every business unit. Normalized gross margin contracted 280 basis points year-over-year to 30.1% as approximately 700 basis points of inflationary headwind more than offset the contribution from pricing and fuel productivity savings. Normalized operating margin declined 150 basis points year-over-year to 9.9%, reflecting the reduction in gross margin, which was partially offset by SG&A cost leverage. Net interest expense came down by $10 million year-over-year to $59 million due to debt paydown. The normalized tax rate of 17.4% was significantly above last year's tax benefit of 2.6%, due to a lower contribution from discrete idles. Normalized diluted earnings per share came in at $0.42 versus $0.56 a year ago, with the tax rate difference representing an $0.11 delta. Normalized diluted EPS exceeded our outlook on stronger top line, tighter control over expenses and a slightly lower-than-anticipated tax rate. Turning to segment performance. Core sales for the Commercial Solutions segment increased 1.7% against a very difficult year ago comparison of 13.8%, with both commercial and Connected Home & Security business units up relative to a year ago. Core sales for home appliances grew 5.6% on top of mid-single-digit growth in the prior year, reflecting strong performance in both North America and Latin America. Core sales for the Home Solutions segment increased 3.2%, lapping a difficult low double-digit comp. Strong growth in Home Fragrance, particularly in Yankee Candle retail stores and in the EMEA region, offset a slight decline in Food, which faced a tough comp. Core sales for the Learning & Development segment grew 5.3% as double-digit growth in Writing, which continued to rebound was offset by a decline in the Baby business, which lapped its toughest comparison to the year. Core sales in the outdoor and recreation segment increased 23.9% versus last year on very strong consumption in the quarter and an improving supply chain situation with broad-based strength across all regions. In 2021, Newell generated operating cash flow of $884 million, below our outlook of about $1 billion. As a result of the aforementioned challenges across the supply chain and strong consumer demand for our products, we decided to strategically build inventories on top-selling SKUs. While the temporary investment in inventory resulted in a miss to our forecast on cash, we believe it was prudent as it puts the company in a much better position to service customers and meet consumer demand going forward. Despite the temporary increase in inventory, we improved the cash conversion cycle by another four days versus a year ago. Through our proactive deleveraging efforts, the company's balance sheet is significantly stronger today than several years ago. Newell's leverage ratio came down to 3.0 times at the end of 2021 from 3.5 times a year ago, reflecting a $721 million reduction in gross debt during the year as well as about 11.5% growth in normalized EBITDA. Before going into the outlook for full year 2022 and Q1, I'd like to provide some context for the forecast and discuss the Connected Home & Security transaction. Our planning stance is that the divestiture will be completed at the end of the first quarter so that Q1 results still include the contribution from this business. Core sales outlooks for both Q1 and full year excludes CH&S. The company expects to use after-tax proceeds to both repay debt and buy back shares with the goal of maintaining Newell's current leverage ratio. Considering the anticipated use of proceeds, the divestiture is expected to have an approximately neutral impact on the company's normalized earnings per share in 2022. We are entering 2022 from a position of strength. We've seen healthy top line momentum early in the year and are encouraged by the quality of our innovation funnel. Although consumer behavior will continue to evolve as mobility improves and government stimulus has lapped, we think many of the recent habits will persist even as some categories continue to normalize. We are assuming a moderate level of volume elasticity from price increases, although thus far, we have not seen much of an impact. On the cost side, we expect inflation to remain elevated, albeit slightly below 2021 levels. We also anticipate continuation of the supply chain challenges that plagued the industry throughout 2021. As previously discussed, we have mitigating actions in place to address both inflationary and supply-related dynamics. We will maintain disciplined cost and cash management throughout the year and continue to build operational excellence as we accelerate automation and move into the implementation stage of Ovid. For full year 2022, we are forecasting net sales of $9.93 billion to $10.13 billion as compared to $10.59 billion in 2021. This outlook assumes core sales are flat to up 2% and a more than 6% headwind from the sale of the CH&S business, exits from low-margin categories, particularly in the outdoor recreation and Home Appliance businesses; closure of some Yankee Candle retail stores; as well as unfavorable currency. We expect normalized operating margin to expand about 50 to 80 basis points versus last year to 10.5% to 11.5% to 11.8% ahead of our evergreen target. This outlook assumes that pricing, along with productivity and mix optimization actions more than offset a roughly 500 basis point headwind from inflation as well as higher investment in advertising and promotion spend. For 2022, we are forecasting normalized earnings per share of $1.85 to $1.93 versus $1.82 in 2021, reflecting a mid-teens normalized effective tax rate and a 1% to 2% reduction in diluted shares outstanding as we deploy deal proceeds. We are budgeting for operating cash flow in the $800 million to $850 million range, which includes the year-over-year headwind from the loss of profits on CH&S once the divestiture is completed and one-time cash tax payment on this transaction. We expect to continue to improve Newell's cash conversion cycle with a particular focus on drawing down on the strategic inventory build in 2021. Capital expenditures for 2022 are estimated around $350 million, above normal levels due to one-time capital costs supporting infrastructure build for Project Ovid. For Q1, our outlook assumes net sales of $2.25 billion to $2.3 billion as core sales growth of 2% to 4% is offset by a 3% to 4% unfavorable impact from currency, exits from low-margin categories and closure of some Yankee Candle retail stores. Due to external dynamics, some retailers have accelerated their orders on seasonal merchandise into Q1, which is reflected in this outlook. We are forecasting normalized operating margin of 8.9% to 9.3% as compared to 10.1% in the year-ago period. Although in Q1, inflation is still expected to exceed pricing and productivity, the gap is much narrower than Q4 2021, and we expect operating margin performance to turn positive in Q2 2022. Our Q1 outlook assumes a normalized effective tax rate in the low 20% range and normalized earnings per share in the $0.26 to $0.28 range. We have driven significant progress over the past several years and continue to see tremendous opportunity for value creation ahead. We believe Newell is a much stronger company today and better equipped to successfully navigate the external dynamics with a focus on driving sustainable and profitable growth.

Let's now open the call for Q&A.

Hey good morning, everyone. I hope you’re doing well. So I kind of just wanted to ask around the comfort around the core sales guidance for the year. There just seems to be a lot of uncertainty out there around price elasticity, pull forward of demand across many of your categories and kind of what the health of the consumer looks like as we lap stimulus in the coming weeks here. So what gives you confidence around delivering growth against these tough comps given the uncertainty that lies ahead? And I guess, is there enough flex in the range should things deteriorate from here that this core sales outlook would still be achievable?

So Peter, good morning, and Happy New Year to you. I want to share that we experienced 12.5% growth in 2021, which is impressive. When we consider the top end of our range, with about 2% growth, we are looking at a stack growth of nearly 15%, and approximately 14% growth when compared to both 2019 and 2020. These numbers are certainly strong. We firmly believe we are on the path to becoming a sustainable growth company. Our brands are quite strong, backed by robust innovation pipelines. In 2021, our consumption levels remained high, and we are also gaining market share. While we faced some supply challenges, we expect that some of these will be alleviated, but not all. Overall, we feel optimistic. Additionally, certain consumer behaviors that began after the pandemic appear to be here to stay. For example, the home and hybrid work environments seem to be lasting trends, with most companies adopting a flexible work schedule of around three days a week. This shift should support continued in-home cooking, which is a positive factor. In the Writing business, although things are changing with hybrid work, we expect improvements in the commercial channel as more people return to offices. The outdoor segment, which had previously struggled, has made remarkable progress. Our Coleman brand is regaining its iconic status with a strong lifestyle positioning, and our nearly 25% growth in the fourth quarter, despite it not being the peak season, is commendable. The Contigo and Bubba brands within beverages are also performing well. However, I do anticipate some softening in the appliance and Baby sectors, which had significant growth last year due to stimulus. On a positive note, our candle business saw incredible consumption driven by interests in tranquility. While this may cool down somewhat, we are launching numerous innovations and expanding geographically, which is another point to consider. We are also accelerating our international efforts, which should support growth. Overall, I feel confident about our position and am hopeful for some upside.

Peter, I want to add one point, which I mentioned earlier in my remarks. We are anticipating a significant positive influence from pricing on our revenue this year in 2022. We have factored in some volume elasticity, meaning we expect that higher prices might lead to a decrease in volume. However, we haven't observed this trend yet. This gives us confidence that our guidance is cautious and not overly aggressive.

Great. Thanks. Good morning, everyone. And congratulations on a strong year, particularly in this environment. Question for Ravi, just on satisfaction with the portfolio. The organization obviously went through a period of great change. It went from a $16 billion company post the merger. Roughly half of that was divested through a period of sort of a fire sale period, almost if you will. You came in, you and Chris have done a great job of sort of amending the culture and stabilizing the portfolio. So the divestiture is sort of noteworthy, I think, within that context of the home security business. So can you just comment overall on your level of satisfaction with the portfolio as it stands? Should we expect further divestitures? What's kind of the role in M&A? And then, Chris, I have to ask two, just sort of the role of buybacks and share repurchases here and how you're sort of weighing that relative to M&A, as you sort of look at the portfolio more broadly. And then I have a quick follow-up. Thank you.

Let me begin, and then Chris can respond to the buyback question. Overall, I believe we have a strong and resilient portfolio. The positive aspect of this portfolio is that the different segments support one another. For instance, during the pandemic, the Food and commercial segments clearly grew, while Writing faced challenges due to school closures. In 2021, Writing had an exceptional year, whereas Food and commercial saw slower growth. This portfolio allows each business to assist the others. Our goal is for all of our businesses to grow, although at varying rates. Additionally, we completed our strategic planning process and categorized our businesses into three groups: the first being our high-value growth engines, which include Food, Home Fragrances, and Writing. These businesses have higher gross margins and I'm quite pleased with that. The innovation pipeline for all these areas is very strong, which makes me optimistic. The second group includes Baby and CH&S, which are steady businesses. In CH&S, we realized that it wasn’t central to our operations and didn’t align with our other businesses, but it remains a solid business. Thus, we decided to divest that segment as part of our ongoing strategy to consider small acquisitions and divestitures. We are very satisfied with the commercial business, which shows significant long-term potential, as does Baby. Then, there are outdoor and appliances, which we consider our challenging areas, but the teams have done an excellent job addressing the issues. We’ve identified that the key concern in these sectors is gross margins. The situation varies widely between the U.S. and International markets. Internationally, both outdoor and appliances show strong performance, highlighting a significant gap in gross margins. Our focus is on how to improve, particularly since the brands are much stronger in these regions. The teams are making substantial progress, and I was initially worried about the performance of appliances and outdoor. However, this year, outdoor has exceeded my expectations. Overall, I am quite pleased with our portfolio and believe we have the capacity to continue enhancing shareholder value. We will always consider small acquisitions, particularly among our top-tier brands, focusing on complementary businesses. However, these acquisitions will likely be minor and we’ll wait for the right timing. We have plenty of valuable brands to develop internally before embarking on a more aggressive acquisition strategy.

Yeah. Just on the capital allocation question, I think our stance on capital allocation remains consistent, which is we think we've got significant opportunity to drive continued strong operating cash flow, because we continue to see opportunity to reduce the cash conversion cycle of the company. With that operating cash flow, our first priority is to invest in the business, where we see strong opportunities to drive high returns. Beyond that, we expect to pay the dividend and maintain the dividend at the current level for the foreseeable future. And then beyond that, I think that's where we get into share repurchase and/or tuck-in acquisition. I think you'll see share repurchase feature more prominently in the near-term versus tuck-in acquisition. And the other comment that I would make is we also think that after having paid down $721 million of debt last year, and with – after we finish the allocation of proceeds from CH&S, we think our level of gross debt will remain consistent, and we'll start to move into share repurchase going forward, and get our net debt-to-EBITDA leverage ratio from the 3.0 down to the 2.5 long-term target through EBITDA growth rather than debt reduction.

Makes sense. Good to hear. If I could just slip in one more because I think it's important around the long-term margin opportunity. Chris, you've spoken a lot about this, and your team has done a good job. And so kind of taking a step back, understanding the volatility of the environment we were in last year that we're still in this year, there's an opportunity for margins here to be – EBITDA margin 17%, 18% versus 13% now. How big of a priority is that for the organization? What's the timeline you think you can achieve it, assuming we sort of get to sort of a more steady state in the environment looking out to next year? And how are you sort of balancing that with strategic investment in top line growth? So, thank you for that. I’ll pass it on.

Yeah. So I would say, we see that opportunity; it is a major focus of the company and the organization. We've done a couple of things. We've changed the company's compensation system this year to bonus business units on gross margin in addition to top line growth and operating income, to put a more specific focus on it. You've seen a lot of the actions we're taking, whether it's SKU count reduction, whether it's the comments Ravi made around margin-accretive innovation. The low-margin category exits are all designed to drive the company's margin up. We also are continuing to aggressively go after overhead. We've taken the company's overhead rate down by, I think, 450 basis points from 2018 to where we ended this year. And we still see opportunity ahead of us there. So we think margin improvement is a major source of opportunity for the company for the next three to five-year period at a minimum.

But I don't see top line growth versus margin improvement as being either/or. We have to walk and chew gum at the same time, and our teams realize that. And the key is it can just be growth for the sake of growth; it really has to be profitable growth. And that's what we've emphasized to all our VPs of marketing and this putting the gross margin in. If there's one focus in this company right now, if there's one word you ask people, it is gross margin.

Good morning. I was really impressed by the progress you've made on Ovid in the last six to twelve months. It struck me because productivity has been an area where many companies have faced challenges or had to take a step back to focus on product delivery. Could you share how you've managed to achieve such significant progress? I'm also interested in the productivity for this quarter. As you look ahead to 2022, what concerns do you have that focusing on these important long-term operational changes might distract from immediate needs, especially with all the challenges you’re facing? Thank you.

Thank you, Lauren. I’d like to share some thoughts regarding our turnaround plan that we initiated at the beginning of 2019. A key focus has been enhancing productivity, which required us to transform the culture and empower ideas from all levels within the organization. We embarked on an internal journey referred to as "peak," which has allowed employees to propose productivity initiatives. Last year, we achieved a remarkable 4% savings on cost of goods sold, stemming from around 2,000 to 2,500 individual projects. This success is attributed to the people operating the factory lines who know their processes best and now feel encouraged to share their ideas. We've fostered a culture that supports swift implementation of these suggestions, leading to a broad program embedded in our organizational culture. Regarding 2022, we anticipate a slight decline in productivity. Our plan assumes strong performance in manufacturing and distribution productivity and continued success in value-add engineering of products, similar to previous years. However, we expect to see a below-average year in sourcing due to inflationary pressures impacting our ability to achieve significant cost reductions from suppliers. In response, we are focusing on implementing our Ovid system this year, which we believe will pave the way for a robust productivity rebound in 2023. On the Ovid front, we are proceeding cautiously with a strong testing program. In January, we successfully completed our systems integration testing. Our first distribution center in Newville, Pennsylvania, is scheduled to begin receiving products in March, and we have cargo en route from China to the East Coast. We believe this initiative will help us manage the current supply environment more effectively.

I'll just add one thing, Lauren, which is sort of stepping back, really the sea change in the company, which is enabling us to really walk and chew gum at the same time, regardless of which area, is that the culture we have ignited the passion of our people. And when you look at the score like 75 and on engagement, and it came up, I mean, it used to be a few years ago about like 45. And when you look at our frontline workers, their engagement was actually at 78, which is pretty incredible in this environment. And so what's really happening in this company, hybrid structure and creating alignment against the vision of what we're trying to do, empowering on the front side with consumers for the business units; on the back unifying. We have 600 people involved with Ovid, for instance. And laser focus on execution. I think that those are the things because you asked the question, hey, how do you also do the day to day? I think we just have to do these things. And the secret sauce is our people and our leadership teams that are driving this.

That's really helpful. I wanted to ask about Ovid because at our conference, Chris mentioned a 30% reduction in miles driven. You provided specific information regarding the logistics side of Ovid. Considering the high transportation and logistics costs, which seem unlikely to decrease, how has the current environment impacted the payback or payback period for this initiative? I would appreciate any insights you can share.

Yes. At a high level, we reported a 40% reduction in miles driven in the US once we fully implement the Ovid network model. We've found that the savings from Ovid are actually higher than we initially anticipated at the project's beginning. This is mainly due to significant savings in transportation costs, and with current rates being elevated, the amount we expect to save will be greater. However, the capital investment has also increased, as the cost of leasing the two new distribution centers and the expenses for racking and equipment has risen. Nonetheless, the overall payback from the program looks even better than when we first launched it. We were fortunate to start at the right time, and I believe the program will deliver a better financial return than we initially expected.

Great. Thank you so much.

Thank you and congratulations on your results. I wanted to revisit your comments on balancing pricing elasticity and margin growth. Could you provide some data on volume share across all channels, comparing the most recent figures to those from 2020 or even before COVID? I understand you began implementing price increases in some categories in the second quarter of last year. It would be beneficial for investors to see how you managed to maintain some volume share. Additionally, I know your appliances business performed well in LatAm and has become a significant area for you within that segment, with María Fernanda likely involved in that initiative. Given the high inflationary environment we are all aware of, are you considering this in terms of elasticity, in relation to what Ravi mentioned? Chris, you also hinted at some elasticity in your guidance, so I was hoping you could help us connect all of these points. Thank you very much.

Yes, let me address that, Andrea. When we compare 2021 to 2020 and 2019, we've been gaining market share in many of our categories, including the Writing and Food businesses and several brands I mentioned earlier, and we're growing faster than the categories themselves. Regarding consumption trends, last year showed strong consumption alongside sales, maintaining a good balance between the two. Additionally, there was consumption growth when we compare pre-pandemic times to 2019, and we've taken part in that growth, indicating our brands are in good health. As for 2022, it’s still early. We anticipated some softness in January due to a significant surge last year, and the retail industry also expected this trend. However, the early weeks of February have shown signs of recovery. It's still uncertain where this will ultimately lead, but we feel confident based on the overall trends we're observing. For instance, with Contigo, we see it gaining market share and consumption over the past several weeks as we push forward with our innovations. We have factored in some volume shortfalls in our models due to price increases, and the extent of that impact remains uncertain. Nevertheless, we’re quite confident in the guidance we've provided. Regarding your question about Latin America, especially concerning appliances, Oster continues to be a strong brand. Its reputation as a moderate to high-price point brand has helped us to drive innovations effectively over the years. We achieved record production of blenders, which allows us to navigate the inflationary landscape with appropriate pricing strategies based on our brand strength and innovation efforts. Chris, do you have anything you’d like to add?

I think you covered.

Thank you. First, could you discuss when you anticipate pricing changes will take effect and provide a range of prices, considering the various businesses involved? Additionally, regarding sales, can you elaborate on the flat to plus 2 growth in total? It seems there will be varying growth expectations across different sectors. Also, the home-related category may slow down as we spend more time outside the home, but it seems you don’t expect a significant decline. Can you share insights on the commercial outlook once Connected Home & Security is launched, and your thoughts on the back-to-school season for 2022 and the timing for returning to the office? Thank you.

Yes. So on pricing, and maybe this will be helpful. The 12.5% core sales growth that we reported for 2021 had about 3 or 4 points of pricing in it. And the balance was volume and mix that were contributing to the growth. With respect to our outlook for 2022, we're expecting the pricing contribution to be in the high single-digit range. And so, it's a much bigger contribution from pricing to the top line in 2022 than was in 2021. Most of that pricing has already been announced. I think, in our plans, virtually all of our pricing will be announced by the end of the first quarter. And so, what you'll see is that in Q1, not all of the pricing is yet effective. But in Q2, the vast majority of the pricing will be in effect. And that's why in the guidance, we're expecting in Q2 our operating margin performance to turn positive. And as we said, I think, in the third quarter call, the third quarter was sort of the low point relative to operating margin trend versus the prior year. It got better in Q4. It's going to get better in Q1, and then it will start to turn positive in Q2. So that's where we are on pricing. I would say broadly, the range this year is sort of high single digits on average across the company is the financial impact.

Let me quickly recap our businesses. In Writing, we anticipate another strong year, with retailer orders accelerating as we approach back-to-school season. Our brands remain robust. The commercial channel holds significant potential, dependent on the reopening of offices, which was not a factor in 2020 and 2021. I feel optimistic about our Writing prospects. Regarding our commercial business, most categories, aside from washroom products, performed well in 2021. We were comparing against 2020, which was influenced by hygiene demands. As offices and the hospitality sector reopen, we believe the commercial business will perform well. In home fragrance, consumption may be somewhat subdued due to increased usage during the pandemic. However, we are innovating in new categories beyond candles and expanding geographically, which we expect to benefit the business. In the food segment, we have numerous innovations and anticipate continued cooking trends in a hybrid model. Our new Rubbermaid bakeware launch is promising, along with a significant restaging of Calphalon, which should contribute positively. The O&R segment is thriving. People are returning to stores, and we are seeing positive momentum. We are working on turning around the Marmot brand, but Contigo, Bubba, and Coleman are performing well both domestically and internationally. Overall, I am confident in the outlook for these five businesses. The Baby segment faces challenges due to strong comparisons, the absence of stimulus, and changes to the child tax credit, making us a bit more cautious. Home Appliances may also face some headwinds due to longer purchase cycles. Our goal remains to grow every business, albeit at different rates. All businesses have implemented price increases as well.

Great. Thanks so much.

Hi, good morning.

Good morning.

Can I follow up on Olivia's question? I'm trying to understand the level of elasticity you're considering or if it's related to comparisons. High single-digit pricing suggests inflation is impacting gross margin significantly. It seems pricing will exceed that, and it almost sounds like you're indicating a drop in volumes to 8 points, which appears much more than slight elasticity. I'm curious if you're observing anything in the business, although it doesn't seem like you're noting significant elasticity. Are you worried about the trends in comparisons? Essentially, I'm trying to clarify your comment on modest elasticity, as your outlook on pricing suggests more substantial elasticity. Thank you for your insight.

I'll just touch on one quick point, and then Chris can elaborate. Remember, we are also exiting some businesses, which impacts core sales, particularly with certain SKUs due to their low margins. We discussed some of this. So with that, Chris, why don’t you...

Yes. Overall, the high single-digit pricing we have planned suggests that our forecast for volume is down in the mid-single digits. We believe that pricing will more than offset this volume decline. However, the anticipated decline in volume is based on our assumptions regarding volume elasticity. So far, we haven't observed this decline; instead, we continue to see volume growth. We are being cautious in our planning, considering that stimulus effects are fading. As Ravi mentioned, we expect certain categories to return to normal trends, and we recognize that pricing will eventually impact consumers. If we see no effect on volume from pricing or limited elasticity, we could exceed our top-line guidance. However, we don't think it's realistic to assume no impact from volume elasticity. We've aimed to set our expectations prudently, taking into account the comparisons, pricing, and overall environment. This year presents a challenging planning landscape, but we want to ensure that our top-line goals still position us for strong profit growth, earnings per share growth, and prudent management of working capital. If our top line performs better than expected, we will be prepared to respond and adjust accordingly.

I appreciate the perspective. Can I ask just one quick follow-up, very quick? From a gross margin perspective. Obviously, operating margins seen up this year. There was a comment around laser-focused on gross margins, and I appreciate there's been commentary on various kind of puts and takes as we get through the year. But with this level of pricing, would you expect gross margins to build and also be up for the year? I apologize if I missed that earlier in the call, but I don't recall hearing it. Thanks.

Yes. So just maybe some additional perspective. And obviously, we don't guide gross margin specifically. But we've guided operating margin to be up 50 to 80 basis points. And I think our expectation is gross margin will be up more than that because we are planning higher investment in advertising and promotion as well.

Hi, thanks very much. Just a housekeeping question, Chris, maybe on Home Fragrance. I mean, the growth there has turned out to be, I think, better than a lot of us expected. But can you just remind us, are you finished with the distribution changes, the closing of the stores and pulling back in some locations? So are the headwinds there now behind us? And are you happy with where your distribution sits today? But then my second bigger picture question, just on international. It's exciting that you're now kind of moving forward. But can you just number one, give us sort of a 20,000-foot view of which markets you think are the ones that have the most potential? How quickly can you move to build out that international business? And is there any risk to your margin expansion goals over the next couple of years as you maybe invest in some of those newer markets? Thanks.

Sure. I'll hit home fragrance, and then Ravi can come on international. On Home Fragrance, we feel very good about the transition that we've made in that business to an omnichannel business. We have a very strong and growing direct-to-consumer business with our online website. We have rationalized our store footprint, and I'll come back to that specifically in a minute. And we've grown our business with leading retailers and feel very good about the position. That change has allowed us to not only get the business back to growth, but to dramatically improve profitability in the business. From a stores perspective, when we started this journey, I think in 2017 or '18, we had over 500 stores. We ended this year with about 300 stores in 2021. And I think our plan is to close maybe 30 stores or something in that range in '22. So the pace of store closures is clearly slowing down. And I think you'll see that most of that store rationalization is behind us at this point, although there is still a little bit to go.

Wendy, regarding international markets, it's indeed an exciting prospect. From my experience as President of international operations, I have a natural inclination towards pricing. I see significant opportunities here, both for growth and profit enhancement. Currently, our gross margins in international markets are slightly better than in the US, especially in sectors like outdoor and appliances. The challenge we face is that while we are consolidating our approach within the United States, we remain fragmented internationally. We have multiple offices that are being streamlined, but we lack a unified strategy. This results in various sales teams approaching the same retailers separately in the UK. One key opportunity lies in unifying our market approach to retailers as One Newell. Additionally, we possess a strong infrastructure and effective country management systems in Latin America, but those are primarily focused on appliances; we haven't fully utilized that strength for other categories. We need to explore how to integrate adjacent markets like food. There is substantial potential in Latin America to enhance our Writing, outdoor, and food categories by leveraging our existing resources. In particular, we will concentrate on the top 10 countries where we have recognizable brands and established discretionary income, which include the UK, Canada, Australia, New Zealand, France, Brazil, Mexico, and Japan. These locations are where we will invest our efforts since we already have a strong presence there. We’re focusing on depth rather than breadth within our market strategy, possibly even exiting certain markets and transitioning to a distributor model in many places. To guide this strategy, we have the right person for the job. María Fernanda is exceptional and will greatly accelerate our efforts.

Yes. Thanks. Good morning, everyone. So, Ravi, I just want to ask you, I mean, Newell historically has competed in very fragmented markets. A lot of your competitors are much smaller in scale. And obviously, the environment has been tough for everyone, but more so for smaller companies that don't have the resources or the capabilities to kind of manage and navigate what's been going on. So I just wanted to get kind of your state of the union on what you've seen in the competitive environment and if that could foster even better market shares as we kind of move forward in a more normalized environment?

Yes, it's a double-edged sword because it's crucial not to become complacent; sometimes smaller competitors can move faster. If we grow complacent due to our size, we risk falling behind, as we may have experienced in the past. I encourage my teams to maintain a bit of vigilance and think about potential disruptors, pushing us to be proactive in disrupting ourselves. One of the significant advantages we've overlooked in the past is our scale. We have operated as if we are eight separate $1 billion companies rather than a single $10 billion company, failing to use our influence effectively with customers. This resulted in fragmented distribution networks, making us compete based on our size instead of truly leveraging our scale. A current example is Ovid's approach of consolidating supply chains into one, simplifying things for our customers who have previously dealt with multiple representatives from Newell. This shift will be beneficial. Additionally, by strategically focusing our advertising and promotion spending on high-growth margin businesses, we expect to gain traction, evidenced by the recent share gains rather than spreading ourselves thin. While we respect our competitors and analyze each category carefully, the fact that we have seen share gains across many brands is encouraging. All of our top 10 brands grew in 2021, with 13 out of the top 15 showing growth, which bodes well for our future.

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.