Newell Brands Inc. Q4 FY2022 Earnings Call

Good morning, and welcome to the Newell Brands' Fourth Quarter and Full Year 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. A live webcast for this call is available at ir.newellbrands.com. I will now turn the call over to Sofya Tsinis, Vice President of Investor Relations. Ms. Tsinis, you may begin.

Thank you. Good morning, everyone. Welcome to Newell Brands' Fourth Quarter and Full Year Earnings Call. On the call with me today are Ravi Saligram, our CEO; Chris Peterson, our President; and the newest member of the executive team, Mark Erceg, our CFO. 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, Form 10-Q and other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as other materials on Newell’s Investor Relations website. Thank you. And now I'll turn the call over to Ravi.

Thank you, Sofya. Good morning, everyone, and thank you for joining us on our year-end call. Fourth quarter results were in line with our expectations and brought to a close a difficult second half. The business continued to be impacted by a tough operating environment, including slowing consumer demand for general merchandise categories as well as inventory reductions at retail. Our team remains focused on executing our strategic priorities with excellence while navigating these challenges. They did a great job in reducing inventories in the fourth quarter and drove sequentially stronger cash flow performance. For the year, Core sales declined 3.4% against a very demanding year-ago comparison of 12.5% growth and soft volumes more than offset favorable pricing. 2-year stacked growth exceeded 9%. The Writing and Commercial businesses delivered core sales growth in 2022, while core sales for the other businesses declined. The company's core sales and domestic consumption exceeded 2019 levels even as Home and Outdoor categories are continuing to normalize from peak pandemic levels. Many of our major brands such as Rubbermaid, Sharpie, Paper Mate, Rubbermaid Commercial Products, Ball, EXPO, Elmer's and Campingaz showed strength. Despite a much tougher than anticipated operating and macro environment in 2022, which weighed heavily on the company's results, we made tangible progress across a number of focus areas. First, many of our iconic brands were recognized for their innovations. For example, Ball stack and store innovation earned Good Housekeeping Cleaning and Organization award. Graco won the JPMA Innovation Award for Child Restraint Systems with Graco Turn2Me car seat. Coleman RoadTrip 285 Stand-Up Propane Grill was recently ranked by Outdoor Gear Lab as the Best Portable Grill in 2022. In the U.S., new innovation under Mr. Coffee, Latte 4in1 received a Good Housekeeping, Best Gear and Best Coffee Award. Our latest innovation in Writing, Elmer's Squishies, launched exclusively in Q4 at a major retailer with very strong results. In 3 months, it became Newell's top activity item outpacing slime sales over 3:1. National launch of Squishies across U.S. retail will begin in late March 2023. In April of '22, we launched Newell Creative Kitchen, a unique and efficient social media vehicle that allows us to take a prandial approach to connect our brands across consumer life moments and occasions and bring curated content to target consumers, allowing them to repost to their own followers. We have seen a fourfold increase in engagement through our live presentations and a 90% higher click-through rate to our branded website since creating Newell Creative Kitchen. Second, we continue to build operational excellence across the organization by transforming our supply chain to Project Ovid and automation. And earlier this year, we announced the next major step in this journey as we are unifying our global supply chain and centralizing manufacturing, which we expect to drive meaningful margin improvement in the long term. Third, we made significant progress on complexity reduction, ending 2022 with about 28,000 SKUs as compared to approximately 36,000 in 2021 and over 100,000 in 2018. Our revenue per SKU has more than tripled versus 2018. We will continue reducing SKUs and accelerate SKU productivity. Fourth, we drove another year of strong productivity savings at around 3% of COGS which, in combination with pricing actions, helped to mitigate the high single-digit headwind from inflation. We will further accelerate our productivity efforts in 2023. And last but certainly not least, we advanced our corporate citizenship agenda, as we continue to galvanize our employees to be a force for good. We strengthened our people-first One Newell culture, maintained strong employee engagement at world-class norms and committed to carbon neutrality by 2040 for all Scope 1 and 2 emissions across our global portfolio. I'm also pleased to share that for the second consecutive year, Newell brands has been named one of Fortune's 2023 World's Most Admired Companies. While we are proud of the operational achievements and believe we are a much more agile company today, we also recognize that the macros have put considerable pressure on our business. We've been taking proactive and decisive actions to effectively navigate the current environment while positioning the organization for long-term success. In late January, we announced Project Phoenix, a major evolution in our operating model and a restructuring program that is expected to drive significant savings. Phoenix will further simplify and strengthen our company by leveraging the scale and power of One Newell to optimize our cost structure and operate more efficiently. Let me shed more light on Project Phoenix. There are 5 key tenets. First, we will combine business units into 3 operating segments based on consumer dynamics and customer commonalities. Second, we will centralize our sales efforts for our top 4 customers. Third, we'll go to One Newell go-to-market approach in key international geographies. Fourth, we will centralize and unify manufacturing globally. And fifth, we'll strengthen key capabilities, reduce duplication, enhance role clarity and drive standardization of processes, tools and measurements. We're bringing the Food, Home Fragrance, Home Appliances and Commercial businesses under one umbrella, Home and Commercial Solutions, led by Mike McDermott, the segment CEO. Lisa McCarthy has assumed a new role as Chief Operating Officer of the Home business reporting to Mike. Learning and Development, which includes Writing and Baby, is led by Kris Malkoski. Jim Pisani will continue to lead our Outdoor and Recreation business. Through this evolution, we will honor the differences and nuances among our businesses and unify our commonalities related to the consumer and customer while leveraging our scale and enabling better opportunities for internal mobility. Our iconic brands play a key role in the lives of nearly every U.S. household. We expect the new operating model to unlock additional growth opportunities for the business over time. We will leverage the power of our brands to meet consumers' daily needs in and out of their homes through their major life moments and occasions. Our international business remains an important priority for Newell. In 2023, core sales for International increased 0.4%, significantly outpacing North America despite macro and geopolitical pressures. As part of Project Phoenix, we are continuing to reduce international fragmentation by moving to a One Newell go-to-market approach in key geographies such as Australia and New Zealand, LatAm, Japan, and as announced last fall, Canada. We're also evaluating the structure in consultation with employee Works Councils in Europe. This should dramatically reduce fragmentation, accelerate growth, and profit trajectory for our international businesses over time and increase depth and breadth of franchise outside of the U.S. As part of Project Phoenix in the U.S., we're also moving to One Newell sales model for several of our top customers. Centralizing these teams will simplify our customer interaction, significantly improve the customer experience and strengthen our position as a best-in-class partner. I'm proud that we've built high, wide, deep and enduring relationships with key customers and are increasingly perceived as a valuable strategic partner. Based on the success of Project Ovid and in the spirit of One Newell, we are moving to a unified global supply chain organization, which Chris will elaborate on later. As we focus on optimizing our cost structure, we are taking decisive action on our real estate. In a hybrid work environment, we have the opportunity to close or consolidate offices and adopt new ways of working. We just announced the closure of our corporate offices in Boca Raton and South Deerfield and earlier this year, the consolidation of our Huntsville campus. We're in the process of discussing other actions. In turn, Project Phoenix is expected to result in the elimination of approximately 13% of office positions. While this was a very difficult decision and one we as a leadership team did not take lightly, we made every effort to treat our departing colleagues with respect and dignity, and we are doing all we can to help with their transitions. The actions we are undertaking are a continuation of the simplification agenda that we've driven over the last 4 years and in response to the difficult macro environment. We expect Phoenix to yield annualized pretax savings in the $220 million to $250 million range when fully implemented. At its core, Phoenix is not just about restructuring. It is about leveraging our scale. It is about significantly evolving our operating model to strengthen the company and prepare for the future. As macro conditions remain unfavorable to top line growth, our prime focus in the near term is cash flow and gross margin improvement. I know Chris is working hard to get his nickname back as the $1 billion man. Speaking about the future, this morning, we also shared that I'll be retiring on May 16. This is a very bittersweet moment for me. While we look forward to pursuing new interests and spending more time with my family, including my first granddaughter, who was born just a few weeks ago, I'll certainly miss everyone at Newell Brands. It's been a distinct honor and privilege to lead the company over the last several years, and I've loved every day at work. I remain inspired by our talented employees, passionate, resilient, and courageous. I'm very proud of our strong world-class executive leadership team who made significant progress in strengthening the company by reducing complexity on the journey to rejuvenate our iconic brands to be more modern and relevant, launching successful innovations that leverage pandemic trends, building e-commerce and omnichannel as a competitive advantage, and transforming our supply chain. The team is working diligently to implement Project Phoenix and make our new segment-based operating model a major success. I want to congratulate Chris on his well-deserved elevation to the new CEO of Newell. He's been a true partner to me in the turnaround, and I believe he is the right person with the right skill set and right temperament to take Newell to the next level. I know our leadership team respects Chris and will strongly support him to deliver our key priorities. I'll be partnering closely with Chris to ensure a smooth and seamless transition and focus my efforts on ensuring the successful execution of Project Phoenix, accelerating momentum on international, and rallying the organization to overcome macro challenges with speed and dexterity. I'm also pleased to welcome Mark to Newell's leadership team and its first earnings call with us. I believe his extensive experience as a CFO will add significant value to Newell Brands, and I'm confident that he and Chris will be a powerful combination moving forward. Despite the macro headwinds the company faces, I am optimistic about the future of Newell. We have great brands that consumers love. We have built e-commerce and omnichannel prowess. We have excellent customer relationships and are reigniting the processes and passion to drive meaningful innovation. We believe we will return to driving sustainable, profitable growth once the economy turns in our favor. Our best days are ahead of us. Onwards and upwards, and now I turn over to Mark for brief remarks.

Thank you, Ravi, and good morning, everyone. Over the last 4 weeks, I've immersed myself in the business and the organization. And during that time, in many ways, I felt like I was getting reacquainted with an old friend. I say that because after spending the first 18 years of my career at Procter & Gamble, I spent the next 13 years learning the ins and outs of building products, transportation, luxury goods, and health care information technology. Those unique experiences, I believe, prepared me well as I now come full circle and return to my first true business love, which is consumer products, where deep consumer insights, differentiated innovation, creative 360-degree marketing, operational excellence, and the first moment of truth all rang true. I undoubtedly still have a great deal more to learn, but in my brief time at Newell Brands, I've already made some high-level observations, which I'd like to share with you. First, it is clear to me that over the last couple of years, Newell Brands under Ravi and Chris' leadership has built a great team within a strong mission-driven culture that guides the behavior of 28,000 dedicated professionals who strive each day to bring value to the business and the organization. Second, dramatic steps have been taken to simplify and streamline the business, which were necessary prerequisites for us to improve our speed, agility, and financial performance going forward. Third, the bold actions recently announced as part of Project Phoenix to reduce overhead costs and create scale across manufacturing, distribution, transportation, and customer service are our key business and organizational enablers, which I believe will serve us very well in the years ahead. Finally, and perhaps most importantly, there is broad recognition across the entire company that while these past and current actions are all steps in the right direction, there's much more work that needs to be done. My interactions have led me to the conclusion that the organization is eager and excited about the future because Newell has a robust portfolio of leading brands with strong market share positions which when coupled with the right capabilities should allow us to continue on our journey towards becoming a world-class innovation-led, consumer-driven company that can consistently grow sales and expand margins year after year and in doing so, generate meaningful levels of total shareholder return. Personally, I'm excited, honored, and humbled to be part of that journey. And I'll now turn the call over to Chris.

Thank you, Mark, and good morning, everyone. I'd like to echo Ravi's sentiment by welcoming Mark to the team. Mark and I have known each other for a long time, having worked together at P&G. Although Mark has only been here for a short time, I can already see what a great fit he is for the organization and look forward to partnering with him and the rest of the leadership team to unlock the full potential of the business. I would also like to thank Ravi for his leadership and partnership over the past several years. I've admired his passion, commitment, and people-first mindset, which are infectious and have reinvigorated the company's culture. I'm honored and excited to become the next CEO of Newell Brands. In my new capacity, I look forward to working with our leadership team, the Board, and all of Newell's dedicated and talented professionals around the world to drive shareholder value creation through diligent and thoughtful execution of our strategic agenda. Before jumping into results, I'd like to take a few minutes to talk about some of the key business and organizational initiatives we have recently taken to strengthen the company's operational foundation. As we've mentioned before, a key component of our aspiration to become a TSR leader in our industry is predicated on creating a scaled, world-class supply chain that positions Newell as the retailer partner of choice from a service, reliability, and capability standpoint and leads to breakthrough value creation in terms of margins, cash, and reduced complexity. Consistent with that, on February 1, we seamlessly implemented the second go-live wave of Project Ovid across the remaining Food categories as well as the Writing, Outdoor and Recreation, and Commercial businesses. Having reached this major milestone in Newell's supply chain transformation journey, we are now at a point where we can begin to fully leverage the new go-to-market model to operationalize distribution and transportation benefits, improve customer service, better enable omnichannel solutions, and drive broad-based operational excellence across the organization. Project Ovid was an integral step in demonstrating the organization's readiness and willingness to undertake a significant change agenda and commit to a One Newell culture. So we are building on this momentum as part of Project Phoenix to further optimize the company's operations by centralizing manufacturing into a supply chain center of excellence. This will, for the first time, allow us to create and leverage manufacturing scale and turn it into a competitive advantage. While this will not materialize overnight, we do believe that a unified global supply chain organization will drive significant efficiencies and improve our supply chain resiliency, further enhance the company's technical capabilities, strengthen our culture of customer connection and collaboration, and position us to become a best-in-class scaled general merchandise supplier to our retail partners. Now let's move on to fourth quarter results, which were largely consistent with the outlook we provided in October, and our focus on optimizing cash flow yielded strong results. Net sales for the fourth quarter declined 18.5% year-over-year to $2.3 billion due to a 9.4% decrease in core sales as well as the impact of the divestiture of the CH&S business at the end of Q1, unfavorable foreign exchange, and certain category and retail store exits. Top line trends remain challenged due to inventory reductions at retail as well as softer consumer demand for general merchandise categories. We expect these dynamics to persist in the near term. Normalized gross margin contracted 360 basis points versus last year to 26.6% as the impact of reduced fixed cost absorption, unfavorable foreign exchange, and inflation more than offset the tailwind from pricing and fuel productivity savings. Before moving off of gross margin, I should mention that during the fourth quarter, we elected to change Newell's method of accounting for certain inventory in the U.S. from LIFO to FIFO and to conform the company's entire inventory to a single method and simplify the company's inventory accounting. Therefore, the financial statements in today's release and the numbers we are referencing reflect the impact of this accounting change to FIFO and both in the current and prior year periods, which have been retroactively adjusted. For Q4 specifically, there was a $4 million increase to cost of goods sold relative to what it would have been under the prior method. Normalized operating margin declined 510 basis points versus last year to 4.9%, reflecting gross margin pressure and the impact of top line deleveraging on SG&A costs. Net interest expense increased to $64 million from $59 million in the year-ago period. The normalized tax benefit was $5 million as compared to a $38 million expense last year with the difference largely driven by an increase in discrete tax benefits. For the quarter, normalized diluted earnings per share were $0.16 as compared to $0.42 last year. During the fourth quarter, Newell's cash flow performance improved considerably, and it began to reflect the actions we took in 2022 to rightsize our supply and demand plans. The business generated operating cash flow of $295 million in Q4 as inventory declined by more than $400 million relative to Q3. Working capital was a source of cash in Q4 despite a meaningful drag from payables, which have been negatively impacted by the timing of our pullback on the supply plan. Although the company ended 2022 with an elevated level of working capital and operating cash outflow of $272 million, Q4 cash results in combination with our proactive pullback in the supply plan give us confidence that operating cash flow will bounce back significantly in 2023. Despite the strong snapback in cash flow, we ended 2022 with a leverage ratio of 4.5x as we took on short-term debt to navigate through this tough environment. While we expect the leverage ratio to be pressured in the near term, we remain laser-focused on strengthening the company's balance sheet in the years ahead. Note that effective Q1, we are implementing a new operating model and consolidating our previous 5 operating segments into 3. Therefore, and in the interest of time, I'm going to dispense with the usual high-level segment sales commentary for 2 reasons: first, you can easily find these numbers in the tables attached to our press release; and second, I'm sure everyone is interested to hear our comments about fiscal 2023. Taking a step back, 2022 was clearly a challenging year for Newell, but we acted quickly and decisively to mitigate the impact of the external headwinds and ensure we are strategically investing in core capabilities that position Newell for success over the long term. In 2023, we've identified 5 major priorities to stabilize Newell's financial performance while driving foundational improvement so we can return the company to sustainable and profitable growth as macros improve. First, strengthen cash flow and balance sheet by continuing to rightsize inventories, carefully managing the forecasting process and staying close to the evolving consumer and customer trends so we can remain agile in planning. Second, drive gross margin improvement by accelerating fuel productivity savings, further advancing our automation initiatives, operationalizing Project Ovid distribution and transportation benefits, pricing internationally for currency, and instilling greater financial discipline surrounding new product innovation. Third, drive overhead savings through Project Phoenix and tight spending controls to offset the impact of incentive compensation reset to normal levels and wage inflation. Fourth, continued SKU count reduction progress and initiate a bottom-up white sheet SKU approach to enable the next phase of reduction. New company structure to enable faster transformation progress. Despite taking these proactive and decisive actions strengthening the company's performance, we expect the external landscape to remain challenging in 2023. The high level of uncertainty on the macro front has influenced our modeling assumptions as follows: we are assuming consumers' disposable spending power will be under pressure due to inflation in food, housing, and energy with consumers in Europe feeling greater stress than in the U.S. We also expect consumer demand for general merchandise categories to remain soft due both to macroeconomic environment and normalization of home and outdoor categories from peak pandemic demand levels. Retailers are likely to continue reducing open-to-buy dollars in general merchandise categories. Foreign exchange is expected to remain a headwind for the year. We expect the supply chain pressures to continue to ease and for inflationary pressure to moderate to low single digits of COGS, down from high single digits in 2022 as commodity and transportation prices continue to move off their peak levels. Since we expect many of the headwinds the company experienced in the second half of '22 to persist in 2023, we are maintaining a prudent bias when setting our demand and supply plans to ensure a heightened focus on cash flow generation, working capital improvement, and optimization of Newell's cost structure. Within this context, our 2023 financial outlook contemplates net sales of $8.4 billion to $8.6 billion with core sales declining 6% to 8%. We're assuming nearly a 3% headwind from foreign exchange, certain category exits, and the sale of the CH&S business, which closed at the end of Q1 last year. Normalized operating margin is expected to be flat to down 50 basis points versus last year to 9.6% to 10.1% as stronger gross margins are offset by overheads. We expect to drive above-average productivity savings, which in combination with carryover pricing and new pricing outside the U.S. should more than offset the impact from inflation. We're planning to maintain tight spending controls and are assuming that Project Phoenix unlocks about $140 million to $160 million of pretax savings this year. However, we expect these benefits to be fully offset in dollar terms by incentive compensation reset, wage inflation, and select capability investments. We are forecasting normalized earnings per share of $0.95 to $1.08 as we expect a significant year-over-year increase in the interest expense and tax rate. We are assuming a return to a more normalized tax rate in the high teens range as compared to 2.5% in 2022. At the midpoint of the range, we are assuming that normalized earnings per share decline low double digits on a constant tax and currency basis. We expect a significant bounce back on cash flow in 2023 from timing of inventory purchases and payables with free cash flow productivity well ahead of 100% at the midpoint of our guidance range. We're forecasting operating cash flow in the $700 million to $900 million range, including about $95 million to $120 million in cash expenditures from Project Phoenix. Our first quarter outlook assumes the following: net sales of $1.79 billion to $1.84 billion, including a core sales decline of 16% to 18% and a 7% headwind from the sale of the CH&S business on March 31, 2022, foreign exchange and certain category Yankee Candle store exits. We are forecasting normalized operating margin of 3.0% to 3.5%, significantly below 10.6% last year due to fixed cost deleveraging, inflation, and foreign exchange pressure. We expect a normalized loss per share of $0.03 to $0.06. The depressed earnings per share in the company's smallest quarter of the year from a seasonality perspective reflects significant margin pressure, a step-up in interest expense, and a modest tax benefit. We clearly expect a much tougher first half of the year relative to the back half as the business cycles more challenging top line comparisons with headwinds from currency and inflation carryover being more front-half weighted, whereas benefits from Project Phoenix are expected to be more back half loaded. We're also assuming that retailer inventory reductions and constrained spending on discretionary products will persist through the first half of the year. As such, we expect core sales growth to be stronger in the second half of the year versus the first half. We are taking decisive actions across all areas that are within our control to successfully navigate through this difficult macro backdrop while building and investing in core capabilities, which we believe will position the company for a return to sustainable and profitable growth.

And our first question comes from Bill Chappell with Truist.

Thanks. Good morning. And congratulations to everyone. First part of question on Project Phoenix. Obviously, over the years, even before your two tenures, there have been a lot of projects, a lot of consolidation of divisions from 5 to 3 and 3 to 5 and what have you. How is this different? I mean what do you see in cost savings that you haven't already gotten from the prior projects that really gets you confident about how this makes a big change? Like I said, it's been done, it seems attempted multiple times before in the past decade.

So Bill, I'll start with that. The idea originated when we were examining the Food and Appliance businesses. The customers and merchants overlap, yet we hadn’t been approaching it in an integrated manner. The consumer base is consistent since they are all connected to the kitchen. As we contemplated this, we realized that the concept of consumer life moments and occasions was really focused on understanding where these fit and how to group the businesses. Newell has shifted between centralization and decentralization over time, but in the last three years, we have adopted a more holistic approach with our businesses being front-facing while unifying the backend to leverage scale. This is the next step in that evolution. We recognized that it makes sense to combine the home candle business, especially after COVID taught us that home is central. The commercial aspect aligns with the Rubbermaid brand, so we decided to consolidate that as well. This transition has helped us streamline operations, reducing the number of CFOs and HR teams across businesses, creating larger roles for employees and improving span of control. Additionally, our integrated international strategy aims to unify Newell as a whole due to past fragmentation. Our One Newell market approach and go-to-market strategy should yield significant benefits. We have never unified our supply chain globally in this way, which we believe will enhance our decision-making regarding sourcing and manufacturing, ultimately improving our gross margins in the long term. There are many opportunities for us moving forward. This initiative is not simply about cutting costs but is strategically designed for sustainable progress.

Okay. I'll follow up on that. The second question is just in terms of consumer demand, trying to understand if there are areas where you're seeing meaningful pullback from consumers due to recessionary environment or if you're just expecting that to happen as we move through the year? And if the former, then where are you seeing the biggest pressure points?

I think well, two points. One, I'll just reiterate. One, we are about 2019 from the pandemic levels overall. So that's encouraging. The stack growth 2 years is 9%. But having said that, clearly, there are a couple of phenomena. One is due to the stimulus that occurred as well as the pandemic on several businesses and categories that was forward acceleration from a consumer standpoint. For instance, appliances is probably the prime candidate. Then you had the phenomenon of candles during COVID where people were burning a lot. And we brought in a lot of low-income consumers that now without the stimulus have left the fold. So you are seeing, even before the recession, there are a couple of impacts, which are the retailers destocking, consumer former acceleration that are impacting different categories. So I think when you take a look into that, those are the things that we are seeing those trends persisting in the first half.

Next question comes from Olivia Tong with Raymond James.

I wanted to talk about your sales expectations and what’s embedded in your core revenue outlook for this fiscal year because we assume that Q2 is going to see similar pressure as Q1? And it would imply sort of a low single-digit core sales growth in the second half at the midpoint. So can you provide some color on your views on trends as you begin to lap the destocking in the second half of the year? And what your full-year outlook reflects in terms of your view on shelf space or retailer losses and what you think the underlying category growth is as you exit this period of destocking?

Thank you, Olivia. I'll address that now. As I mentioned earlier regarding our revenue outlook, there are three or four trends influencing it. First, we are seeing a normalization of categories from peak COVID levels, particularly affecting our Home and Outdoor segments, where there is a return to pre-pandemic levels. Second, consumers are facing pressure on discretionary spending due to inflation in food and housing, which is taking a larger portion of their budgets. Third, we are experiencing the impact of retailers destocking, and over the past two years, we have seen nearly 20% inflation in input costs. We have largely accounted for this in our pricing, but it does exert pressure on volume in certain categories. For Q1, we are expecting a core sales growth decline of 16% to 18%. While we won’t provide specific quarterly guidance, it's important to note that we don’t expect the same level of decline in Q2. Q1 is particularly challenging due to difficult comparisons; we are up against a nearly 27% or 28% increase from two years ago, making it our most difficult comparison. As stated earlier, we anticipate the second half to perform better than the first half, but it's not reasonable to predict that Q2 will experience declines as steep as Q1.

Got it. And then Chris, congrats first. I wanted to get your view in terms of potential for a strategic review as you move into the CEO position, whether you think there is another look at the categories you're in, the brands you have, how you think about that for the longer term?

Sure. Yes, I think the way I'm thinking about that is I think that we put the turnaround plan in place about 3 or 4 years ago. And I think, as we've talked, we've made significant progress on that. But the macro environment is different today than it was then. And because of the progress that we've made, I think that now is an opportune time to relook at the company's strategy going forward. And so I intend to do that with the leadership team. I don't expect that we're going to have a revolution in the strategy, but I think it's likely that we will evolve the strategy. But I want to take the time to confer with the leadership team and also understand sort of the current environment. I expect that will take us several months to get through, and we'll be ready to share something as soon as we get through that process.

Our next question comes from Peter Grom with UBS.

Congratulations to Ravi, Chris, and Mark. I have a quick housekeeping question. Does the outlook for the top line reflect any impact from recent developments with one of your largest retail partners that has been in the news? Additionally, looking at the bigger picture, the business has undergone some changes over the past few years. Considering the guidance, it seems sales are really retracting. Chris, you mentioned normalization and consumer pressures. Bringing this back to the long-term sales target of low single digits, have you learned anything over the last year or 18 months that affects your confidence in achieving that target as we navigate through this period of disruption?

I'll just do the first one very quickly. The answer is no, and in terms of any particular retailer's issues affecting us. So Chris?

Yes. To expand on Ravi's response regarding the first question, I believe the retailer you mentioned is likely Bed Bath & Beyond. They account for less than 2% of the company's revenue. We are collaborating closely with them to establish a mutually beneficial partnership going forward. It is not a significant segment of our business. Regarding our long-term goals, I don’t think anything has changed in our strategy to achieve low single-digit, consistent, sustainable core sales growth. We remain committed to that as our primary target. Although we've faced various trends this year that have affected our progress, we are diligently working to return to that growth pace as soon as possible.

I think the one thing I'd add just sort of when you look back. Look, these last 3.5 years, we've had so many things, right? We've had the pandemic, then supply constraints, inflation, foreign exchange, the war in Ukraine, etc. So to me, the Holy Grail is 2019 as the baseline here. And the fact that in 2022, we were still up versus 2019 and the stack growth was 9% should really show our brands remain strong. I know Chris and the team are really going to take it to the next level. So I think once the economy turns, I do feel that they have a green model that Chris and I espoused is still intact.

Great. This might be a challenging question to answer given the current uncertain environment. Chris, we've seen that when new CEOs start, their initial outlook is often conservative to help set the team up for success. How would you describe your confidence in this guidance today? Do you believe you've built enough flexibility in case conditions worsen, whether from consumer demand, inflation, or foreign exchange? Are you confident that this is likely the worst situation we face and that there is potential for improved earnings as we progress through the year?

Yes. I think I'll just give you sort of a high-level conceptual answer to that, which is we tried to reflect in the guidance everything we knew about the current environment. We tried to be realistic in what we know based on the go-forward tailwinds and headwinds for the business this year. And we did want to take a prudent bias on the core sales because our focus this year is to get cash flow back. And the best way to get cash flow back is not to overbuild inventory, and we wanted to manage our supply and demand plan in a way that ensured that we had an above-average cash flow year. We are, as we mentioned in the prepared remarks, seeing significant headwinds in terms of the tax rate, which is going from 2.5% to a high teens rate, which is our kind of long-term normalized operating rate. We are seeing interest expense probably is going to be up about $45 million this year versus last year. And we've got the headwinds, as we mentioned, of incentive comp reset and foreign exchange in addition to the core sales deleveraging. On the flip side, we feel very good about Ovid and the benefits that Ovid is going to generate. We've built our productivity, our gross productivity assumptions are well above 4% of cost for this cost of goods sold for this year. So it's a step up in gross productivity that's embedded in our guidance because of Ovid, because of the fuel productivity program and automation. And we've embedded in, as we talked, the Phoenix overhead savings and international pricing along with carryover pricing. And so I feel good about sort of where we are based on what we know today.

Our next question comes from Kevin Grundy with Jefferies.

Great. And just to echo my congratulations as well. In a difficult environment like this, it may not seem that way, but I think a lot of folks on this call that have followed the company for a while, it's certainly in a better place than it was post the Jarden merger, so congrats on that. Question on Project Phoenix to start, if we could. It seems like another step along with Ovid to drive efficiencies and reduce complexities in the organization, which was inherently more complex and in many cases, perhaps too decentralized coming out of the Jarden merger. But at the same time, it's a lot of change in what's a very dynamic and challenging environment. Can you just comment on how the organization is handling all this change and why we should not be worried about a potential risk to results, at least in the near term? And then I have a follow-up.

Yes, Kevin, thank you for your question. I truly believe we couldn't have managed this three years ago. When Chris and I began, our engagement scores were between 37 and 45. We reached 75, which is considered world-class, and while consultants estimated it would take us a decade, we achieved it in just two years, maintaining that level as of last November. The culture within our organization is a significant competitive advantage, and our employees were able to adapt to the changes. The concept of One Newell has been deeply instilled in our team, and we approached this with careful planning. We initiated the Phoenix project, starting in July, bringing in various teams gradually to give them a sense of ownership. Our communication efforts have been exceptional in ensuring everyone understood the reasons behind these changes. Additionally, we treated those we had to let go with great dignity and respect, and many of them have continued to support Newell on platforms like LinkedIn. I believe our culture is strong, and our employees recognize the necessity of these changes. This process is a journey; our successful centralization of distribution through Ovid has encouraged us to centralize manufacturing and align sales under our Chief Customer Officer. Overall, the organization's response has been very positive. We have also been attentive to those remaining, ensuring they embrace the changes, while also focusing on role clarity and reducing duplication. As a result, people are feeling more empowered, and I am optimistic about the prospects for success.

Excellent. Ravi. Chris, probably for you just on margins, just to kind of step back and make sure that we're not missing the forest for the trees here. Currently, in dealing with a lot in terms of volume deleverage, FX cost, etc. But longer term, sort of thinking with margins versus your original benchmarks. But since then, you have Project FUEL, we have Ovid, now you have Project Phoenix. I think the commentary has been that there's no reason this cannot be a 17% to 18% EBITDA margin business longer term as we sort of look past this volume deleverage and so forth as we come out of the cycle. Is that still the view? Is that where investors should sort of anchor longer-term expectations? Or is it potentially even superior to that now just given some of the programs that you've announced? And then I'll pass it on.

Yes, there is no doubt that we are aiming for a significantly higher margin profile in this business, and we believe we have the opportunity to achieve that over time compared to our current position. Specifically, we're targeting a mid- to high-teens EBITDA or EBIT margin in the long term. Initially, during our benchmarking, we aimed to increase the company's gross margin to 37% to 38%. However, we've faced several setbacks due to factors like fixed cost deleveraging and inflation. This year, we anticipate that gross margin will begin to improve. We are very focused on this positive trend. While we may experience some deleveraging effects this year, we believe it's essential to reduce our overhead to the 15% to 16% range. Achieving this can result in much stronger margins than we currently have. Much of this is within our control, although we remain aware that macro trends can affect us in the short term, meaning the path forward might not be linear, as I've mentioned previously.

And our next question comes from Andrea Teixeira with JPMorgan.

Thank you, operator. Good morning, everyone, and congratulations to all. I believe I can relate to most of those on this call, as you did not seem as negative about the outlook when you announced the Q3 earnings and later with Project Phoenix. Can you provide some insight into what has worsened since November and December, potentially regarding the consumer or the retailers that have taken a more cautious approach towards our inventory levels? Additionally, could you clarify the commentary regarding the higher management compensation in 2023? Given that results are significantly lower this year, how can compensation normalize? It seems you might be adjusting for some external factors within the compensation metrics, so I would appreciate if we could address those aspects. That would be very helpful.

Let me quickly address your last question. This year, our compensation is largely performance-driven and variable. There is also a long-term incentive component. Since we didn't achieve our targets, the short-term incentive component was very low for 2022, which impacted our long-term incentives as well. Looking ahead to 2023, we assume things will be normalized and we expect to hit the target numbers. This represents a significant increase, along with the rising costs of labor. That's why we mentioned that Phoenix is offsetting those costs.

Okay. Regarding the changes we are seeing since November, this is the first time we have provided guidance for this year. We decided to give guidance now because we have clearer visibility on the macroeconomic conditions. The macro environment is challenging for forecasting due to significant uncertainty and variability. As we have observed macro trends over the past few months, considering our Q4 performance and January's start, we felt more confident in informing our top line guidance for core sales growth this year. Most of our previous comments still stand. We expect this year to be a notably above-average year for gross productivity due to benefits from the Ovid program, fuel productivity, and automation, leading to an anticipated increase in gross margin. However, the overhead rate is what is counteracting that from a margin perspective, mainly due to top line deleverage. Our total overhead costs remain relatively flat in dollar terms, impacted by wage inflation, incentive compensation, and targeted capability investments that offset the savings from Phoenix. Additionally, interest expenses have risen as the Federal Reserve has increased rates, affecting short-term borrowing costs. From a tax standpoint, we are planning for a full operational tax rate as mentioned earlier.

Can I just add something? We have analyzed the full year of 2022 and observed some repetitive patterns. The combined factors of inventory destocking, increased consumer spending, and the potential for a recession suggest that the consumer environment has softened. Therefore, we are acting cautiously. Our brands are continuing to strengthen, and it's important to note that Chris has clearly stated that the main focus for 2023 is to restore cash flow.

And our last question will come from the line of Lauren Lieberman with Barclays.

Great. Thanks. Mark, hi again. Just wanted to ask one quick question about when you're just looking at the outlook for this year. How you’re thinking about still lingering destocking activity versus consumption? If you talked about it earlier in the call, I apologize, I missed it, but clarity on that would be great, if possible.

Yes. It’s a good question, Lauren. And I would say that we do expect some lingering retailer destocking. Largely, we expect that to be complete in the first half of the year. And so clearly, if you look at the Q1 guidance, where we’re guiding core sales down 16% to 18%, we are not seeing our underlying POS trends down that much. And part of the difference there is retailer destocking. I would say that the retailers made significant progress on destocking from our view and what we’re hearing in the back half of last year, but we don’t believe that it’s fully over yet. We do expect, from what we’re hearing, that the retailer destocking will largely be complete by the first half of the year, although hard to predict entirely, but that’s what we’re planning for and that’s what we’re hearing from the major retailers that we interact with today.

When we just say why we think the second half would be slightly better than the first half.

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