Newell Brands Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to Newell Brands' First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. As a reminder, today's conference call 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' first quarter earnings call. On the call with me today are Ravi Saligram, our CEO; Chris Peterson, our President; and 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 referred to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables that were furnished to the SEC. Thank you. And now, I'll turn the call over to Ravi.

Thank you, Sofya. Good morning, everyone, and welcome to our first quarter call. I'll keep my remarks brief. As Chris and Mark will take you through our results and outlook for the balance of the year. This is my last earnings call with Newell Brands. As many of you know, in February, we announced that I'll be retiring on May 16 and Chris will take over as the next CEO of the company. This is a historic event for us, as Chris will be the first internal CEO successor in Newell’s recent history. In fact, in the last two decades it’s a testament to our well-thought-out succession planning process. Over the past several months, I've partnered closely with Chris to ensure a seamless, smooth and orderly transition as well as a successful execution of Project Phoenix. I'll also spend time in our international markets, and I'm encouraged by the long-term opportunities for our key brands. I'm confident that Chris, along with the world-class management team we've assembled over the past couple of years, will get us through this difficult environment and take Newell to the next level. While the macro environment has put considerable pressure on our business, I'm optimistic about the future of Newell Brands. Over the past several years, we've come together as One Newell, but we are still in the early stages of truly leveraging the scale of the company. We have a strong world-class executive leadership team with great brands that consumers love. With both e-commerce and omni-channel prowess, we have excellent customer relationships and are reigniting the processes and passion to drive meaningful innovation. Our team has done a superb job on systematically reducing complexity and we are gaining momentum on driving operational excellence through Project Ovid and automation. Our talented employees are our number one asset, and we are grateful for their continued efforts, resilience, and dedication, as well as their support in executing the change agenda we've implemented as part of Project Phoenix. Phoenix is not just about efficiencies and cost savings. It is truly a new operating model. I'd like to thank our employees for their trust in me and thank the entire leadership team. It has been a distinct honor and privilege to lead the company over the last several years. I'm confident that our best days are truly ahead of us, onwards and upwards. And I now turn over to Chris.

Thank you, Ravi, and good morning, everyone. First quarter results were largely in line with our expectations. As anticipated, this was a very difficult period for the company with both top and bottom line under significant pressure. The headwinds Newell faced in the back half of 2022 from normalizing category trends, constrained consumer spending in discretionary categories, retailer destocking, fixed cost deleveraging, inflation, and foreign exchange persisted into Q1. However, there were several bright spots, including stronger cash flow performance relative to last year. During Q1, we also continued to build operational excellence across the organization and made meaningful progress operationalizing the distribution and transportation benefits associated with Project Ovid and implementing Project Phoenix. Let me provide additional perspective on both initiatives. As you may recall, on February 1, we implemented the second go-live wave of Project Ovid across the remaining food categories as well as the Writing, Outdoor & Recreation, and commercial businesses. The conversion has been very successful, and our distribution and transportation organization is now fully centralized. We are currently operating in the new go-to-market model, utilizing both East Coast and West Coast ports via a nationwide multi-node network of mixed distribution centers, including the two new DCs we stood up in Pennsylvania and North Carolina. While it's still in the early days, we are beginning to realize benefits from the new model and in the first quarter, we meaningfully improved fill rates relative to last year, reduced delivery times, and have a clear line of sight to cost efficiencies. First quarter represented a crucial period in the implementation of Project Phoenix, which is expected to simplify and strengthen the organization by leveraging our scale to further reduce complexity, streamline our operating model, drive operational efficiencies, and unlock significant savings. Although there is certainly a lot more work ahead of us, we made progress on key pillars of Project Phoenix during the first quarter. First, we transitioned the company into the new operating model organized into three segments: Home and Commercial Solutions, Learning & Development, and Outdoor & Recreation. This should enable us to better leverage the scale of the organization, unlock new opportunities for growth, while enhancing mobility for our talented employees. Second, we moved to a One Newell sales model for our top four customers to harness the scale of our portfolio while building win-win, enduring partnerships with our top customers. We are bringing a unified approach to selling our products to our major customers to simplify customer interactions, significantly improve their experience, and strengthen our position as a best-in-class partner. Third, we are in the midst of implementing a One Newell go-to-market approach across all key international geographies, which should allow us to operate more efficiently, drive incremental distribution gains, and improve our agility. We moved to a One Newell go-to-market approach in Canada last year and in January of this year, we did the same in Latin America, Australia, New Zealand, and Japan. We expect to complete EMEA and all other markets by the end of this year. Fourth, we have centralized manufacturing in Newell’s supply chain center of excellence. We are excited about the opportunity to turn the company's manufacturing scale into a competitive advantage and to optimize our global manufacturing network. We continue to believe that a unified global supply chain organization will drive significant cost and service efficiencies, 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. As we continue to tightly manage costs and assess all aspects of our spend, we are also analyzing our real estate footprint, particularly given the shift towards the hybrid work environment. We closed three offices during the first quarter and expect additional office closures throughout the upcoming years. We are on track to achieve the planned headcount reduction associated with Project Phoenix along with the annualized pre-tax savings in the $220 million to $250 million range when fully implemented. Careful planning and consideration have gone into every decision relating to our employees with communication to the impacted individuals either already complete or in process depending on the market. The past several months have confirmed our cautious stance on the macroenvironment and the consumer for the balance of this year, particularly as it relates to discretionary spending. Our views are predicated upon macro indicators such as slowing retail sales, rising household debt, and persistently high although moderating inflation on essentials such as food, energy, and housing. We expect these factors, along with the rollback of government stimulus spending, to restrict the share of consumers' wallets that's directed towards discretionary purchases. Elevated prices on everyday goods are not only weighing on consumption in the U.S. but we're observing similar trends in international markets, particularly Europe. We are seeing continued normalization in demand across home-based categories that benefited from stay-at-home trends during the pandemic. Given the longer purchase cycle for many of these products, we expect this behavior to persist through the year. Retailers have continued to pull back on general merchandise inventory levels and we expect this behavior to persist in the near term. Also, as you may have seen earlier this week, one of our customers, Bed Bath & Beyond, filed for bankruptcy protection and indicated they may pursue a dual path of potentially selling off their assets. While we typically do not comment on individual retailers, given they were an important customer for Newell Brands in 2022, I'll shed some light on where we stand. They accounted for less than 2% of Newell’s sales in 2022. Given their situation, we took steps last year to largely eliminate our credit exposure. While we have minimal risk on the receivables front due to the proactive actions we've taken, we do expect this to be a slight headwind for Newell as they liquidate inventory and shoppers migrate to other retailers. While there's a fair amount of uncertainty surrounding the macro backdrop, with Q1 results largely in line with our expectations, we are reaffirming our outlook for 2023, although we now expect the company to be towards the lower end of the guidance range. We continue to expect this to be a challenging year for the company and remain committed to stabilizing Newell’s financial performance while driving foundational improvement. Our ultimate goal is to return the company to sustainable and profitable growth as macros improve. We are laser focused on delivering against the five priorities we laid out on the last earnings call. First, strengthening Newell’s cash flow and balance sheet by continuing to right-size inventories, carefully managing the forecasting process, and staying close to the evolving consumer and customer trends. Second, driving gross margin improvement by accelerating fuel productivity savings, further advancing our automation initiatives, operationalizing Project Ovid distribution and transportation benefits, and pricing for currency and inflation. Third, driving overhead savings through Project Phoenix and tight spending controls to offset the impact of incentive compensation reset to more normal levels and wage inflation. Fourth, continuing SKU count reduction progress along with other simplification initiatives. And fifth, operationalizing the new company structure to enable faster transformation progress. As Ravi mentioned, over the past several months, he and I have partnered closely to ensure a smooth transition in mid-May. At the same time, I along with the rest of the leadership team have embarked upon a refresh of our strategy, which entails a full assessment of where Newell stands versus best-in-class competition on the key capabilities required to win in this industry, an updated and integrated set of where to play and how to win choices, an assessment of the talent and culture required to enact the strategy refresh as well as an evaluation of the capital allocation priorities required to support the new strategy. We are on track to complete this work and share our thoughts in the next few months. While we continue to face a very challenging macroeconomic environment, I'm confident that our portfolio of leading consumer brands and talented employees will allow us to further strengthen the company in the years ahead as we sharpen our strategy, optimize our cost structure, and fully leverage the scale of the company. Before turning over to Mark, on behalf of our entire organization, I would like to wish Ravi well in his retirement and thank him for his leadership, partnership, and dedication over the past several years. I'll now hand the call over to Mark.

Thanks, Chris. Good morning, everyone. Let's jump straight into our Q1 results, which were largely consistent with going-in expectations, with core sales and normalized earnings per share both landing within guidance, albeit at the lower end of the range. Net sales contracted 24% year-over-year to $1.8 billion, reflecting an 18% decline in core sales, a 2% headwind from currency, and a 4% impact from the divestiture of the CH&S business and certain category exits. While we are clearly not happy with an 18% decline in core sales, it does bear mentioning that this was against a particularly difficult base period comparison. Since core sales grew 6.9% in Q1 of 2022, and 20.9% during Q1 of 2021. Therefore, on a stacked basis, core sales were up versus 2019 levels. Newell's normalized operating margin contracted 820 basis points versus last year to 2.4%, as normalized gross margin declined 410 basis points versus last year to 27.1%. Fixed cost deleveraging due to a softer top line alongside inflation, including carryover inflation costs from last year, were the largest drivers of margin pressure in Q1. These factors more than offset the favorable impact from pricing, Project Phoenix, and our fuel productivity efforts, which are tracking slightly ahead of our going-in expectations. Net interest expense rose $9 million versus last year to $68 million, primarily due to increases in debt and interest rates and the normalized tax benefit was $1 million, all of which netted out to a normalized diluted loss of $0.06 per share for the quarter. From a cash flow standpoint, operating cash was a use of $77 million during the quarter, which while still negative was an improvement of nearly $200 million versus last year. Inventory was a big part of the improvement coming in $150 million lower than a year ago. Importantly, while this is good progress, we need to drive inventory levels much lower while still maintaining or increasing order fill rates. Consistent with this, it is worth noting that in-transit inventory at the end of Q1 was approximately $250 million below year-ago levels. This suggests two things. First, we are doing a better job of matching raw material and sourced finished goods orders and internal manufacturing production to actual customer order patterns. Second, the significant inventory reduction we are expecting and counting on over the balance of the year is already working its way through the system. The company's leverage ratio was 5.7 times at the end of Q1 and we don't expect it to be below 5 times until the end of the year. Anticipating this, last month we secured a temporary reduction in the interest coverage ratio in our revolving credit agreement to 3 times from 3.5 times for the next four quarters. This amendment, we believe, provides the company with sufficient flexibility to navigate through this challenging period. Moving on to our second quarter outlook, we have assumed the following: Net sales of $2.13 billion to $2.24 billion with core sales down 10% to 14% and a 1% to 2% headwind from currency and certain category exits. Normalized operating margin is expected to remain under significant pressure in Q2 due to the same headwinds that weighed on Q1, as well as an unfavorable mix due to a shift in some writing orders from Q2 to Q3 related to back-to-school activity. Taking all this into account, we are forecasting Q2 normalized operating margin of 6.5% to 8%. We expect a step-up in interest expense and a high-teens tax rate, so normalized earnings per share are forecasted to be $0.10 to $0.18. For the full year, we are reaffirming our 2023 outlook, with net sales of $8.4 billion to $8.6 billion, driven by a core sales decline of 6% to 8% and a nearly 3% headwind from currency, divestiture of the CH&S business, and certain category exits. Normalized operating margin is expected to be 9.6% to 10.1% or flat to down 50 basis points versus last year, as gross margin improvement is more than offset by overheads despite $140 million to $160 million of anticipated pre-tax savings from Project Phoenix in 2023. For 2023, we are reiterating our normalized earnings per share guidance range of $0.95 to $1.08 which includes a high-teens tax rate as well as a step-up in interest expense. As Chris indicated earlier, we now expect our top and bottom line results to come in towards the low end of the range as we are incrementally more cautious on the operating environment as well as consumer discretionary spending. We continue to expect significant year-over-year improvement in operating cash flow, driven primarily by a reduction in working capital. Specifically, we anticipate $700 million to $900 million of operating cash flow, inclusive of $95 million to $120 million of cash payments related to Project Phoenix. At the midpoint of our range, free cash flow productivity is comfortably above 100%. With Q1 actuals now in hand, along with our Q2 and full year guidance, it becomes self-evident that we are expecting a much stronger top and bottom line during the back half of the year versus the front half. Given this reality, we thought it would be helpful to provide some specific reasons why we believe our business results should improve in the second half of the year. First, from a macroeconomic standpoint, we expect that FX pressures on profits should ease, inflation should be much less pronounced, and the massive amount of general merchandise trade destocking we have been incurring starting with Q3 of last year should finally slow down. Second, as it relates to our own underlying business dynamics, our second half, historically, with the exception of last year when significant destocking began to manifest itself during the third quarter has represented more than half of total company sales, which will help with fixed cost absorption. And as I'm sure you're all aware, starting with the third quarter, our base period comps get much easier. In addition, based on back-to-school order patterns, we now expect about a point of sale to move from Q2 to Q3 this year, which is one of the reasons why our back-half mix should be more favorable. Third, we have several corporate-driven initiatives already in place, which we believe will disproportionately benefit the second half of the year. For example, we are on track to have our biggest productivity year ever on two fronts. First, as it relates to gross margin, we're on pace to save over 4% of COGS due to our fuel initiative with the savings being slightly back-half weighted. Second, Project Phoenix, which Chris has already commented on, should understandably have a bigger positive impact on overheads during the second half of the year. Finally, we just completed an in-depth analysis of our domestic business at a SKU level. Our extensive analysis clearly showed that additional pricing is required to mitigate the impacts of continuing inflation on some categories and to fix the underlying structural economics on products that are not generating an appropriate level of return on a fully loaded basis due to the unprecedented level of inflation we have sustained in recent years. We believe it’s imperative that we address these issues now so they don't perpetuate or get worse. Thus, we are now expecting to take an incremental U.S. pricing action across roughly 30% of our U.S. business largely concentrated in the Home and Commercial Solutions segment in the third quarter. Absent this intervention, we will not be able to invest in the consumer understanding, brand building, and innovation capabilities our consumers and retail partners expect. So based on these reconciling factors, we believe our guidance, including the associated front and back half splits, is appropriate and reasonable and reflects progress on our multiyear journey to create meaningful levels of sustainable shareholder value going forward. Operator, if you could, please open the call to questions.

Yes, sir. Our first question or comment comes from the line of Peter Grom from UBS. Your line is open.

Hey, thanks, operator, and good morning, everyone. So Chris, I guess I just wanted to get your perspective on just kind of underlying category growth, but more in the context of really what's changed since we last spoke in February. You discussed discretionary spending pressures, but it seems like those were already there or occurring back in February. So just any commentary just in terms of what's really changed, where it's really got worse. And then I appreciate all the building blocks around hitting the back half guidance, but if we do go into a recession, is that outlook still so feasible?

Yeah. Sure. Thanks, Peter and good morning. From a consumer and sort of macro environment, as I mentioned in the prepared remarks, really what we're seeing is continued pressure on the consumer in discretionary and durable categories. And that's a function of inflation on food, housing, and energy causing the consumer to prioritize more essential items and deprioritize spending on durable and discretionary categories. Coupled with that, many of our categories have longer purchase cycles. And when stimulus money came into the market a year or two ago in a big way, a lot of consumers bought product categories that effectively took them out of the market for a period of time. And so I don't think there's a meaningful change on that fundamental dynamic, which is why we're maintaining the range for the year. I will say that we've gotten, I guess, in terms of what's changed in the last two months since we talked, specifically, we did come in at the lower end of our guidance range, minus 18% on core sales growth. That was really driven by Outdoor & Recreation, which got off to a slower than expected start to the season, primarily due to wet and cold weather in the western part of the country. We've seen, as I mentioned in the prepared remarks, one of our major retailers declared bankruptcy that we do expect to have a temporary sort of disruption in the market. We expected that on the year, but the timing was not certain. And then from a retailer destocking standpoint, I think in our first quarter results, probably of the minus 18% core sales growth that we reported about half of that was underlying sort of consumer dynamics and the other half of that was retailer destocking roughly. And so that's part of the reason why we think that retailer destocking were largely true, although we do expect it to continue to have an impact on Q2. But we think by the time we get to sort of midyear, that will largely be behind us.

No. That's the problem. So just to clarify that last point, so around roughly half of the minus 18 was related to retail destocking and roughly half was just kind of what you're seeing in terms of underlying demand?

That's right. And that underlying demand, I would say, is as a result of the base period, as a result of the pressure on consumer wallets and normalization of some of the categories from COVID peak levels, but that's accurate.

Great. Thanks so much, Chris. I'll pass it on.

Thank you. Your next question or comment comes from the line of Kevin Grundy from Jefferies. Mr. Grundy, your line is open.

Great. Can you guys hear me okay?

Sure. Okay. Good morning, Kevin.

Good morning, everyone. I apologize for the brief interruption with my line. I'd like to turn the focus to cash flow. Compared to last year, Q1 is typically a lighter quarter and usually results in cash usage for the company. I have a few questions that are important. First, how did cash flow align with your expectations for this quarter? Second, what visibility or confidence do you have regarding the $700 million to $900 million range? I recall the guidance being generally appropriate and reasonable, but I would like to know if it might be considered conservative. Lastly, given the current dividend yield, I would appreciate any updated thoughts on your ability to fund it. Looking at the guidance and potential CapEx, if you hit the lower end of the range, there appears to be limited flexibility to support the dividend. Understanding that this is ultimately a Board decision, any insights you could share would be appreciated. Thank you for your time, everyone.

Let me jump in and help with the cash flow piece, and then Chris can talk about the second part of your question. So in Q1, you're right. It's always a cash take quarter, but we did have really good progress there, basically being up about $200 million year-over-year. If you want to get into the bridge items that relate to that, the biggest part of it was better working capital performance that was about $400 million better, almost all of that was driven by inventory. We did have a lower incentive comp payment, cash payment for incentive comp for management that was about $100 million. Lower operating income was probably a $200 million differential negatively year-over-year. And then we had several items that combined for another $100 million downturn, which was the Phoenix restructuring, the Brazil tax payment, and some higher cash interest. So if you do that bridge, you'll find yourself comfortably at that $200 million, which was the improvement that we saw. If you think about the full year, again, it's going to be a story of basically working capital improvement because if you look at the operating cash flow from the prior period, it was down roughly $300 million. If you take the midpoint of our $700 million to $900 million range, that puts you at $800 million. So we're basically looking to bridge about $1.1 billion of improvement. And effectively, all of that comes from working capital. I mean operating income is about $100 million take year-over-year, but the working capital is the $1.1 billion positive movement, with inventory being about $700 million of that and then AP and AR accounting for the balance of the differential with AR being a little bit of a hurt in AP being a pretty big-sized help. From where we sit right now at the end of Q1, we're expecting another $400 million to $500 million to come out of inventory throughout the course of the year. Our inventory performance in Q1 exceeded our expectations. And as you heard in my prepared remarks, the in-transit inventories are already $250 million down versus the prior period. So we feel pretty good about the operating cash flow elements. We're watching it very closely, but we have a high degree of confidence in it.

Yes. To address your question about the dividend, the operating cash flow range remains at $700 million to $900 million, which is adequate to cover this year's capital expenditures, the dividend, and allow for some debt reduction. However, as I indicated in my prepared comments, as part of our strategy refresh, we will review the capital allocation strategy moving forward. The dividend will definitely be considered in that review. While we haven't reached any conclusions yet, this strategic work will take that into account, and we will communicate our findings once we've had discussions with the Board.

Thank you very much. I appreciate the color.

Thank you. Your next question or comment comes from the line of Chris Carey from Wells Fargo. Mr. Carey, your line is open.

Hi. Good morning.

Good morning, Chris.

Yeah. Just from a gross margin standpoint, right, a little bit of a step-up sequentially, but obviously, still under a lot of pressure. You're looking at taking pricing in the back half of the year now, which should give a little bit of a lift. Can you just clarify how you expect the gross margin to trend sequentially? And then just on the new pricing, I'm sorry if I missed it, but how are you factoring the macro backdrop? So if the consumer starts to get weaker, do you still go through with the program? Are you going to need to offset it with any incremental promotions if that environment seems to play out from a macro standpoint? So just how you thinking about the sensitivity of this new pricing plan that you have for the back half of the year? So things on the gross margins and the pricing.

Yeah. So let me help you on the gross margin, and I'll even help you on the operating margin line as well because obviously, the two are highly correlated. It's not lost on us that the guidance that we're providing is kind of a tale of two halves. And if you look at the operating margin in the first half, we're calling for it to be mid-single digits. And then for the back half, we're calling for the operating margin to be in the low teens. And that obviously implies a big reversal from the first half of the second in both op margin and gross margin. But if you look at all the elements that we have in flight, I think you'll see that the splits we have are reflective of what we're seeing on the underlying trends of the business itself. So for example, if you look at the Phoenix if you look at the fuel productivity initiatives, and if you look at the net pricing that we discussed, roughly 60% of the benefit that comes from those three programs will fall into the second half of the year. Similarly, if you look at inflation in FX, roughly 70% of the hurt from those two things falls in the first half. And then, of course, you have to look at the comps on the base periods. In the first half, we're going up against plus 4% in the prior periods. In the second half, we're going against minus 10. So obviously, that's a big factor as well. From a trade destocking standpoint, we think most of our large customers are at their target weeks of coverage now. We think there might be a little bit more that comes out through the second quarter. But at that point, we think we're in pretty good regard as it relates to that. We talked about normal business seasonality, where the second half historically has been just the larger dollarized value than the first half and we talked about the shift that we see in back-to-school from Q2 to Q3. And then finally, I guess, I'd offer that in Q1, we did have some additional E&O charges as we work down our inventory levels, and that actually cost us a couple of pennies on the quarter. So if you really look at the underlying pieces that drive the first half, second half splits on gross margin as well as operating margin, we think they're reasonable and appropriate. And on the pricing piece, I know Chris wanted to add a few thoughts on.

We have made significant progress on pricing. When Mark joined, we started reducing our SKU count from 100 in 2000 to 28,000 last year. This led us to evaluate profitability and inflation impacts at the SKU level in the U.S. business. Our analysis revealed that several SKUs were structurally challenged and not fully priced for inflation. Consequently, we are announcing a pricing adjustment in the U.S. effective in the third quarter, affecting about 30% of our business. This adjustment will range between high-single digit and low-double digit percentages. We believe this is necessary as we have not fully accounted for inflation on these SKUs. Simplifying our SKU count has improved our visibility, allowing us to assess profitability more effectively. We view this change as crucial for the long-term health of the business. We will closely monitor consumer response to this pricing strategy. It’s important to note that our guidance does not factor in an increase to the top line in the latter half of the year from this pricing; instead, we anticipate potential volume loss. Our focus is on enhancing the structural economics of the business rather than seeking immediate top-line growth.

Thanks a lot, Chris. Thank you.

Thank you. Your next question or comment comes from the line of Andrea Teixeira from JPMorgan. Ms. Teixeira, your line is open.

Thank you very much and good morning. Can you share your thoughts on the back-to-school situation? Mark, you mentioned that inventory levels appear to be normalized, and Chris, you made a similar remark regarding retailers. I'm curious about the timing of shipments as it seems to have shifted compared to last year. Additionally, could you comment on the Writing division and the Outdoor segment as they enter peak season? What does this indicate for your gross margin guidance, considering that those two are typically higher-margin businesses? Also, regarding resin, I know you don’t purchase it directly, but you should benefit from its significant decline over the past year as you compare with previous months. Are you starting to see that benefit reflected in your guidance? Has there been any change for the better or worse since your last update? Thank you.

Very good. Thanks, Andrea. I'll address the business unit questions and then let Mark handle the resin question. Regarding the Writing business and back-to-school, we're feeling very positive about the first quarter. Writing was effectively flat in terms of core sales. So even though the company experienced an 18% decline in Q1, Writing did not see a decrease. This is significant because Writing is our most profitable segment, and its flat performance in Q1 indicates that we are considerably ahead of the 2019 baseline, having gained market share since then. As we approach back-to-school, we are currently in the sell-in phase. Typically, we don't get a clear picture of back-to-school consumption until July through September. However, from a sell-in standpoint, retailers appear to be planning for a fairly typical back-to-school season. Overall, the expectation is that back-to-school will be consistent with last year. We are confident about our strategy for the upcoming season because, as you may remember, we faced some supply challenges in certain business subsegments last year. This year, those issues have been resolved, and we are fully stocked and ready. Moreover, we have good visibility on most of the back-to-school seasonal orders, and we feel strong about our in-store display placement with leading retailers. Therefore, we are optimistic heading into the season. One last point about back-to-school, which applies to many of our seasonal businesses, is that due to the rapid improvement in the supply chain, retailers are ordering seasonal inventory later than before. For instance, last year retailers wanted back-to-school inventory as early as February, March, and April to ensure they had what they needed for the season. This year, they're opting for a later timeline since earlier orders are not necessary. Consequently, as mentioned in the prepared remarks, we anticipate that back-to-school shipments will return to more normalized levels, with much of the shipment activity happening in May, June, and July. This same trend is evident in our other seasonal categories. As for Outdoor & Rec, the situation is somewhat different. Outdoor & Rec has a lower gross margin compared to our company average and had a slow start. As previously noted, core sales in this segment were down in the high 20s during the first quarter, significantly under the company's average decline of 18%. This was mainly due to comparing against a strong prior year and also because of a slow start related to weather conditions. This was the only category in Q1 that performed below our expectations at the top line. It’s too early to make any definitive conclusions regarding the season. The Outdoor & Rec season usually takes off from May through July, which is the peak time. Right now, retailers are requesting that we hold up shipments due to the slow weather, as they do not need inventory as quickly. However, it's still premature to determine how the season will ultimately shape up. And then as it relates to your question on resin, resin has been a help for us since the third quarter of last year, and we expect it to remain so for ’23. We think about COGS inflation in totality, we expect it to be low-single digit for '23 versus what was high-single digit in ‘22.

Super helpful. Thank you.

Thank you. Your next question or comment comes from the line of Bill Chappell from Truist. Mr. Chappell, your line is open.

Hey. Good morning. This is Stephen Lengel on for Bill Chappell. Thank you for taking our question.

Good morning, Steve.

Hi. Good morning. On the gross margin side, thank you for some of the color you guys gave, and sorry if I missed this, but understandably left the guidance unchanged, but kind of mentioned some fuel savings from Phoenix. Can you kind of talk more about your freight assumptions and how those have changed over the course of the past few months and kind of how do you see it evolving over the next 12 to 18 months?

We are observing a significant decrease in transportation costs, influenced by a couple of key factors which I will break down into three areas. Firstly, the ocean freight market for inbound shipments has decreased sharply, returning to near pre-pandemic levels. As I mentioned previously, the contract period for ocean freight runs from May 1 to May 1, and we have finalized negotiations for the upcoming contract year. Consequently, ocean container costs are now approaching pre-pandemic levels, marking a significant decline from where they were in the past couple of years. This is a positive development. The second factor involves U.S. trucking costs, where we see full truckload costs significantly decreasing alongside a drop in diesel fuel prices and a decline in demand for full truckload capacity in the U.S. market, creating a favorable trend. However, less than truckload freight costs remain stubbornly high and have not followed the same downward trend. The third factor contributing to our lower transportation costs is the implementation of Ovid. As we have introduced Ovid and transitioned to mixed distribution centers, we are finding substantial opportunities to shift from less than truckload shipments to full truckload shipments. Although operationalizing this change requires effort, we are making excellent progress with several of our top retailers in making this transition. For context, full truckload shipping costs about half as much as less than truckload for similar volumes, so converting our business from less than truckload to full truckload could lead to a 50% reduction in transportation costs for the volumes we transition. This summarizes our current status concerning transportation costs.

And then you mentioned the fuel productivity program. I just want to offer a few additional thoughts on that because it's been one of the areas that's really impressed me when I've been joining up here at Newell Brands. If you look back at 2019 and 2020, as an example, we sold $250 million on average on CapEx during those two years. And in those two years, we spent a little less than 20% of our capital on productivity projects. If you look at '21 and '22 capital program, which was roughly $300 million, over 40% of our capital is spent on productivity projects. So the fuel program has really started to ramp up. You're seeing that through increased automation and the move that we made as part of Project Phoenix to basically bring the supply chain management to the center following on the success of Ovid gives us huge opportunities because at this point, across our 49 plants, 90% of those are single-node sites. We have an opportunity to manage that much more effectively across the entire renewable network. And if you look at the $4 billion of direct and sourced finished goods, only 60% of that right now is single sourced. So we have a tremendous opportunity going forward, and we only see the fuel productivity savings just increasing over time as we sit here today.

Awesome. Thank you guys very much.

Thank you. Your next question comes from the line of Filippo Falorni from Citi. Mr. Falorni, your line is open.

I have a quick follow-up on pricing. First, what has been the reaction from your retail partners to the additional price increases? Have you also noticed your competitors raising their prices, or do you expect them to do so? That's the first question. Then, looking at the longer term, could you provide some insight into the path toward recovering operating margins to the mid to high teens? Clearly, you're making significant progress with cost savings, but the external environment seems to be offsetting some of those benefits. What do you believe is the pathway to reach those targets? Is the timeline for achieving these goals affected by the macroeconomic conditions? Please share your thoughts on the timing. Thank you.

Let me start with the pricing. We have just announced the pricing in the U.S. today, so it’s too early to assess the retailers' reactions. However, the pricing we are implementing, which affects about 30% of our U.S. portfolio, is justified by costs. This portion of the business has not been fully priced for inflation. Historically, when we’ve raised prices in the past few years, competitors have generally followed suit. While we can't predict their reactions this time, we believe they face similar inflation cost pressures. We have focused on maintaining reasonable price levels to provide great value to consumers. We feel positive that we do not need to increase prices on 70% of our U.S. portfolio because previous price adjustments have caught us up. It’s only the remaining 30% where we have not fully accounted for inflation, and where the business faces structural challenges, that necessitates this increase. We will keep an eye on the situation and collaborate with our retailers during this process. Generally, retailers have been receptive to cost-based pricing, as highlighted by recent reports from other consumer product companies. Looking at the long-term outlook for operating margin, we believe there is a substantial opportunity for improvement. This potential is primarily tied to gross margins, which is why we are pursuing fuel productivity savings, the Ovid initiative, and automation, along with striving for innovations that enhance gross margins. We also see continued opportunities to streamline operations to boost productivity throughout the company. While short-term top-line pressures may mask this, our guidance suggests a robust recovery in the latter half of the year, as Mark indicated.

Great. Thank you. Very helpful.

Thank you. Your next question comes from the line of Olivia Tong from Raymond James. Ms. Tong, your line is open.

Great. Thank you. First, I just wanted to ask a follow-up on pricing. If you could talk about any SKU versus categories that we'll see price hikes in? Any SKU in terms of more premium or more value to your products? And then as you think about, I know you mentioned that these are cost-justified, but what happens if others don't follow? How comfortable are you with wider price gaps as you try to rebuild profitability? And then I have a follow-up. Thank you.

We can't discuss the specifics due to the range of pricing. However, as Mark indicated earlier, we are primarily focused on the home and commercial segment. Our analysis has shown that we haven't completely adjusted our prices for inflation, leading to some structural profitability challenges. Moving forward, we've noticed that when we implement price changes, our competitors tend to follow, but with a delay. This cautious approach may put some market share at risk if we increase prices and competitors respond later. While we can't predict their actions, we will monitor the situation. We believe this strategy is correct, as the pricing adjustments target products that already face structural challenges. Even if we see a decrease in volume, it won't significantly impact our profitability. That's why we are confident in this approach and will keep you updated as we progress.

Great. Thanks. And my follow-up is just that I know we're only one quarter into fiscal '23. But as you consider the exit rate and the implications for growth in the second half, should we anticipate a similar run rate at the beginning of the first half of fiscal '24? I understand that the seasonality of the business will change, but if destocking is in the base, the timing for back-to-school is clear, commodities improve, and pricing is established, I would expect that the growth rates in the first half of '24 should be quite compelling.

We appreciate the question. We do, but we don’t think it’s appropriate for us to comment on anything related to fiscal ‘24 at this time.

Got it. Thanks.

Thank you. Our final question comes from the line of Lauren Lieberman from Barclays. Ms. Lieberman, your line is now open.

Thanks. So I know you've touched a bunch of times on the price increases coming in the third quarter. But my question was actually more about the kind of SKU by SKU analysis and kind of thinking about structural economics across the business. I was curious how much of the gaps that you're kind of seeing or other spots maybe where you're not taking pricing, but that things sort of revealed themselves to you in that work and that suggested there's kind of structural dynamics to be explored to use your own words, to free up capacity for reinvesting for having a stronger and more an innovation pipeline. But this notion of looking at structural economics across the business, I found to be really interesting. And if there are things in play that aren't just about straight pricing that helped get it that maybe on a SKU-by-SKU basis. Thanks.

Yeah, Lauren. We have the same excitement that is in your question from this work because I think one of the things that we've been building, and as we've been simplifying, is a much stronger analytical capability to dissect the business on many different metrics. And that capability, coupled with the complexity reduction is what has sort of revealed this opportunity, which the company really wouldn't have been able to do a few years ago. To the question of, well, are there other opportunities? I think the answer is going to be yes. And one of the things that I mentioned in my prepared remarks is that we're going through a refresh of the corporate strategy. And as part of that refresh, we're going relatively deep on all of the different capabilities that are required to win in this industry and how we stack up versus competition. We're also using this analytics to take a fresh look at the where to play choices and the how to win choices for the company. And then what we need to do from a sort of culture, talent standpoint to enable the execution of that strategy. So I think we're pretty excited about that work. We're not through it yet, which is why we're not sharing it here today. But I do think we're going to be in a position to share that in the next few months. And it's very much based on that sort of more detailed analytic look at how the business really breaks out across a whole variety of different vectors.

The only other thing I'd add is we look at almost 6,000 SKUs in the U.S. as part of this work. We are replicating that same analysis for Latin America for EMEA. We've been building out customer P&Ls, brand P&Ls. We've been doing 4-wall plant cost analyses. I mean the analytical capabilities are really ramping up, and we think it's going to provide us with tremendous opportunities in the future.

Okay. Great. It's a good place to end the call, I think. Thank you.

Yes. Yes, it is. Thank you. Thanks, everybody for joining, and we look forward to talking to you again soon.

Ladies and gentlemen, 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.