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

Thank you. Good morning, everyone. Welcome to Newell Brands' First Quarter Earnings Call. On the call with me today are Chris Peterson, our President and CEO; and Mark Erceg, our CFO. Before we begin, I'd like to inform you that during the core of today's call, we will be making forward-looking statements, which involve risks and uncertainties. Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q, and other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables that were furnished to the SEC. Thank you. And now I'll turn the call over to Chris.

Thank you, Sofya. Good morning, everyone, and welcome to our first quarter call. Newell's turnaround gained momentum during the first quarter with results ahead of plan across all key metrics. Core sales performance improved sequentially and versus a year ago, gross margin increased for the third consecutive quarter. Normalized operating margin nearly doubled with normalized EBITDA growing over 30%, and we meaningfully increased operating cash flow. We made excellent progress on the five major operational and financial priorities that we established for the year. First, during the quarter, we operationalized the new operating model and continued to execute our strategy, which focuses on disproportionately investing in innovation, brand building, and go-to-market excellence in our largest and most profitable brands and markets while driving further standardization and scale efficiencies across the supply chain and back-office functions. We are seeing stronger cross-functional partnerships, which enable more agile and efficient decision-making, streamlined ways of working, and a greater sense of ownership and accountability from Newell's teams, all of which are critical to our transition to a high-performing, innovative, and inclusive organization. Second, during the quarter, Newell's top-line performance improved sequentially as core sales declined 4.7% versus 9.3% in the fourth quarter with three businesses: Baby, Writing, and Commercial returning to core sales growth. We are seeing green shoots from the decisive actions we are taking to strengthen Newell's front-end commercial capabilities as we are beginning to bring consumer-driven innovation to market. The new business development team is gaining momentum, and the international business is outpacing North America. Let me provide you with a few tangible examples on these three elements. Upgrading Newell's consumer insights function to unlock actionable insights and proprietary consumer understanding so that we can develop and launch superior new product innovation has been an integral area of focus for us. During the first quarter, we launched our first top-tier innovations that came out of our strengthened funnel as we debuted the new Sharpie Creative Markers and Paper Mate InkJoy Gel Bright! pens, which we have deemed a Euro creativity for the Writing business. Sharpie Creative Markers represent the brand's entrance into a new category and are expected to be highly accretive to the category. They feature proprietary, no-bleed, paint-like ink with the control of a marker, which enables writing and creative enthusiasts to make bold statements on a variety of light and dark surfaces including metal, wood, ceramic, glass, rock, canvas, and more. The new InkJoy Gel Bright! pens feature vivid ink that pops on light and dark paper to inspire endless creative possibilities. To support both launches in March, we kicked off the 'Let's Get Creative' campaign at the hub of creativity and innovation South by Southwest. Sharpie also partnered with Mindy Kaling for a variety of media and influencer events while Paper Mate launched a new 'Feel the Joy' campaign featuring influencer Happy Kelli to introduce Paper Mate InkJoy Gel Bright!. And just last week, Sharpie embarked upon 'The World Is Your Canvas' cross-country Sharpie bus tour, which began at the Main Street Arts Festival in Fort Worth, with additional planned stops at festivals, events, and retailers throughout the year, culminating in Art Basel in Miami. We are fully supporting the marketing activation for these exciting consumer-driven innovations, which are off to a terrific start. In fact, the Sharpie 12-count creative marker set is already amongst the top SKUs for permanent and paint markers at several key retailers, and the 6-count pack of Paper Mate InkJoy Gel Bright! is currently the #1 selling gel pen SKU at the same retail customers. Importantly, this is just the first example of much stronger new product innovation supported with compelling marketing campaigns we plan to launch across our top 25 brands as we operationalize the new strategy and use our pillars of competitive advantage framework to strengthen Newell's market-leading brands. We have eight top-tier innovations planned for this year across multiple businesses and expect the pipeline to continue to build as we look further out. The new business development team, which we established last year in the U.S., is driving distribution gains with both new customers and existing customers with new categories. During the first quarter, new distribution was one of the upside drivers to core sales versus the company's outlook. The new business development team has made significant strides in a remarkably brief period. This team has delivered new distribution gains on Graco, Rubbermaid Brilliance, Calphalon, and commercial cleaning in the club channel, which will set in the second half of 2024. We have also seen gains in the dollar channel with significant wins on Rubbermaid and NUK baby care, to name a few. With the exit of buybuyBaby, we have many new specialty retailers we will be expanding our distribution of Graco and NUK and other existing customers who are looking to elevate the omni shopping experience for the Baby category. Coles recently announced their Babies 'R' Us store-in-store concept, and our brands will be prominently featured. We expect new distribution gains to be a meaningful contributor to top-line growth going forward. International markets were a growth engine in the first quarter as we moved to the One Newell commercial organization across most regions. Pricing in international markets to offset inflation and currency movements was a meaningful contributor to the core sales performance. Similar to the situation in the United States, we have substantial potential across key markets to enhance distribution further, an opportunity that the regional teams are prioritizing. The third priority we identified for 2024 was driving strong gross margin and operating margin improvement, building on the progress from the second half of 2023. Newell's first quarter results were ahead of our expectations on both metrics as normalized gross margin and operating margin expanded 410 basis points and 220 basis points versus last year, respectively. Even as we increased advertising and promotion spend as a percent of sales about 100 basis points year-over-year. This excellent result was a direct reflection of the strategic choices we made to accelerate productivity, focus on more profitable parts of the portfolio, exit structurally unattractive SKUs and categories, and direct our innovation efforts to focus more on MPP and HPP segments. We also made progress on the fourth priority for 2024 as we drove strong growth in operating cash flow, with the cash conversion cycle improving about 30 days year-over-year, enabling us to slightly reduce the company's leverage ratio relative to the 2023 year-end and what is historically a cash-use quarter. Lastly, we continue to improve operational excellence by reducing organizational complexity through business process redesign with a focus on simplification and accountability as well as technology standardization and enablement across the organization. For example, we successfully completed the Sistema SAP integration in the first quarter. We are encouraged by our first quarter results being ahead of plan on all key metrics. That being said, the first quarter is our seasonally smallest quarter, and the external environment remains challenging as we expected. The categories we compete in remain under pressure, with consumers continuing to carefully manage their discretionary spend as the cumulative impact of inflation on food, energy, and housing cost has outpaced wage growth. As such, we are maintaining our outlook for the full year with a continued focus on the five key priorities we laid out at the beginning of the year. It has been less than one year since we deployed our new strategy. We are excited and energized by the progress we are delivering on the turnaround agenda. We remain confident in our ability to strengthen the company's performance and create value for our stakeholders over time as we continue to move with speed and agility to operationalize our strategy. I would like to thank our dedicated employees for their continued commitment to operating with excellence and delighting our consumers around the world. I'll now hand the call over to Mark.

Thanks, Chris, and good morning, everyone. While we're still writing the first several chapters of Newell's turnaround story, we're pleased to report that core sales, normalized operating margin, and normalized earnings per share were all better than the guidance we provided on our fourth quarter call. We believe this is further evidence that the interventions being made to operationalize Newell's new corporate strategy and improve the structural economics of the business are beginning to take hold. Core sales at minus 4.7% represented a nearly 50% improvement on a run rate basis when compared to a 9% decline in the back half of 2023 and was the best core sales performance posted since the second quarter of 2022. As expected, pricing in international markets, particularly Latin America, which was largely in response to currency movements and inflation, was a meaningful contributor to core sales performance. Investments in Newell's front-end commercial capabilities, particularly innovation, the new business development, and the more streamlined organizational structure following our organizational realignment also positively contributed to the company's top and bottom line results. A 3% headwind from currency, largely driven by hyperinflationary conditions in Argentina accounts for most of the difference between core and net sales, which contracted 8% year-over-year to $1.7 billion. We offset the bulk of this currency headwind with pricing in the market. Perhaps even more encouraging than the sequential improvement in Newell's core sales trend was the 410 and 220 basis point expansion in normalized gross margin and normalized operating margin versus a year ago to 31.2% and 4.6%, respectively. This was the third consecutive quarter of normalized gross margin improvement and the second straight quarter of normalized operating margin expansion year-over-year. Savings from best-in-class productivity, Project Phoenix, and organizational realignment, along with favorable mix and pricing, were the largest drivers of normalized operating margin expansion in Q1, which more than offset the impact of lower net sales, inflation, and higher advertising and promotion investment levels. While we're on the topic of advertising and promotion, it bears repeating that we remain committed to putting more A&P dollars to work behind compelling consumer-led product innovations such as Sharpie Creative Markers and Paper Mate InkJoy Gel Bright!, which is why our A&P spend was up versus last year in both absolute dollars and as a percentage of sales. In addition, and in a similar vein, the fact that overhead spending increased versus last year as a percentage of sales despite being down in absolute dollar terms due to over $50 million of Project Phoenix and organizational realign of savings is not lost on us. The increase in overhead spending as a percentage of sales versus a year ago was largely due to top line deleveraging and annual wage inflation and discrete investments being made to enhance several critical front-end commercial and consumer-facing capabilities required to support our new strategy. Importantly, we believe these organizational investments are starting to come to fruition as evidenced by the green shoots Chris mentioned earlier. As such, we remain fully committed to them, and while we do expect overhead as a percentage of sales to remain elevated in the near term, we believe it will start turning down as our revamped product innovation funnel continues to improve and comes to market. Net interest expense rose $2 million versus last year to $70 million, primarily due to higher interest rates, all of which netted out to flat normalized earnings per share for the quarter despite a much higher-than-expected quarterly tax rate. From a cash flow standpoint, Newell generated $32 million of positive operating cash flow in the first quarter of 2024 compared to a use of $77 million in the first quarter of 2023. Working capital reduction, together with operating income growth, resulted in positive operating cash flow, which due to the seasonality of our business has been very hard historically to achieve during the first quarter. Notably, this is the first time Newell has generated positive first quarter operating cash flow since 2020 and only the second time first quarter operating cash flow was positive since the Jarden acquisition in 2016. Newell's strong cash performance is also helping the company's leverage ratio down to 5.4x at the end of Q1, which was better than we had originally anticipated. Moving on to our second quarter outlook, we have assumed the following: core sales are expected to decline 4% to 6%, with net sales down 7% to 9%. As with the first quarter, most of the difference between core and net sales is expected to be driven by foreign exchange. We expect normalized operating margin of 9.1% to 9.6%, which is flat to up 50 basis points versus last year. The second quarter normalized operating margin performance is expected to be driven by a meaningful improvement in gross margin, partly offset by an increase in SG&A spending in both absolute dollar terms and as a percentage of sales, primarily driven by a step-up in A&P as we continue to invest behind new consumer-led innovations. We expect a slight uptick in interest expense, a normalized tax rate around 20%, and normalized earnings per share in the range of $0.18 to $0.21. With a stronger-than-anticipated start to the year and with full knowledge that Q1 is traditionally our smallest quarter, we remain confident in our full year outlook. Consistent with that, we are affirming 2024 guidance, which assumes the following: a core sales decline of 3% to 6% with a net sales decline of 5% to 8%. Normalized operating margin of 7.8% to 8.2%, which at the midpoint represents a 100 basis point improvement. If achieved, this would double the 50 basis point annual expansion called for in our evergreen financial model. A normalized earnings per share guidance range of $0.52 to $0.62, which includes a mid-teens normalized tax rate and a $15 million to $20 million step-up in interest expense. Now you may recall from our last discussion that this EPS guidance range at its midpoint represents high single-digit growth versus last year once a $0.26 year-over-year tax differential is accounted for. For the full year, we continue to forecast operating cash flow of $400 million to $500 million, including about $150 million to $200 million in cash restructuring and related charges. From a leverage standpoint, we continue to expect Newell's leverage to drop to about 5x at the end of Q4. And longer-term, we remain committed to achieving investment-grade status and continue to target a leverage ratio of about 2.5x. In closing, it is worth noting that in the last three full quarters since our leadership transition and the development and adoption of our new corporate strategy, Newell returned to normalized gross margin expansion with year-over-year increases of 170 basis points in Q3, 570 basis points in Q4, and now 410 basis points in Q1 of 2024. Over that same three-quarter period, we have also generated $685 million of operating cash flow, paid down about $360 million of debt, and lowered our leverage ratio from 6.3 to 5.4x. Therefore, while we are the first to acknowledge that much more work remains as part of our business and organizational transformation to a world-class consumer products company, we are encouraged by the significant progress Newell's highly professional and dedicated employees have delivered in such a short period of time and remain supremely confident in our ability to fully operationalize and monetize Newell's new corporate strategy in the years ahead. Operator, if you could, please open the call for questions.

Our first question comes from Lauren Lieberman with Barclays.

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

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

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

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

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

Our next question comes from Bill Chappell with Truist Securities.

Can you provide more insight on the three businesses that have returned to growth? Do you believe this trend will continue throughout the year, or is it more related to timing with comparisons? How are the categories performing? Are they experiencing growth as well, or is it primarily due to increased shelf space distribution? Any additional details on these three businesses that are showing signs of recovery would be helpful.

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

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

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

Our next question comes from Andrea Teixeira with JPMorgan.

Chris, could you elaborate on the consumption trends within your outlook for the low single-digit category decline? I would also like you to discuss the negative impact seen in kitchen and home fragrance, which seems to have offset the positive performance in commercial solutions. When do you anticipate this business might see improvement, especially given the easier comparisons you mentioned, such as for Baby? You have been on a lengthy journey of SKU rationalization. Is this category still likely to face tough comparisons due to the COVID bump as we progress through 2024? Additionally, could you clarify how much of the overall decline is expected from a category perspective?

Let me break that down. Our expectation for the categories we compete in is to decline by low single digits this year, which we anticipate will be consistent across all four quarters. We saw this decline begin in the first quarter and expect it to continue in the second, third, and fourth quarters. We do not foresee these categories returning to growth at any point this year. However, we expect our core sales to improve in the second half of the year compared to the first half, mainly due to the launch of our new front-end capabilities. I mentioned earlier one of our key initiatives, which is focused on Writing, and we have several other initiatives launching in the second half, particularly in the kitchen segment. Therefore, I am optimistic about improvements in the kitchen business in the latter half of the year due to our investments in capabilities and new product launches. The home fragrance segment relies heavily on the holiday season, and while it is a bit early to make specific predictions, we are actively innovating in that area and have promising developments coming from our new business development team as we move further into the year.

Chris, can you elaborate on your earlier point? Is there a way to generate revenue from some of the brands you mentioned, perhaps by reducing investment in those businesses? Or is that unrealistic at this stage? Are you content to retain those businesses since you have already streamlined your product offerings and optimized your marketing efforts?

Yes. To provide some context, when we implemented our strategy in June of last year, we prioritized the top 25 brands from the 80 we were selling, which represented approximately 90% of our sales and profits. Currently, we have streamlined our operations by cutting around 20 less productive brands, leaving us with about 60 brands. This change has improved the quality of our brand portfolio. Additionally, when we set our guidance for this year, we intentionally stepped away from less attractive parts of the business, which we anticipated would create a 2-point headwind to our core sales growth. This headwind is more pronounced in the first half of the year, as we exited those businesses last year, and we expect to see the positive effects in our results moving forward. This is reflected in our core sales trend improving in the second half compared to the first half. Furthermore, we're seeing a positive shift in our gross margin due to better product mix across our portfolio. A key element of our strategy is to enhance the quality of our portfolio by reducing the number of underperforming brands and limiting our involvement in unattractive businesses, and we are making significant progress in both areas.

Our next question comes from Peter Grom with UBS.

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

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

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

Our next question comes from Olivia Tong with Raymond James.

Continuing with the outlook and the visibility into the rest of the year, the Q2 guidance indicates that declines are expected to accelerate again after slowing this quarter. If I recall correctly, new product launches typically occur between Q2 and Q3. Additionally, you have mentioned pricing in the context of learning and development, which isn't something we discuss often. Could you elaborate on the pricing plans for the next year or two, particularly regarding the Writing division and its growth? So, I have two questions: one about the cadence for the year and another about pricing.

Let me address pricing first. We have some carryover pricing from the pricing adjustments made in the U.S. since July 1 last year, which has positively impacted our results in the first half of this year. We are not planning or have announced any major new pricing initiatives this year. However, we are experiencing low single-digit input cost inflation, mainly due to labor, overhead, and resin costs. In international markets, the situation is different. We have encountered foreign exchange headwinds, and we now anticipate a 3-point headwind in our guidance due to the strength of the U.S. dollar in several countries. Consequently, we are implementing pricing adjustments in certain international markets to counteract this foreign exchange impact. In the first quarter, pricing contributed approximately 3 points to our core sales growth, and we expect it to influence our performance by about 2 to 3 points as the year progresses.

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

Our next question comes from Chris Carey with Wells Fargo.

I'm going to mention visibility again, but perhaps from a slightly different perspective. You've noted in recent comments that one of the challenges was the surge in demand during COVID for categories that typically have three to four-year purchase cycles, and moving past that situation has been difficult for revenue. This has also impacted retail inventories. I understand the discussions about improved execution related to the refresh strategy, which seems to be effective. What are your observations regarding this purchase cycle trend? Are consumers starting to return to these longer-lasting, infrequent purchase categories? Additionally, what is your current insight on inventory levels at retail in these categories? Is inventory finally at a point where you can manage shipments more effectively? Any insights on the purchase cycle dynamics in these categories and how that relates to inventory and visibility would be appreciated.

Yes, that's a good question and one we consider regularly. From a retail inventory standpoint, we believe retail inventories are well-adjusted. Therefore, we're not experiencing significant impacts from inventory changes on our revenue, and we do not anticipate any notable inventory-related challenges or benefits for the remainder of the year. Consequently, this factor is no longer a significant influence on our revenue performance. Regarding the other two drivers, which include the pull forward in categories with longer purchase cycles, we believe this still plays a role in some of our categories. However, it's difficult to determine how much this is affecting category dynamics compared to the pressures on consumers due to inflation in food, housing, and energy, which are impacting discretionary spending. Both of these factors are contributing to our expectation that category performance will decline by low single digits. Our forecasting for the year assumes this trend will hold true across each of the four quarters. The positive aspect is that we are starting to see stability, as it is no longer fluctuating like it did over the past couple of years. We are keeping a close watch on this, yet it remains challenging to distinguish between these two influences.

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

Yes, I believe we are gaining more support for our premiumization strategy. For instance, products like Sharpie Creative Markers and Paper Mate InkJoy Bright! offer great consumer value despite being in the medium and high price point category. Our focus is on innovating in these areas using proprietary technology while ensuring excellent consumer value. Most of our products require a relatively small investment from consumers yet can still deliver a significant value, even in the medium and high price segments. This allows us to achieve higher gross margins, which means we can allocate more funds for advertising our innovations and enhance our overall business mix. Looking at where we stand in several of our competitive categories, there is plenty of room for improvement while still offering great consumer value. From the recent creativity launch I mentioned, the gross margin on those products—now among the top three best-selling SKUs in the Writing category—is higher than the overall Writing gross margin and nearly double the company's gross margin. This reflects a significant improvement when executed correctly, and that is what we are aiming for across our innovation portfolio. If successful, I believe we have a substantial opportunity to enhance margins in this business in the future.

Our next question comes from Filippo Falorni with Citi.

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

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

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

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

Our last question comes from Brian McNamara with Canaccord Genuity.

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

Thank you, Brian. It's been three quarters since I started, and during this time, we've restructured the leadership team. We completed a full capability assessment and launched a new strategy last June. This strategy has been communicated across all business units, brands, and regions, and we've incorporated it into individual work plans for every employee for 2024. We have also revised our operating model and how we work and execute our plans. A significant amount of foundational work has been established as we move into this year, and we are focused on executing based on the groundwork laid previously. I'm pleased with the early results from our strategic decisions and feel optimistic about our direction over the next few years. Thank you all for joining, and I look forward to speaking with many of you soon.

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