Newell Brands - Q1 2024

Transcript

Operator (participant)

Good morning, and welcome to Newell Brands' first quarter 2024 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. In order to stay within the time schedule for the call, please limit yourself to one question during the Q&A session. 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 Sophia Sinnis, VP of Investor Relations. Ms. Sinnis, you may begin.

Sofya Tsinis (VP of Investor Relations)

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 course of today's call, we will be making forward-looking statements which involve risks and uncertainties. Actual results and outcomes may differ materially, and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q, and other SEC filings available on our investor relations website for a further discussion of the factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures.

We believe these Non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these Non-GAAP measures and 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.

Chris Peterson (President and CEO)

Thank you, Sophia. 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 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 to 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, and what we have deemed a Year of Creativity for the writing business. Sharpie Creative Markers represents 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 Campus 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 six count pack of Paper Mate InkJoy Gel Bright is currently the number one 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 8 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 stood up 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 buybuy BABY, we have many new specialty retailers, where we will be expanding our distribution of Graco and Nook and other existing customers who are looking to elevate the omni shopping experience for the baby category. Kohl's 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 2023 year-end, in what is historically a cash use quarter. And lastly, we continued to improve operational excellence by reducing organization 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.

Mark Erceg (CFO)

Thanks, Chris, and good morning, everyone. While we're still writing the first several chapters in 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 -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 and the new business development, as well as 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 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 realignment savings, is not lost on us. The increase in overhead spending as a percentage of sales versus year-ago was largely due to top-line deleveraging, 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 also helped bring the company's leverage ratio down to 5.4 times 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%-6%, with net sales down 7%-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%-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-$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%-6%, with a net sales decline of 5%-8%. Normalized operating margin of 7.8%-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-$0.62, which includes a mid-teens normalized tax rate and a $15 million-$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-$500 million, including about $150 million-$200 million in cash restructuring and related charges. From a leverage standpoint, we continue to expect Newell's leverage to drop to about 5x by 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 6.3x 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.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. One moment for questions. Our first question comes from Lauren Lieberman with Barclays. You may proceed.

Lauren Lieberman (Managing Director)

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

Chris Peterson (President and CEO)

Yeah, thanks, Lauren. Yeah, 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 endpoint 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 rec 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.

Lauren Lieberman (Managing Director)

Great. That, that's super helpful. And if I can sneak in one more?

Chris Peterson (President and CEO)

Sure.

Lauren Lieberman (Managing Director)

Thank you. So just looking back, and I know we're now, it feels like, you know, things are inflecting, and like, Mark, you pointed out the gross margin progression in the last couple of quarters. But in 2022, you took down guidance a few times. Same thing happened last year, usually comes kind of 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, you know, more confident, presumably, in the outlook today than kind of what's happened in the last two years.

Chris Peterson (President and CEO)

Yeah, 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've 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.

Mark Erceg (CFO)

And the one thing I would add is, just from a planning standpoint, we've 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 out over the course of the entire year. We've centralized more of our customer teams and have a very rigorous catch ball 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 to put brand P&Ls 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.

Lauren Lieberman (Managing Director)

Great. Okay. Thank you so much. I appreciate it.

Operator (participant)

Thank you. Our next question comes from Bill Chappell with Truist Securities. You may proceed.

Bill Chappell (Managing Director)

Thanks. Good morning.

Chris Peterson (President and CEO)

Good morning, Bill.

Bill Chappell (Managing Director)

Hey, just first question on, good morning, on the three businesses that have returned to growth. Can you give us more color, I mean, in terms of, do you think that's here to stay as we go through this year? Or was that more of a kind of a timing of comps? How are the categories faring? Are they growing as well, or is it more of just kind of shelf space, distribution gains? Just any more color, kind of, on the three businesses that are at least back to growth would be great.

Chris Peterson (President and CEO)

Yeah. Yeah, sure. Yeah, so, let me take them each in turn. So the writing business, you know, we feel the writing business, we are 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, were drafted number eight, nine in the first round. They both are gonna use Sharpies to sign their contracts, and we're activating marketing against that, which is fantastic.

And 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. We have a lot of activity going on, not just from a marketing, 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 flat, 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 new momentum from new distribution, and we are lapping a challenging base period from last year, with buybuy BABY having gone out of business. And then on the commercial business, that business is also going sort of from strength to strength. We've got some good innovation on that business. You know, 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.

Bill Chappell (Managing Director)

No, that's helpful. It's... I'll dig in one 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 know, you're just kind of maintaining guidance across the board, but is it safe to say that you, there's 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?

Chris Peterson (President and CEO)

Yeah, so cash flow came in significantly better than we expected in the first quarter. You know, 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 in 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 offtake standpoint, but we are doing better, I think from a selling perspective.

Bill Chappell (Managing Director)

Great. Thanks so much.

Operator (participant)

Thank you. Our next question comes from Andrea Teixeira with JPMorgan. You may proceed.

Andrea Teixeira (Executive Director)

Good morning, and thank you. Chris, I think you spoke a little bit about outdoor, but if you can also talk about consumption trends within your low single-digit category decline outlook, right? And now talking about more the negative impact that you saw in kitchen and home fragrance, which offset the commercial solution side and the positive performance there. When do you think this business could potentially slack, either by having the easier comps, as you called out, for example, for baby? Now, you've been in a very long journey of SKU rationalization, or you'd think that, you know, it's a category that given the COVID bump, you're still gonna see tough comps as we navigate through 2024.

If that is the main assumption that you're seeing within or if you can explain to us how much of that overall low single digit category growth, I'm sorry, category decline, how much of decline you're expecting this business to have from a category standpoint? Thank you.

Chris Peterson (President and CEO)

Yeah. So let me try to parse that out. So if you look at our expectation for the year of the categories in total in which we compete to be down low single digits. That is relatively consistent in each of the four quarters this year. So we are expecting the categories to decline. They declined in the first quarter. We expect them to decline in Q2 and Q3 and Q4. So we're not expecting the categories to return to growth in any of the four quarters this year as a starting point. That being said, we are expecting our Core Sales to improve in the back half of this year versus the front half of this year. And that's largely as a result of the front-end capabilities coming online.

I mentioned the first of our eight Tier One and Tier Two initiatives that we've launched, which was the writing one, in my prepared remarks. We have a number of the other seven that are launching in the back half across other businesses, and many of those are launching in the kitchen business, specifically. So I'm expecting that the kitchen business trend will improve in the back half of this year versus the front half of this year, driven by capability investments and innovation launches that we expect in the back half. I think the home fragrance business will see, you know, the big quarter there is the holiday period. We're a little bit away from the holiday period, so I don't want to guide specifically on that.

We are working on innovation in that business as well. We've got a lot of good things happening on new from the new business development team there, as we head towards later in the year.

Andrea Teixeira (Executive Director)

Chris, if I can just piggyback on what you just said, is there any, I think, way or perhaps, you know, getting some of these brands you called out, of course, exiting some of these businesses from a basically organic standpoint, just not investing as much? But is there any way you can perhaps monetize some of these brands, or that's wishful thinking at this point? You'd have to, you're happy with having those businesses they are, as you already took out a lot of SKUs and rationalized your commercial campaigns on those.

Chris Peterson (President and CEO)

Yeah. So just on that, maybe a couple statistics to help. When we put our strategy in place in June of last year, recall that we said we were gonna focus on the top 25 brands out of, at the time, 80 brands that we were selling. And those top 25 brands, we said, accounted for about 90% of the company's sales and profits. As we sit here today, we have already rationalized about 20 tail brands. So we now are operating with about 60 brands, down from 80. So that is a good thing because the quality of our portfolio is getting stronger, as we sort of reduce these tail brands.

The second thing I would say is we, when we gave guidance for this year, we purposefully walked away from structurally unattractive parts of the business, which we said was going to account for about a two point headwind to core sales growth. Most of that two point headwind is a little bit more front-half loaded than it is back-half loaded, because some of those businesses we walked away from we walked away from last year, and we will begin to annualize that. And so that is embedded in our guidance, and that's one of the reasons why you see our core sales trend. I'm saying our core sales trend is going to improve in the second half versus the front half.

It's also one of the reasons why you see our gross margin inflecting so positively, because we're driving mix improvement across the portfolio. So I think as we go forward, one of the big tenets of the strategy was to fundamentally improve the quality of the portfolio by reducing the number of tail brands and reducing the amount of business that we were operating in that was structurally unattractive, and I think we're making good progress on both fronts.

Andrea Teixeira (Executive Director)

Great. Thank you so much. I'll pass it on.

Operator (participant)

Thank you. Our next question comes from Peter Grom with UBS. You may proceed.

Peter Grom (Equity Research Analyst)

Thanks, operator, and good morning, everyone. Hope you're doing well. 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, you know, 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.

Can you maybe just remind us what's kind of contemplated in the 2Q guidance at this point? Thanks.

Chris Peterson (President and CEO)

Yeah. 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've 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.

Mark Erceg (CFO)

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, 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.

Peter Grom (Equity Research Analyst)

Thanks so much. I'll pass it on.

Operator (participant)

Thank you. Our next question comes from Olivia Tong with Raymond James. You may proceed.

Olivia Tong (Managing Director, Senior Analys)

Great, thanks. Just continuing on, sort of the outlook, and your level of visibility, into the rest of the year, given that the Q2 guide calls for declines to accelerate again after decelerating this quarter. You know, sort of getting under all the commentary so far, if I remember correctly, some of the new product launches are usually skewed towards Q2 to Q3. And then you discussed pricing as well, you know, in learning and development. So that's not something we talk about frequently, but maybe can you talk a little bit about pricing plans for the year too, given that call out on the Writing division and the growth in that division? So two questions, one around the cadence of the year and then also on pricing. Thank you.

Chris Peterson (President and CEO)

Let me try to take pricing first. So, we are pricing two things. We have a little bit of carryover pricing from the pricing action that we took in the U.S. from July first last year to address the structurally unattractive parts of our portfolio, that is providing a benefit in the U.S. in the front half of this year from a pricing perspective, from a carryover standpoint. We are not planning and have not announced major new pricing actions this year, although we still are experiencing sort of low single digit input cost inflation, largely driven by labor, overhead and resin, primarily. In the international markets, it's a bit of a different story.

We have seen FX, the FX headwind step up, and we're now expecting in our guidance about a three point headwind from foreign exchange, a two to three point headwind from foreign exchange, because of the strength of the U.S. dollar in a number of countries around the world. As a result, we are taking pricing in some of the international markets to offset that FX headwind. That is new pricing. In the first quarter, I think pricing was about a three point contribution to core sales growth in total. We expect it to be probably a two to three point impact as we go through the year.

Mark Erceg (CFO)

And then as it relates to your first portion of the question, I think you saw that we guided Core Sales for Q2 to be somewhere between a -6% and a -4% decline. You know, we basically just posted -4.7% in Q1, so effectively it's exactly the same. As far as, you know, getting within that a little bit more, the only real differential is we still expect Gross Margin to, you know, move forward, meaningfully in the second quarter. But unlike the first quarter, there's 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 gonna 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, you know, significant lower revision for management incentive comp. 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.

Operator (participant)

Thank you. Our next question comes from Chris Carey with Wells Fargo. You may proceed.

Chris Carey (Equity Analyst)

Hi, good morning.

Chris Peterson (President and CEO)

Morning.

Chris Carey (Equity Analyst)

I'm gonna use the visibility word again, I apologize. But maybe from a little bit of a different angle. So, you know, you've said in recent, you know, public remarks that one of the challenges has been or had been, that there was, you know, a pull forward of demand during COVID of categories that might have three, four year purchase cycles, and that, you know, getting beyond that dynamic has been a challenge for top line. It's also been a challenge for inventories at retail. I fully appreciate that, you know, the comments around improved execution behind a refresh strategy, and that seems to be coming through. How or what are you seeing from this purchase cycle dynamic?

Are you seeing a return of consumer to these more durable, long purchase cycle categories yet? And secondly, what are you seeing from an inventory standpoint at retail in these categories? Is inventory finally at a point where you can call your shots a little bit better from a shipment standpoint? So any comments on, you know, the sort of, you know, purchase cycle dynamics in some of these categories, and perhaps relate that to where you see inventory and how that's helping visibility?

Chris Peterson (President and CEO)

Yeah, good question, and it's one that we ask ourselves, you know, continuously. Let me start with, from a retail inventory perspective, we believe that retail inventories are right sized. So we're not seeing any significant impact from retail inventory changes to our top line, and we don't expect any significant retail inventory headwinds or tailwinds as we go through the balance of the year. So that dynamic, I think, is now no longer a major driver of our top-line performance. On the other two drivers, which are pull forward in long purchase cycle categories, we do believe that in some of our categories, that is still with us.

It's hard to parse out how much is that driving the category dynamic versus how much is pressure on the consumer from inflation in food, housing, and energy, which is putting pressure on discretionary spending, driving the category dynamic. I think both of those are factors that are driving our outlook for the categories to be down low single digits. And as I said, our forecast for the year effectively assumes that down low single digit is true in each of the four quarters. The good news is we are seeing that begin to stabilize. It's not bouncing around the way that it was over the last couple of years. And so we're monitoring it, but it's hard to parse those two out from each other.

Chris Carey (Equity Analyst)

Okay, that makes sense. One follow-up. One of your strategies.

Chris Peterson (President and CEO)

Mm-hmm.

Chris Carey (Equity Analyst)

To improving gross margins over the longer term, obviously includes productivity and operational execution. But one is also, you know, I guess, prioritizing medium price point and high price point offerings. To your point.

Chris Peterson (President and CEO)

Yep.

Chris Carey (Equity Analyst)

Just there on the consumer, are you starting to see any, you know, consumption challenges to that strategy, you know, 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, you know, the first phases of execution on gross margin? So just that balancing, like a premiumization strategy with what we're seeing in the macro. Thanks.

Chris Peterson (President and CEO)

Yeah, I think actually, if anything, we're seeing more encouragement for that premiumization strategy. If you think about the Sharpie Creative Markers and the Paper Mate InkJoy Bright, you know, those are MPP, HPP products, but they represent a terrific consumer value. And so the thing that we're focused on is innovating in those spaces with proprietary technology and have it be a terrific consumer value. Because most of the products that we sell are not large cash outlay products and can represent a superior consumer value, even in the MPP, HPP space, which enables us to have a much higher gross margin, which enables us to spend advertising dollars behind those innovations and enables us to mix the whole company up.

And if you look at our starting point, in many of the categories in which we compete, we have a lot of room to move higher and still represent a superior consumer value. So that's what we're seeing so far. You know, if you look at the year of creativity launch that I referenced, you know, the gross margin on those products, which are now in the top three selling SKUs in the writing category, is ahead of the writing gross margin and almost double what the company gross margin is.

And so it's a material improvement when we get it right, and that's what we're working on across the innovation portfolio, which, if we get right, I think has a long runway for us to really improve the margins in this business going forward.

Chris Carey (Equity Analyst)

Okay, thank you.

Operator (participant)

Thank you. Our next question comes from Filippo Falorni with Citi. You may proceed.

Filippo Falorni (Director, Equity Research)

Hey, good morning, everyone. I wanted to ask a question on the cost environment. We've seen reinflation in some commodities, particularly the oil complex, 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? Thank you.

Mark Erceg (CFO)

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. You know, 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. You know, 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 rec, 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 go from roughly 3%, from 2019 to 2022, 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 fabulous work, and right now we see that low single-digit inflationary environment across our, you know, collective pools.

Filippo Falorni (Director, Equity Research)

Got it. That's super helpful, Mark. 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 a retailer feedback, any pushback on potentially lower pricing or increasing promotional activity will be helpful. Thank you.

Chris Peterson (President and CEO)

Yeah, 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, you know, we've generally said we're gonna 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.

Filippo Falorni (Director, Equity Research)

Got it. That's super helpful. Thank you, guys.

Operator (participant)

Thank you. Our next, our last question comes from Brian McNamara with Canaccord Genuity. You may proceed.

Brian McNamara (Managing Director, Senior Analyst)

Hey, good morning. Thanks for taking our questions. 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?

Chris Peterson (President and CEO)

Yeah, thanks, Brian. I would say we've had three quarters since I've come in, and we've reconstituted the leadership team. During that period of time, we completed the full capability assessment, as we've talked. We rolled out a new strategy last June. We've cascaded that strategy to each of the different business units, each of the brands, each of the geographies. We've now built that strategy into individual work plans for 2024, for every professional and clerical employee in the company. We've changed the operating model and changed how we're working, and how we're executing and how we're focused. And so a lot of that foundational work, I think, has been put in place.

As we turn to this year, and as we said in our priorities, this is really the year where we're focused on executing against that, given the foundational work that we've put in place, and beginning to show progress as a result of the strategic choices that we've made. I think it's been a lot of work to put the foundation in place, with the new strategy, the new operating model, the new work plans, and the new organization structure. But I'm very excited about some of the results that we're starting to see, early results from that, those strategic choices, and I'm very optimistic about where we're headed over the next couple of years here.

Brian McNamara (Managing Director, Senior Analyst)

Great. Thank you. Best of luck, guys.

Chris Peterson (President and CEO)

All right. Thanks, everybody, for joining. We will leave it there, and, I'm sure talk with many of you in follow-up conversations shortly.

Operator (participant)

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.