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spk05: Good morning and welcome to Newell Brand's fourth quarter and full year 2020 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 questions and answers session. As a reminder, today's conference is being recorded. A live webcast of this call is available at ir.newwellbrands.com. I will now turn the call over to Sophia Sinnes, VP of Investor Relations. Miss Sinnes, you may begin.
spk06: Thank you. Good morning, everyone. Welcome to Neil Brand's fourth quarter earnings call. On the call with me today are Roddy Salagram, our President and CEO, and Chris Peterson, our CFO and President, Business Operations. Before we begin, I'd like to inform you that during the course of today's call, we will be making forward-looking statements which involve risks and uncertainties. Actual results and outcomes may differ materially. I refer you to the questionary language and risk factors available in our earnings release and our forms 10-K and 10-Q available in our investor relations website for further discussion of the factors affecting forward-looking statements. We assume no obligation to update any forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those who 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 considerations between GAAP and non-GAAP measures can be found in today's earnings release and tables, as well as in other materials on the New Investor Relations website. Thank you, and now I'll turn the call over to Ravi.
spk08: Thank you, Sophia. Good morning, everyone. Happy New Year and Happy Lunar New Year, and welcome to our call. I sincerely hope that you and your loved ones are staying healthy and safe. While there's no answer, 2020 was very challenging yet. I'm immensely proud of the results our team delivered as we quickly adapted to the evolving environment. At the same time, we remain focused on ensuring the safety and well-being of our employees, carefully operating our farms and distribution facilities, while ratcheting up capacity and maintaining financial viability and business continuity. We close this historic year on an exceptional note, with fourth quarter and full year results ahead of our expectations across the board. This is a testament to the incredible resilience, fortitude, and commitment of our employees who executed this excellence. In fact, in third quarter, we pivoted to accelerate the turnaround plan and drove significantly stronger underlying performance in the business in the second half of the year across all key value drivers, top line margins, earnings per share, and cash flow. We also achieved meaningful progress against our strategic priorities in 2020. First, we strengthened and diversified our team as we brought in WorldCraft leaders from the outside into our appliance, commercial, food, and outdoor and recreation businesses, as well as into other functions. They hit the ground running, as COVID certainly did not allow for any downtime. They complement our strong existing leaders across the domain for businesses. The leadership team and I are focused on building a winning one-year culture, focused on trust, transparency, and teamwork. Our diversity, inclusion, belonging efforts are our top priority as we continue to galvanize our employees and unify everyone behind the common purpose of delighting consumers with our innovative brands that create moments of joy, build confidence, and provide peace of mind. Second, throughout the year, we improve customer relationships through enhanced collaboration, joint business planning efforts, as well as increased emphasis on delivering excellent service for our customers. We are leveraging our omnichannel capabilities to advance joint business planning and believe this is an area of strength for new. We're also seizing opportunities to close our distribution gaps, particularly in the food, drug, and dollar channels. We're already making progress on that front across a number of businesses, such as food writing and home pregnancy. Third, we drove a 30 basis point improvement in normalized operating margin in 2020, an incredible feat. Given the cost and business mix headwinds, we had to overcome during the year. This was made possible by establishing a culture of productivity, as well as aggressively attacking overhead costs and organizational complexity. In fact, normalized operating margin expanded 120 basis points year over year in the second half, reversing the losses in the second quarter that were mostly driven by fixed cost de-averaging. And for the full year, ETS of $1.79. Wow. Up nearly 12% from continuing operations. For tight working capital management resulted in stellar operating cash flow of more than $1.4 billion. Yes, folks, $1.4 billion. Our business unit, CFOs, led by our own billion-dollar man, Chris Peterson, did a phenomenal job. Lastly, one of the key objectives of our turnaround has been to return the company to sustainable core sales growth. While core sales for the year declined 1.1%, I'm delighted to say that in the second half of 2020, we turned the corner. Core sales grew 6% and increased across seven out of eight business units with every geographic region growing. During 2020, we experienced healthy domestic consumption, both broad-based. The strength and resilience of our portfolio, shown through as growth in food, commercial and appliances, cookware, business units, offset rising softness. The team successfully navigated demand surges, product and container availability issues, and temporary factory and distribution center closures. Tightened focus on relevant innovation, grounded in consumer insights, as well as omni-channel execution are making a difference. During 2020, we drove improved domestic market share across a number of businesses, including baby gear, food storage, vacuum sealing, fresh preserving, tents, corridors, and fence, to name a few. Many of our top brands delivered incredible results in 2020. as Rubbermaid, FoodSaver, Oster, Mapa, Spontex, Ball, Breville, and Woodwick all grew at a double-digit rate. Omnichannel is the way forward and a critical priority for us. Our e-commerce business has continued to be a substantial growth engine for the company. In 2020, e-commerce revenue growth accelerated to the high 30s, and penetration online improved to about 22% of net sales on a global basis. close to double the rate versus two years ago. While baby remains by far the most highly penetrated business across the digital platforms, we've seen meaningful shift towards online consumption across the portfolio. In fact, in 2020, four business units commanded digital penetration as a percent of net sales of more than 20%, including baby, home fragrance, outdoor and recreation, and appliances and cookware, and food is chasing that number. All of our leaders took quick and decisive actions to swiftly adapt to the COVID-19 environment and emerging trends. These trends include preparing more food at home as regular people turn into home chefs, heightened interest in outdoor hobbies and personal well-being, and increased investment in sanitation. We anticipate that trends will continue to evolve throughout 2021. We also believe that many of the habits that have been found during the pandemic are here to stay, with our portfolio well positioned to capitalize on them. Let me briefly touch upon how each of our businesses performed in 2020, as I'm truly thrilled with the progress we have made. Let's start with appliances and cookware, where we delivered mid-single-digit core sales growth driven by the strength in the international markets. In the U.S., consumption increased during the fourth quarter and for the full year, as more people have been cooking, baking, and spending time at home. In Latin America, despite COVID-related challenges, the team delivered outstanding results as they quickly pivoted towards the digital platform. Although I'm extremely proud of these results, I also realize that a lot more work needs to be done to reposition the appliance business for sustainable growth. During 2020, the appliances category accelerated significantly, and in some instances, we did not keep up, especially in the U.S. This resulted in share losses, albeit lower in magnitude than in prior years. Although we have seen good traction with recent innovations such as Mr. Coffee iced coffee maker, poster texture select blenders, and as the diamond force heated cooking products, we need to extend the learning and leverage consumer insights across the entire brand portfolio. That work began in 2020 and is continuing in earnest throughout 2021 as we implement the necessary strategic changes to successfully position appliances. We have a strong international appliance franchise with strong brand equity for Oster, Crock-Pot, and Sunbeam in Latam in Australia and New Zealand, followed by Breville in Europe. Our challenge is to address pale category businesses in the U.S. with low gross margins that track down the portfolio. Chris Robbins, our CEO for that business, will undertake actions in 2021 to improve the portfolio. Within the commercial solution segment, our commercial business had a phenomenal 2020, as core sales growth during each quarter culminated in high single-digit growth for the year. We saw particularly strong sales growth in washroom, glove, and scouring products, as well as outdoor and garage organization businesses, which benefited from heightened consumer engagement across the home improvement categories. In response to strong demand for sanitization, as well as our strategic investments to expand production capacity, we placed about 3.3 million soap and dispenser sanitizer dispensers globally and sold enough soap and sanitizers to clean over 30 billion pairs of hands. That's a lot of hands. We're not stopping there. We're introducing innovative stands and brackets that enable facility operators to put hand sanitizers virtually anywhere in a building, including on a wall, on a tabletop, or any general open space. The breadth of the commercial business portfolio, which includes both consumer and commercial offerings, as well as the diverse coverage of verticals, and enhanced partnership with retail partners position the business for long-term success. Let's move to connected home and security business. While poor sales were down in 2020 due to supply constraints caused by pandemic-related plant shutdowns, the business performed well in the back half of the year, with top-line accelerating in the fourth quarter. Within the home solution segment, our food business has certainly lived up to its rocket ship status that I've grown very fond of. It actually returned to growth prior to the pandemic and built momentum to mid- 20% core sales growth in 2020, propelled by strong consumption throughout the year, as well as market share gains. In the U.S., our leading brands, Rubbermaid, FoodSaver, and Ball took share across food storage, food preservation, and canning verticals, benefiting from improved commercialization of products, stronger consumer social engagement and programming, as well as recent innovations, such as the latest vacuum sealing device, FoodSaver, a BS3000 multi-use preservation system, and Rubbermaid Brilliance Glass. The launch of Brilliance Glass is off to a rolling start. And the overall sub-brand of Rubbermaid Brilliance sales have almost doubled in 2020. 2020 was a stellar year for FoodSaver, which is the fastest-growing brand across all of your brands. And it broke through as a top-ten brand for us. Strong appliance sales in 2020 should translate into increased consumer purchases in 2021. In food, we continue to chase strong demand for January, and we are working hard to address supply constraints in certain product lines. And turning to home fragrance, we experienced strong consumption growth in our home fragrance business during 2020, driven by a surge in demand in the back half of the year. As a result, core sales increased in both North America and EMEA in the second half of the year and in the seasonally critical fourth quarter period. Full year top line sales performance was partially hindered by the temporary closure of our Yankee Candle retail stores and other specialty chains. for several months earlier in the year and the supply chain disruption experienced in the second quarter. I'm extremely proud of the team's resilience and creativity in addressing supply shortages as they worked around the clock and even engaged the corporate teams in the manufacturing and packing operations. They went all out on production in an attempt to keep up with consumer demand, which remained robust in January. The category category was on fire in 2020, no pun intended. As demand for products that help bring tranquility to consumer homes remained robust. We helped share despite supply constraints. As we look out to 2021, there are a number of exciting innovations in the harbor, including the Yankee Cam signature collection, the largest update to the Yankee line in years, and it's launching this month. It'll provide our best burning experience today. We continue to reposition the home fragrance business for the long term. During 2020, we exited the fundraising business and 77 retail stores with additional store closures anticipated in 2021. At the same time, we're building great momentum on our direct-to-consumer business. which grew strong double digits in 2020, offsetting shortfalls in retail, expanding distribution into the grocery and truck channels, and diversifying the product portfolio into auto diffusers, etc. The learning and development segment for our baby business grew modestly during 2020. The rebound from Q3 to Q4, driven by healthy consumption, recovering from the depressed levels in March and April, where lockdowns went full effect. For the year, domestic demand improved across baby-gear and infant care businesses, particularly from our car seats, high chairs, swings, and bottles. We have seen a continuation of strong domestic consumption trends in January. As mobility improved post-lockdowns, the rebound in demand for toddler currencies has been nothing short of remarkable. What's even more gratifying is that we solidified our leading position in this important category in 2020, gaining over 250 basis points of share. With thrilled by the strong performance of our Graco brand, which picked up 130 basis points of share in 2020, InnoGear packed with innovation. More exciting launches are planned for 2021, including Graco's slim fit 3-in-1 car seat, our slimmest design that fits three car seats across, saving space in the backseat without compromising on safety in the future features parents need. Now, as anticipated, 2020 was a tough year for our writing business and the category in towing, particularly in the commercial channel. Core sales pressure continued into the fourth quarter, albeit at lower levels relative to the prior two quarters as demand in the U.S. normalized a bit. During the fourth quarter, we did see continued consumption growth in the U.S., which started in September as the back-to-school season was extending. For the full year, there were also few bright spots, including pens, labeling and fine art businesses, all of which grew POS despite the disruption. Although category headwinds were significant both in the U.S. and internationally, we've made progress on the market share front in our core writing categories, which position us to come out of the pandemic on a stronger footing. 2020 was the year of the pen for the writing business, with our innovation delivering outstanding market share gains of about 750 basis points in gel pens and 260 basis points across the total pen categories. We're optimistic about our momentum in the PENS category and have launched expansion to our Sharpie S-gel platform with Sharpie S-gel fashion designs and color expansion and Sharpie S-gel metal barrel. We'll be launching this platform around the globe. We also achieved strong share performance in our labeling business as Dymo reached record share both in the U.S. and the M.E.A. While category challenges persist, consumption has remained positive thus far in 2021. We exited 2020 with the lowest retailer inventory position across the office superstore since several years. This should better position us and the retailers for a rebound post-pandemic as schools and offices return to more normal cases. While there's a great degree of uncertainty around the timing of return to a sense of normalcy in schools and offices, we're assuming a more novel back-to-school season in 2021, but that offices may remain in a hybrid environment for the balance of the year, impacting our commercial channel. Lastly, core sales and consumption in our outdoor and recreation business were under pressure during 2020, weighed down by the softness in our technical apparel and beverage businesses as a result of our reduced on-the-go activities. We delivered fast performance in the outdoor business in the back half of the year, particularly in the outdoor equipment category, such as coolers, stands, and stoves. We also saw a number of favorable developments in the market share fund in several core categories, such as coolers and tents, where we gained about 90 and 190 basis points of share respectively. I'm especially excited to share that Coleman, which is one of New York's largest brands, returned to growth during 2020. What a way to celebrate the band's 120th anniversary. Coleman had a number of successful launches in 2020, including the Coleman, Skyder, and we refresh many coolers. We're following up in the 2021 season with additional consumer-centric and purposeful innovations. To highlight just a few, we're expanding the assortment of the 2020 Coleman Sky Dome Tent to larger dome tent formats in a variety of styles and colors. We're also introducing a Coleman reunion collection of coolers, which will include new mass-powered quick finishes and three beautiful trans-focus colors that elevate and rejuvenate the Coleman steel belted cooler. Although I'm certainly encouraged by the progress we've made in the outdoor equipment business, we have more work to do on technical apparel, which is especially led by my mom and brand, and beverage with Contigo. We've brought in capable leaders to do just that, and I expect a stronger 2021. Newell is now two years into the turnaround with notable progress across the organization. As we look out to 2021 and beyond, we intend to build on the improving momentum. We will continue to position new brands for sustainable and profitable growth with our strategic priorities focused on the four and five areas. First, galvanize our employees behind our purpose to create consumer-obsessed, customer-focused organizations that are digitally savvy and willing to experiment and learn while adhering to our core values. Second, sustain top-line growth by focusing on the end-to-end consumer journey, strengthening omnichannel capabilities while accelerating online penetration, and focusing on scaling and modernizing our top brands. We also want to strengthen efforts to improve supply availability, to improve customer service levels with a strong focus on forecast accuracy. Third, become an innovation engine by sharpening our focus on consumer insights and trends, implementing an enterprise-wide innovation operating model, building cross-business unit platforms, and better leveraging our R&D resources. Fourth, accelerate international growth and improve profitability by addressing fragmentation, high overheads, prioritizing drive countries, evolving autonomous, geographic units to one new approach to build scale and move to a distributor model in non-parity countries. And fifth, continue to make progress on the financial agenda, expanding margins to productivity-type management of overhead costs and complexity reduction, as well as strengthening New York's cash conversion cycle and balance sheet. Although 2020 was undeniably one of the most trying and volatile periods in recent history, I'm extremely proud of my employees' resilience, persistence, ability to adapt, pivot, and execute with speed and agility. This has enabled us to gain significant traction on our turnaround strategy and strengthen the underlying fundamentals, positioning the company to come out even stronger post the pandemic. I'm excited about Newell's prospects and feel our better days are ahead of us. Onward. And now I turn the call over to our billion-dollar man, Chris Peterson.
spk07: Thanks, Robbie, and good morning, everyone. The team delivered an outstanding finish to the year with Q4 results ahead of our expectations across every key metric, including top line, operating margin, EPS, and operating cash flow. In fact, our 2020 results exceeded or were in line with the initial guidance we laid out a year ago, despite the significant disruption from the pandemic. We are now two years into the turnaround and have come a long way in strengthening the financial performance and operational effectiveness of the company. Last year we drove excellent progress on each area of the turnaround plan and gained significant momentum in the second half of 2020. Before getting into the financial results and outlook, I want to spend a few minutes on operational highlights. We made significant progress simplifying the organization. For example, on SKU count, we exceeded our target a year early and exited 2020 with 47,000 SKUs as compared to our goal of 50,000 by the end of 21. We have eliminated 54% of our SKUs over the past two years with a 37% reduction in 2020 alone. Effectively, we have doubled our revenue per SKU over the past two years. We've also meaningfully strengthened the quality of our inventory, cutting our excess and obsolete inventory by more than half since 2018. We are not stopping here and will continue to simplify the SKU portfolio across each of our businesses. Over the past two years, we've also significantly simplified our IT architecture as we rationalized nearly 90% of IT applications ending 2020 with less than 800 apps. successfully implemented eight ERP migrations, including the October 1st move of Coleman North America to SAP, which went smoothly. We expect to get 95% of our business on two ERP systems over the next two years. We also fully redesigned our digital technology platform, rationalizing the number of sites in North America from about 290 to 40. We have already migrated 35 of these 40 sites to the new platform with another three conversions expected to be completed by the end of February. This is a remarkable achievement within an 18-month period. The new platform delivers a much higher quality, more engaging and impactful consumer experience and allows us to introduce exciting omnichannel features along the way. We expect to complete the conversion of the remaining US sites by the summer and later this year plan to extend this initiative to our international markets. As I mentioned on a prior call, during 2020, we also implemented a new technology to consolidate and better control the company's indirect overhead spending, which we expect to drive significant savings going forward. These are just a few examples of where we are eliminating complexity from the organization, but the efforts go well beyond the ones I mentioned, impacting areas including the supply chain, legal entity structure, cost centers, profit centers, financial systems, and real estate, amongst others. We are driving overhead efficiency through complexity reduction along with benefits from restructuring savings, which we started to realize in the back half of the year. We lowered our overhead as a percent of sales by another 100 basis points in 2020. Importantly, as we look forward, we see ample opportunity to continue to simplify our operations and optimize our supply chain. Beyond efficiency, simplification allows us to become a more preferred partner with our retail customers. As we continue to optimize Newell's cost structure, we are increasingly leaning into our productivity initiative called Fuel, a significant enabler of our margin ambition. In 2020, we drove a stellar outcome on Fuel, reducing our cost of goods sold base by about 4% year over year, as gross savings increased about 35%. This was not only the best annual result Newell Brands has delivered since we started tracking this measure, but also amongst best in class in the industry. We are systematizing these productivity efforts across the organization and have a strong pipeline of projects for 2021 and the coming years, which should help drive gross margin improvement going forward. Now let's turn to the quarterly results. During the fourth quarter, sales increased 2.5% year-over-year to $2.7 billion, as core sales growth of 4.9% was partially offset by headwinds from foreign exchange as well as business and retail store exits. For the second consecutive quarter, we saw broad-based top-line momentum with core sales growth across all four geographic regions and six business units. Normalized operating margin improved 10 basis points year-over-year to 11.4%, which was ahead of our expectations. Overhead cost reduction and productivity savings helped to offset higher advertising and marketing expenses, as well as pressure from business unit mix, COVID-related costs, and inflation. We reduced our net interest expense by $1 million year-over-year to $69 million due to debt repayment during the year. We recorded a normalized tax benefit of $6 million as compared to a normalized tax expense of $51 million in the year-ago period, reflecting discrete tax benefits in the current quarter. We grew Q4 normalized diluted earnings per share 33% year-over-year to 56 cents a share. Stronger than anticipated, top line results in combination with disciplined expense management and strong productivity enabled us to outperform versus our expectations. Moving on to our segments, core sales for appliance and cookware increased 4.2% driven by international markets. Consumption trends continue to reflect increased frequency of at-home cooking. I would like to point out that effective January 1, 2021, the CEO of the food business has taken over the responsibilities for the Calcalon cookware business. As a result of this change, the appliance and cookware segment will be renamed home appliances in 2021. Core sales growth for the commercial solution segment accelerated sequentially to 13.8%, with increases across both the commercial and the connected home security businesses. Consumption trends also improved sequentially across both businesses. Within commercial, we saw strong demand for many consumer-facing businesses as well as in washroom and hand protection. Core sales for the home solutions segment increased 12.4%, propelled by growth across both food and home fragrance business shares. Food was once again the strongest performer within the portfolio, continuing on its double-digit growth streak as consumption remained strong. In a seasonally important quarter, core sales increased in the home fragrance business, reflecting strength in e-commerce, EMEA, and the wholesale channel. As anticipated, core sales in the outdoor and rec segment were under pressure, declining 7.4%. Fourth quarter results were negatively impacted by the timing shift of sales in Coleman North America into Q3, ahead of the October 1st conversion to SAP. Looking past the timing shift and focusing on the second half of 2020, core sales for outdoor and rec grew year over year as improved consumption in outdoor equipment categories offset softness in beverage and technical apparel. Core sales for the learning and development segment contracted 2.2%, which was a meaningful improvement from the prior three quarters. While forced sales for writing were challenged due to the impact of COVID-19 on school and office closures, we were encouraged to see continuation of positive consumption trends in the U.S. Topline momentum for baby accelerated in the fourth quarter, reflecting strong consumer demand. Our efforts to tighten working capital delivered outstanding results, making cash flow one of the major highlights in 2020. We generated over $1.4 billion of operating cash flow during the year, which represents a $388 million improvement from 2019. Last year at Cagney, we set an ambitious target of delivering free cash flow productivity in excess of 100%, and this was our second consecutive year of meeting that goal. In fact, in 2020, Newell's free cash flow productivity was 154%, a remarkable achievement by all accounts. We shortened the cash conversion cycle by about 26 days to 72 days, which is very close to our benchmark target of 70 days. Accounts payable was the most significant driver to the improvement in the cash conversion cycle as we saw a flow through of more favorable payment terms that we have renegotiated with our suppliers. We also ramped up our supply chain to build inventory in order to support demand, creating a timing benefit in payables that we expect to partially reverse in 2021. We are in a much stronger balance sheet position today than we have been in a very long time. We ended the year with a net debt to normalized EBITDA leverage ratio of three and a half times versus 4.0 times at the end of 2019. And we are closing in on our target of 3.0 times. During the fourth quarter, we completed a $300 million debt tender. And for the year, we reduced our net debt by $748 million to $4.6 billion. We exited 2020 in a very strong short-term liquidity position, which exceeded $2.5 billion, including nearly $1 billion of cash on the balance sheet. Turning to 2021, I want to start by providing some context for our plan. We are encouraged by the momentum we have seen in our business in the second half of 2020. The first quarter of 2021 is off to a very strong start from both a consumption and shipment perspective. At the same time, we are balancing this optimism against a macro environment which remains quite dynamic as a result of the ongoing pandemic. We are taking a prudent planning approach to 2021, capitalizing on growth opportunities while continuing to drive cost and cash discipline. While we expect many of the recent consumer habits to persist, we are assuming a normalization of category trends over the course of the year. Since the comparisons are much tougher in the back half of 2021, we expect a stronger first half relative to the second half. Additionally, we are seeing inflation trends pick up primarily due to residence, transportation costs, wage rates, and source finished good pricing. We plan to grow gross margins despite this cost pressure with both pricing and productivity actions. Specifically, in 2021, we expect to deliver on our evergreen financial targets for core sales growth, operating margin expansion, and free cash flow productivity. For the full year of 2021, we are guiding for net sales of $9.5 to $9.7 billion, with core sales growing at a low single-digit rate and favorable foreign exchange more than offsetting the headwind from continued rationalization of the Yankee Candle retail store footprint and other minor business exits. We are planning for normalized operating margin improvement of 30 to 60 basis points year over year, to 11.4 to 11.7%. We expect productivity and overhead savings will more than offset the impact of inflation, as well as incremental investment behind higher advertising and marketing spend. We are assuming normalized effective tax rate in the high teens, significantly above the 2020 level, due to a lower benefit from discrete tax items. This outlet does not contemplate any potential changes in the U.S. corporate tax rate under the new administration. We expect this to net out in normalized earnings per share of $1.55 to $1.65, with a modest uptick in the number of shares relative to 2020 levels. The year-over-year step up in the tax rate represents a more than 30% headwind to earnings per share in 2021. On a tax rate equivalent basis, we are projecting strong growth in earnings per share in 2021. For 2021, we expect to generate operating cash flow of approximately $1 billion. Our outlook implies that we will continue to make progress on reducing our cash conversion cycle, despite a lower year-over-year benefit from working capital. For Q1, we are guiding for net sales of $2.04 to $2.08 billion, or 8% to 10% year-over-year growth, with core sales increasing in the high single-digit range versus Q1 2020. favorable currency is expected to more than offset the impact from Yankee Candle store closures and minor business exits. Our first quarter guidance assumes normalized operating margin improves 90 to 130 basis points year-over-year to 6.9 to 7.3%, reflecting benefits from productivity efforts and overhead savings that are partially masked by higher advertising and marketing investments, as well as heightened commodity and transportation costs. We are projecting a normalized effective tax rate in the mid-20s for the first quarter, reflecting a discrete tax headwind in the quarter. We expect normalized earnings per share in the 12 to 14 cent range, which represents strong double-digit growth as compared to 9 cents in the year-ago period. Over the past two years, we have made tremendous progress on our turnaround. We are coming out of 2020 in a much stronger position than we were coming in, despite the ongoing disruption from the pandemic. We continue to see significant opportunity for value creation and will remain vigilant in executing on our goal of driving consistent and sustainable core sales growth, operating margin expansion, and improved cash conversion cycle. Operator, let's now open up the Q&A session.
spk05: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. That's star 1 to ask a question. We will now take our first question. from Bill Chappell from tourist securities. Please go ahead.
spk07: Thanks. Good morning.
spk08: Just trying to, I understand that, uh, forecasting this year's is more of an art than a science, but can you kind of walk us through on the, I guess, uh, the comparison, just understanding, I guess, three things. One, being a year ahead of expectations, what the skew account reduction does to expected revenue to, uh, the Yankee store closures. I mean, I know it won't have as much impact on, on, uh, first quarter, but certainly on, on the back half. So just trying to understand what that does. And then third, I can't remember, or I don't remember exactly what it was in terms of last year, you had a fair amount of, of plant closures around COVID that, uh, created shortages and out of stocks. Any idea of kind of what you can make back as we look at first, second quarter of this year? Sorry, that's a lot, but thanks.
spk07: Yeah, no problem. Let me try to address those. We are very excited on the SKU count progress that we've made. As I said in the prepared remarks, we've gotten to our goal a year early. One of the things that we've done is we've put in place a systemic process that we call a magic quadrant analysis that looks at revenue per SKU and gross margin per SKU. And as we've gotten into that and systematized the process, we think we've got opportunity to go further on SKU count reduction going forward. We don't believe that this is going to be a revenue headwind. We actually think that this is going to be a revenue help for the company and a cost help because it allows us to improve our customer service levels. We're in the process of setting new targets and we'll share more probably at CAGNI next week with regard to the out front targets. But very encouraged by the results so far and we see it as an enabler for both revenue growth and continued productivity. On Yankee stores, we ended 2020 by closing, I think, 77 stores in 2020. Our store count was 398 stores. I think our plan for 21 is to close somewhere about another 80 to 100. Most of those will happen. And in fact, most of those happened in January. So it's very front part of the year loaded. That does not have a significant impact on the company's revenue because we're growing very fast in that business on the e-commerce side with the wholesale business and in the international markets. And so we believe that we're going to see a profitability benefit as we make that transition from retail to more online and wholesale in that business. And then on the plan closures, You're right, in the second quarter last year, of our about 135 manufacturing facilities and distribution centers, we had 20 that were closed via government mandate. As we sit here today, all of our facilities are open, largely operating at full capacity, and we have largely caught up across the majority of our product categories. That being said, we do have some product categories where we're still supply constrained, and those tend to be the product categories where we've seen outsized consumer demand increases. but we're working hard to catch up and add capacity in those situations.
spk08: That's great. And one just follow-up on writing, and you're talking about kind of tougher comparisons for the overall business in the second half. I've got to think writing is set up for a gangbusters third and fourth quarter, assuming schools are back open, offices are back open. Are you preparing for that, or how should we be thinking about that as we move to the third quarter, fourth quarter? Yeah, Bill, let me tackle that. The first piece of good news in terms of The resilience of the portfolio when you look at 2020 with all the headwinds we had on writing that we were able to do as well in the second half and actually contain the decline to the full year to negative one is testimony to how we're beginning to get resilience with other brands. So that to me is comforting when you look from a long term. Writing is a very well-managed business for us. It's just the macro has been what it has been. When we look at 21, I think what we're assuming is that schools will go back to reopening or at least the supermajority in the second half of the year. And we've taken that into consideration. We're preparing for it. We think it will be a more normal back-to-school season. And I think some of the universities as well. The big unknown at this stage is the commercial business because when you look at offices, The prediction, I had thought that most of the offices would get back in by July, but everything we're reading and hearing is that until you get heard immediately, I think companies are allowed to sort of take that step. We've heard from Silicon Valley companies. that they may actually remain closed not only to the fall, but the entire year. So that does get affected in terms of commercial business, which is sort of a part of the business. So we'll have to see on that. Overall, do we expect the writing business to grow in 2021 versus 2020? Absolutely. How much? I think second half will be the question mark. And look, the other thing I should say, which I said in my prepared remarks, the share gains we're proud of making are truly spectacular. And Sharpie's brand strength that it can go beyond markets and how it is doing in the Penn side and all the innovations that are coming up. And lastly, we're really preparing for a different future with this business. We're now, that team is very focused on innovations, which is if there's more stay-at-home stuff that we have prepared to do that in the longer term. So still very, feel good about this business, and about the other business picking up as well. Okay.
spk07: Thanks so much.
spk08: Thank you, Bill.
spk05: We can now take our next question. from Olivia Tong from Bank of America. Please go ahead.
spk01: Great. Thanks. Good morning. I was hoping to talk a little bit more about the margins, particularly gross margin. You mentioned the commodities pressure, of course, and some pricing. So perhaps could you give a little bit more detail in terms of where you think you could potentially price And then just sort of marrying all the different things, the puts and takes from margin. You've got commodities pressure, potentially some offset from pricing, maybe a little bit less leverage, but hopefully an improved sales mix relative to last year. So just thinking through all those different pieces in a position to give us a little bit more color on that in terms of the puts and takes there. Thank you.
spk07: Chris, I should take that. Yeah, sure. So, if we think about the margin guidance, the operating margin guidance, and in particular, gross margin inputs for next year, for 2021, Basically, there are two primary headwinds. The first is inflation, which, as I mentioned in the prepared remarks, is due to resin wage rates, the source finished goods, primarily due to the strengthening of the Chinese currency and transportation costs. We expect that inflation pressure, based on what we're seeing today, to be almost a 200 basis point headwind for the company for next year, which is a significant ramp up from prior years. We also are planning to increase our advertising and marketing cost as a percent of sales in 2021 given that our innovation pipeline has strengthened in 2021 as we've brought new leadership on and they've begun to develop stronger innovation plans. So those are the two headwinds. We're guiding to operating margin growth because we have of benefits that more than offset that. And the benefits that we're seeing are the biggest one is productivity with the fuel savings program. And so we're using that productivity drive to basically offset, largely offset the inflation pressure. We also have We are going to take selective pricing. We're not taking pricing to fully offset inflation, but we are taking selective pricing in those categories that have seen the biggest inflationary pressure. We also expect business unit mixed benefit. As Robbie mentioned, we are expecting the writing business to come back. and be a meaningful growth driver for the company in 2021. Actually, we're expecting the writing business to grow starting in the first quarter from what we've seen. And then the last thing I would mention is continued focus on overhead cost reduction through our simplification initiatives. So those are sort of a walk through the puts and takes. I think when you net it all together, we're expecting to drive gross margin improvement in 2021 despite the inflation environment because of the productivity efforts, the pricing, and the mix from the business unit forecast.
spk08: All right. Next question, please. Thank you.
spk01: Can I ask you one about how you were thinking about channel exposure, Bobby, for the business going forward? Obviously, e-commerce has been growing pretty substantially. So as you expand online, can you talk about the margin implications of that? And then where are you focusing on distribution expansion more acutely? Which segments do you think you have more opportunity in terms of distribution expansion? Thank you.
spk08: Let me quickly get back to those. So I think e-commerce is here to stay. It's going to continue to grow, and we're going to be advantaged because we've got strengths. As I mentioned, 22% global net sales penetration and e-commerce growth, high 30s. And for us, that business, our e-commerce business is quite profitable, and it's not something that is a very good margin business. So I don't think that's a concern, and we'll continue to grow there. Second, in terms of channels, as I mentioned, where the big trust for us is the grocery business, the dollar stores, the drug stores, and we're making already good progress, especially our food business really had a good year on the grocery side. We're putting together now a very focused sales team on this channel. We think that there's a lot of opportunity. While we continue to do well with our strong mass merchants or our biggest customers. So continue to focus on that. Okay, next question please.
spk05: And our next question comes from Kevin Grundy from Jefferies. Please go ahead.
spk02: Great, thanks. Good morning everyone and congratulations here on the recent momentum. It's great to see. First question perhaps for Chris on the margin opportunity. I have one for Ravi on the geographic opportunity. So first, on the margin opportunity, Chris, as you're well aware, there's a 600 to 800 basis point opportunity with respect to combined gross margin and overhead, understanding those figures are gross and X any sort of reinvestment concerns. Frankly, it's pretty unique and rather substantial within the consumer space. So the long-term guidance calls for 50 basis points of improvement each year. Your guidance this year is 30 to 60 basis points. The question is, what's the organization's ability to lean in and accelerate the pace of that margin enhancement and unlocking that value for shareholders while balancing versus the investment needs and cost inflation that you'll encounter in any given year? So your comments there would be helpful. And then I have a quick follow up on opportunities outside the US.
spk07: Yeah, so let me start on the margin question, Kevin. So if you look at the underlying trends of what we're driving this year, The organization is driving sustainable margin improvement progress on both gross margins through the fuel program and on overhead reduction through the complexity reduction that dramatically exceeds our guidance of 30 to 60 basis points in operating margin improvement. The reason why we're guiding the 30 to 60 basis points is because we have an inflationary environment, which I mentioned is about a 200 basis point headwind, And we're planning to increase advertising and marketing costs as a percent of sales significantly in 2021. And so, you know, if those two things were not there, you would see our ability to fundamentally be driving operating margin improvement be higher than the net guidance. I think the evergreen model that we've put out of 50 basis points improvement each year, our guidance is very much in line with this year. Our guidance here has us fully on all metrics in line with our evergreen model. And we think that the company has really turned the corner in regard to delivering against that evergreen model. You know, in any given year, we'll guide as appropriate when we get there, but I feel very good about the underlying capabilities of the company to continue to drive margin improvement, primarily in the gross margin and overhead area. Got it. Do you have a follow-up? Yes, a quick follow-up.
spk02: Thank you for the comment. I'm sorry?
spk07: Do you have a follow-up? Go ahead.
spk02: I do. Yeah, thank you, Robby. Just very quickly on the opportunity outside the U.S. for the business. I think it's probably been a little bit lost in the company's efforts to stabilize and put processes in place, which you've had success doing. But now it's about roughly 30% of the company's mix. Could you spend a moment on the international strategy, how big of a priority it is to grow the business outside the U.S., where you see the greatest opportunities? As we think about the algorithm for the overall portfolio, how should we think about the core sales growth rate for your businesses outside the U.S.? And then I'll pass it on. Thank you.
spk08: Yeah, so thank you, Kevin. As you may know from my background, I've been president of an international place in my career, so obviously this is something that is near and dear to my heart. But our first priority was to really get U.S., focus, which we are now beginning to get traction. So we're getting more of our attention on that for 21 and beyond. I think there is a lot of opportunity. The key is depth, not breadth. We are not into planting flags, which has been the issue in the past. It's where I think in a lot of places that the overheads in the international business are higher than U.S. So we've got to get It's very fragmented. So if you take the UK, we have many businesses. There are different offices. There's not the synergies. So we've got to get focused. So what we're doing is focusing on sort of top ten countries and saying how do you get after them. and how do we create longer-term a country management system, more of a one-year approach, rather than everyone doing their own thing. Having said that, the teams have been still doing pretty well. And when you look at the fact that overall international actually grew pretty well and slightly better than the U.S., in 2020, and when you think about appliances where Latin America is the strongest, it was double-digit growth, strong double-digit growth in Latin America. So it's all positive. I just think there's a lot of opportunity, and we're going to get after it with a very well-articulated strategy. COVID has also made it difficult to get to these countries, but this year this is one of my big priorities as we go forward.
spk02: That's great. I appreciate the call. Good luck.
spk08: Okay, next question. Thank you. Thank you. Wendy?
spk05: And our next question comes from Wendy Nicholson from Citi.
spk03: Hi. Two questions, please. First is just in the very short term, we've read some reports about the Port of Los Angeles having that log of issues. And Chris, I was just wondering if you had any issues given that you import some of your goods from China or your materials from China. Do you have any issues or bottlenecks there? And then second question, actually back on the margins, but looking at it from a different perspective, you know, my take is that the biggest hindrance to your overall margin is how low your margins have been in appliances and cookware specifically. And I know there's been a lot of lumpiness quarter to quarter, but with new management there, you know, how long do you think it will be until that specific segment can firmly be in double digits from an EBIT margin perspective? Thanks.
spk07: Very good. Thanks, Wendy. So on the port of Los Angeles, I'll just give a few comments. We do import a significant amount of containers through the port of Los Angeles from Asia and primarily China. That has been a backlog and a source of supply disruption for us. Earlier in the pandemic, as I mentioned, in the second quarter of last year, it was about our manufacturing facilities and our distribution facilities. Now the disruption is more related to that port. We are getting products through there. We're also shipping through other ports on the East Coast and other places in the West Coast. The prices for containers have gone up dramatically. We are a large-scale importer. from a volume standpoint, that gives us some advantage in the marketplace because we have contractual commitments for volume and pricing that I think advantages us versus many of our smaller competitors. So we don't see it as a major headwind for the quarter or for the year, but it is something we're sort of battling every day as we go along here.
spk03: Great.
spk08: Let me address appliances there. So look, yeah, we recognize that the appliance business we need to work on the margin structure here. There's no question. So the big issue is gross margins. And part of the issue for us is we deal with some of the OPP and MPP segments. And so we've got to get more innovations out which then can be at higher gross margins. The good news is when we look at our brands which are more premium, outside of the United States, like a Breville in Europe or Oster in Latin America. The gross margins outside of the U.S. are actually quite good. So what the judge Chris Dobbins, hey, we've got to get that gross margin up over the next several years. And also, as we get out of these scale businesses, some of these we are finding were gross margin negative, so we really need to get out. If you are giving out dollar bills with some things, it's no good. So we're being very hard-headed about looking at these categories. And while in the chop down that might have a little revenue shuffle, it's okay. We need to get the margins up. So very, very focused on gross margins on this business.
spk03: Fair enough. Thank you so much.
spk08: Thank you.
spk05: Next question comes from Joe Altobello from Raymond James.
spk08: Thanks. Hey, guys. Good morning. Just had a question on the guidance. Given the momentum that you guys saw in the second half, I know you assume some of those consumer trends that we saw last year have started to normalize and there's a lot of uncertainty, but why would sales in 2021 be below 2019? I mean, other than writing on the commercial side, what businesses might be lagging from two years ago? Sorry, did you say 2021 versus? Can you repeat? We couldn't share you very well. Sorry about that, Joe. Yeah, I'm just curious. Outside of writing on the commercial side, what businesses might be lagging from 2019?
spk07: Yeah, so I think, I don't think our guidance is implying lagging. Let me try to just address the top line guidance and give some color to it. So I think, as you all know, the company turned positive on core sales growth in Q3 of last year. We had a very strong Q3. We're reporting today a strong Q4. We're guiding to high single-digit core sales growth in the first quarter and to low single-digit for the year. And I think when you look at that and you look at the, like if you were to look at our two-year stacked growth rates, We turned positive on a two-year stack basis in Q3. We were positive on Q4. We're guiding positive on Q1, and we're guiding positive for all of 2021. If you look specifically at the categories, I think the category that has been most negatively impacted, as we've talked, has been writing because of the schools and office closures. But as Robbie mentioned in the prepared remarks and as we alluded to on the Q&A, we are exiting 2020 in a very good position from our retail inventory perspective, and we expect the writing business to be back to growth in 2021 starting in the first quarter. So I don't think we're seeing categories that we're expecting to have declines heading into 2021.
spk08: So let me just add one thing to that, which is, The first half, look, we have better visibility because no one knows what's going to happen. And the first half, we are pretty bullish. I mean, we're giving you a pretty good sense of first quarter. We had a great second half. We also take into consideration a food business that grows 35%. last year on core sales, it's gone up, and that was big in the second half especially. So you've got to laugh at that. So when you look at staff growth, I think we're doing pretty well. So we actually feel pretty strongly that even coming out of COVID, this business is beginning to turn around and get growth momentum. That's helpful. I appreciate that. Just one quick follow-up for Chris. You mentioned that there's more opportunity You're at 47,000 now. How low do you think that number could ultimately get?
spk07: Yeah, so as I mentioned, we're excited about getting to our goal of 50,000 a year early. We're going through that analysis as we speak, and I think we're doing it in a database fashion. Just as a little bit of background, Two years ago at Cagney, when I first presented as the CFO of Newell Brands, we were over 100,000 SKUs. And so we've been able to go from over 100,000 down to 47,000. And we set our 50,000 goal based on just sort of a thumb in the air. What we've got now is a much more data-based way of tracking and measuring it. We're finalizing our objectives, and we'll share a – a revised out front target next week at CAGNI as we get there. But there's no question that we have further opportunity for skew reduction. And that further opportunity, I think, is going to enable us to both accelerate revenue growth and drive strong growth productivity and cost of goods savings and gross margin improvement. But we'll share more next week.
spk08: Great. Thank you.
spk05: Next question comes from Lauren Lieberman from Barclays. Please go ahead.
spk04: Great. Thanks. Good morning. I was hoping we could talk a little bit about baby. You called out very strong performance in the fourth quarter and we're just thinking forward some of the headline risks or realities about the birth rate. I know that over time innovation for Trump's birth rate dynamics, but I was just curious what you were seeing terms of how you're projecting the category, how you're thinking about innovation in the pipeline, what may be developing from a competitive landscape standpoint.
spk08: Yeah, Lauren, good morning. So while the U.S. birth rate itself is not high, but you also have continued immigration. And so growth rates depending on the U.S. population may be higher in certain groups and stuff. So, but also really it's a global business for us. There's opportunities elsewhere in the globe. And we have both a gear business and a care business. And we think in the care business in the U.S., we have a lot of share opportunities with our milk brand. And we're driving innovation to put out that temperature control bottle, which has really done well both in the U.S. and in Germany. And in gear, we continue. There are still seven segments. While Greco is the overall leader and had a tremendous share improvement this year, there's still more to go. So we think that this business is a good, steady business. It's got good operating margins, good cash flow. Overall, a solid business, and we're quite confident that this will continue to be a good part of the portfolio.
spk07: The only thing I would add on that, as Robbie alluded to, we've done actually a fairly deep dive into the category growth rates. The US birth rate is not indicative of the category growth rate because of the immigration point that Robbie mentioned. What we're seeing is that immigration is as big a driver in the category growth rate as the US birth rate. And what we're seeing is the immigration trend is more than offsetting the US birth rate dynamics so that the category is actually growing, even on a volume basis, because of the net of those two dynamics, which may be a little bit counterintuitive to those that are just thinking about the U.S. birth rate. Not that you are, Lauren, but other people have asked us that question.
spk04: No, that's great. It's really helpful. And just anything on innovation? Sorry, that was kind of a category growth piece. I know we're late in the call, but I was just curious about innovation and competition.
spk08: Yeah, I think, look, where I talked about the slim car seat, I think that is a great one. The whole sensory side that we launched last year, which we're continuing to look at it, I think, which in terms of cradles, bassinets, all of that is very positive for us. I think that technology. So I think when you look at those, the new cradle thing that really is a Japanese sort of innovation and that came in, I think so. We're continuing to innovate. I mean, this group, and then we launched the Century Band, which has been really a great, more, it's really minimalistic, appeals to millennials, is more value-based. And we think that will have a lot of traction going forward. And then we're working on a lot of innovations on baby dollar. So that should come out in training one and training two.
spk04: Okay. Great. Thanks so much.
spk05: Okay. We only have time for one more question, and that's from Steve Powers from Deutsche Bank. Please go ahead.
spk08: Hey, thanks. Appreciate it. Actually, if I could squeeze in two, that'd be great, but I think they're both relatively straightforward.
spk07: The first one is just, as you think about 21 balancing the expected store closures that you called out versus some channels maybe reopening and your own efforts to expand points of distribution online and improve driving elsewhere, can you just frame how you're expecting actual end market consumption to trend across the portfolio versus the low single-digit core sales guidance that you issued today?
spk08: I'd just love to score that circle if I could. Yeah, I'll do a quick one on that, Steve, which is, look, as we look at our various categories, we do think, at least in the first half, which had more visibility, there's continued growth. And I think it's all these trends. That came out of the pandemic. There's been a real interest one started as home cooking as a security measure not to go so much to restaurants, they have turned them to from a hobby to really a home chef. So I think you'll continue to see these which means many of the categories we compete in are going to handle growth. But importantly, we're also taking share. I mean, this is the first year in 20 where we got shared in a number of categories. And writing, you know, we feel very good that we're pushing the share side. And second half, we'll just have to see. So I think overall, and then I think one of the comments was on store closures, which is really more of a, it really affects two things, right? Yankee Candlestick, we're ourselves closing, and the D2C business process has been very strong, so it's absorbing that. On the specialty side, clearly that affects our writing business, And so the commercial business is affected there a little bit. But overall, I think we're hoping that the strength that we have both in terms of our brands will, if that category grows, will grow ahead of it. Or if it's flat, we will go after share.
spk07: Okay. I guess if I summarize, it sounds like you're assuming that overall consumption kind of trends more or less in line with core sales.
spk08: Is that fair? Yeah, yeah. I would say that's a fair comment.
spk07: Okay, cool. And then, Chris, this may be something that you'll talk more about next week, but just the working capital drivers that you outlined on slide 15, you gave us some color on your 21 expectations.
spk08: But I guess just stepping back, I'm curious how you view the longer-term opportunity on those metrics and just the pacing by which you think you might be able to make ongoing improvement there.
spk07: So maybe any color. Thanks. Yeah, sure. And you're right, I'll cover a little bit more on this next week at Cagney. But just as background, I think two years ago, as I mentioned, when I first showed up at Cagney, I was two months at the company, and I reported that our cash conversion cycle was 115 days, which had us as the worst company in the industry. And we set a goal of 70 days, where we wanted to get to. And the 70 days was really based on looking at the categories that we compete in and trying to say if we could get to a median level based on our peer group, what would that look like? And that was 70. We ended this year at 72. So we've gotten there very quickly. I think the move from 115 days down to 72 has been phenomenal. I'm not satisfied with being at median. I think that we aspire to be best in class, not just median. And so we're working through similar to the SKU count. Now that we've achieved the initial target that we've set, I think we're likely to set a more aspirational target that's more aggressive because we continue to see opportunity ahead of us for cash working capital takeout and cash conversion cycle improvement. Similar to SKU count, I'll share more detail on what that looks like next week when we get into the strategy discussion. Hey, Steve, one quick follow-up.
spk08: Also, I forgot to mention, in January, consumption is really looking strong across most of our categories, and RPLS is really doing well. So that goes well. All right, great. Thanks, you both. Appreciate you putting it in. Thank you.
spk05: All right. This concludes our questions and answer session. I will now turn the call back to Mr. Saligan for closing remarks.
spk08: Thank you very much. We feel very good as we go into 2021. Apologize to those who couldn't get their questions. We ran out a little bit. But thank you for that and onwards and upwards.
spk05: Thank you. A replay of today's call will be made available later today on our website, ir.newwellbrands.com. This concludes our conference. You may now disconnect.
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