Newell Brands Inc.

Good morning, and welcome to Newell Brand's second quarter 2022 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 scheduled for the call, please limit yourselves to one question during the Q&A session. As a reminder, today's conference is being recorded. A live webcast of this call is available at ir.newellbrand.com. I will now turn the call over to Sophia Tsinas, VP of Investor Relations. Ms. Tsinas, you may begin.

Thank you. Good morning, everyone. Welcome to Newell Brand's second quarter earnings call. On the call with me today are Ravi Saligram, our CEO, and Chris Peterson, our President and CFO. Before we begin, I'd like to inform you that during the course of today's call, we'll 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, Forms 10-Q, and other SEC filings available on our Investor Relations website for 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, as well as in other materials on Newell's Investor Relations website. Thank you, and now I'll turn the call over to Ravi.

Thank you, Sophia. Good morning, everyone, and welcome to our second quarter call. We are pleased with our second quarter results, which demonstrate the power of our diverse all-weather portfolio and another quarter of terrific execution by our team. We delivered balanced performance across core sales and normalized operating margin in a difficult environment as we remained laser focused on driving sustainable and profitable growth and operational excellence. For the quarter, Core sales increased 1.7%, while normalized operating margin improved 100 basis points versus last year. For the first half, this puts us at 4% core sales growth and 70 basis points expansion with normalized operating margin, which is excellent performance. Q2 was the eighth consecutive quarter of core sales growth for new brands. This is a significant achievement, particularly given the difficult comparison of 25.4% from the prior year period, which reflected double-digit growth across nearly each business unit. We saw a shift of some customer orders from Q3 into Q2, although this was less meaningful than we initially anticipated, given retailers increased focus on right-sizing their inventory levels. Core sales increased year-over-year across four of our seven business units as growth in commercial, writing, baby, and outdoor and recreation more than offset declines in home fragrance, home appliance, and the food businesses. We were not surprised to see a divergence in performance across businesses as some, such as writing and commercial, are benefiting from the reopening activities, while others, such as home fragrance, home appliance, and food, are in challenging parts of the cycle due to elevated levels of demand during the pandemic and prior stimulus benefits in the U.S. These dynamics are expected to continue to impact consumption, which contracted year over year in the U.S., while still remaining well ahead of pre-pandemic levels. During the quarter, six of our top 10 brands grew, including Sharpie, Paper Mate, Expo, Rubbermaid Ball, and Rubbermaid Commercial Products, and 11 of our top 20, which included Elmer's, Camping Gas, Contigo, Nook, and Mr. Coffee. The strength of our brands has enabled us to take pricing actions across our businesses to help mitigate the impact of inflation. Looking at the geographic results, core sales increased across each of Newell's major regions. International markets grew 2.9%, with Latin America registering nearly 10% growth. EMEA and APAC regions were up modestly. In EMEA, demand continues to be hampered by low consumer confidence due to mounting prices and concerns about the war in Ukraine. While it's early days in our journey to turbocharge international, we are actively analyzing ways to best leverage existing neural infrastructure across key markets to drive synergies and unlock additional opportunities for growth. Let me share some highlights of our business unit results, starting with writing, which was gearing up for the back-to-school season. The top-line momentum remained strong and writing registered its sixth consecutive quarter of core sales growth, notwithstanding a very challenging double-digit comp in the prior period. Growth was broad-based across every region and most categories, reflecting increased orders for the back-to-school season and continued recovery in the commercial channels as more employees returned to their offices. We did see a shift in retailer back-to-school orders into the first half as some customers decided to set their shelves earlier. Although we remain enthusiastic about the back-to-school season, we believe the shift in orders to the first half will unfavorably affect the third quarter. We are focused on ensuring we're in the best possible position from a supply perspective to serve our retail partners and consumers. In baby, core cells grew modestly against its toughest double-digit comp of the year, driven by baby care. A slight shift in shipments from Q3 to Q2 ahead of Project Albert implementation helped the squatter. As anticipated, the category softened modestly against unprecedented growth in 2021. Given the essential nature of this category, parents and caregivers continue to show the willingness to invest in gearing up for babies and keeping their children riding safely. They're also willing to pay for premium innovations with added benefits. For example, the recently launched premium turning car seat platforms, including Graco Turn to Me and Baby Jogger City Turn, are off to a very strong start. Commercial was our top performing business unit in Q2. This was the third consecutive quarter of core sales growth, which accelerated to 10.7% driven by North America, Latin America, and to a smaller degree, EMEA. We saw broad-based strength across our major categories, with the exception of disposable gloves, which continued to moderate relative to elevated prior period levels. Strong price realization, along with improved product availability, return to offices, and improved mobility all contributed to the excellent Q2 performance. Despite the disruption to some of its verticals throughout the pandemic, the commercial business boasts a strong track record of consistent offline delivery. Its core sales grew During nine of the past ten quarters, the team has been quick to adapt to evolving trends and has leveraged the diversity of the portfolio, which serves both B2B and consumers. In food, core sales were below last year's elevated level. as sustained strength in our fresh preserving business was more than offset by softness in other categories, particularly cookware, which along with others continued to normalize relative to the pandemic peak. When the process of restaging South Park Calphalon products with exciting new offerings providing superior non-stick cookware, while tough comparisons due to pandemic-related surges in demand are impacting quarterly results, the food business remains on solid footing with a very strong innovation funnel. The business is also substantially larger than it was in 2019. There are several category trends that should be beneficial to the food business, particularly in a more challenging and highly inflationary macro environment, including greater at home cooking occasions relative to pre-pandemic levels with hybrid work only accentuating this behavior, increased investment in gardening, heightened propensity to buy food in bulk and find ways to avoid food waste. Our leading brands are well positioned to capitalize on these trends while ensuring that our communication with consumers reinforces the value messaging. After nearly doubling in the year-ago period as demand surged, core sales for the home fragrance business declined in the second quarter, with softness in both North America and EMEA. Consumption continued to moderate off peak levels and was further constrained by broad-based inflationary pressure on low-income consumers. Although the business was down in Q2, core sales grew relative to the pre-pandemic level. We expect the home fragrance category to remain challenged in the near term due to both difficult comps, albeit below first half levels, as well as softening macros. We're focusing our efforts on optimizing the product assortment to stimulate demand across price tiers. Q2 was a tough quarter for home appliances as core sales contracted 4% with softness in North America and EMEA, more than offsetting increases in Latin America and Asia Pacific. Core sales grew on a three-year stack basis. The appliance category is expected to continue to normalize relative to elevated levels from prior years, given long purchase cycles for these products, as well as increased mobility for consumers. While the U.S. market is challenging, there are pockets of strength. For example, launches of Mr. Coffee Ice Plus Hot and Frappuccino 3-in-1 have propelled the brand to the number two share position in single-serve coffee category. Latin America decelerated sequentially, but remained a bright spot for the business, leveraging Oster's leadership position across many markets. The outdoor recreation business lapped 25% core sales growth a year ago and still delivered a 2.5% increase this quarter. Growth in outdoor equipment across the international markets was complemented by continued post-pandemic recovery of the beverage business. Accounting for the shift of some retailer orders into the first quarter and assuming that inflationary conditions impact purchase decisions, we expect the business momentum for outdoor recreation to decelerate in the back half. As consumer and shopper behavior evolves, we expect our categories and leading purpose-driven brands to continue to play an integral role in the lives and remain a good value. We also believe the diversity of our portfolio is an advantage that we leverage in this environment. For example, while we are seeing softening in home fragrance and home appliances, the commercial and writing businesses are on a very solid footing and we are leaning in. We're particularly encouraged that our swift and decisive actions to alleviate the significant impact of inflation through initiatives such as pricing and fuel productivity have enabled us to maintain gross margin in the second quarter. This is no small feat as we absorbed about 9% inflation on the cost of goods sold. Of course, the ultimate goal is to drive gross margins higher and we remain committed to getting closer to benchmark levels over time. As we look forward, inflation remains at elevated levels and we expect a tougher second half relative to the first half. There is greater macro uncertainty and consumer demand headwinds, with some retailers taking a tougher stance on their inventory positions. Higher cost of living due to inflation is pressuring shoppers' wallets, weighing on sentiment and consumer demand, particularly at the lower income levels. While this is something we had already started to plan for in some categories, particularly home fragrance, the pullback in consumer demand has been more acute than initially anticipated. And we are pivoting our plan of action accordingly. Strengthening of the dollar has been another key development in the past few months, presenting a significant challenge both on top and bottom lines relative to our initial forecast. We're doubling down on our efforts to mitigate the unfavorable impact of both currency and inflation as we accelerate our productivity actions, further hone in on overheads and discretionary spend management, and evaluate pricing opportunities in the international markets. We previously declared 2022 a year of margins, and that is the outcome we've been driving forward towards. In fact, during the first half, Newel's normalized operating margin expanded 70 basis points, which was ahead of our expectations, mostly due to stronger overhead cost management. With the recent depreciation of the dollar, we expect an unfavorable transactional impact, and as a result, are adjusting our margin outlook for the year accordingly. Importantly, there is no change in our full year 2022 sales and earnings outlook on a constant currency basis, although there are some moving parts. As we look to the balance of the year, our actions are equally focused on navigating the difficult macro backdrop and simultaneously executing on our strategic priorities surrounding driving the top line innovations and mastering the 360 degree consumer and shopping journey. driving margin improvement in spite of significant inflationary and currency headwinds, turbocharging international, enhancing customer service levels, and transforming our supply chain through Project Avid and automation, and strengthening the one-year culture and building on our employee engagement momentum. Over the past several years, we've become a more agile, consumer and customer-centric organization and are confident we have the right strategies in place to navigate the softening macro backdrop while building competitive advantage and driving operational excellence. We remain committed to unlocking and realizing cost-saving opportunities across the organization while driving top line. I'd like to express my gratitude to our employees whose resilience, hard work, passion, and commitment paved the way to a bright future. I continue to believe that our best days are ahead of us, onwards and upwards.