newell brands inc. (nwl) q1 2019 earnings call transcript - classroom projector

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Newwell brand(NASDAQ: NWL)
CallMay q1209 earnings.
03,209, 8: 30m.
Content: ready to speak: Good morning, everyone. welcome to the Newville brand 2019 earnings conference call.
At this time, all the participants were listening. only mode.
After a brief discussion by management, we will start asking questions.
In order to be within the schedule of the phone, please limit yourself to a question in the Q & A session.
Remind me that today's meeting is being recorded.
Newellbrands provides an online webcast of this call.
On the home page of investor relations under Events and demos.
I will hand over the meeting to Ms now.
Nancy O'Donnell, senior vice president of investor relations. Ms.
O'Donnell, you can start.
Nancy O'Donnell-
Senior Vice President of Investor Relations and Communications, thank you. Good morning.
Welcome to the first quarter conference call of the newwell brand 2019.
Today's call is Mike Polk, our President and CEO, and Chris Peterson, chief financial officer.
I would like to inform you before we start this call includes forwarding
Look at the report.
These statements involve risks and uncertainties, and the actual results may differ materially from the results expressed or implied in the outlook statement.
I would recommend that you use the prudent language in our press release and in the report submitted to SEC.
During the call, we will also use some non-
GAAP financial measures, including what we call standardized measures, which we believe are useful to investors, although they should not be considered superior to those proposed under GAAP.
You can find non-
GAAP Financial indicators adopt the most direct comparable GAAP indicators in our earnings release and in investor relations websites and company SEC documents.
I will hand over the conference call to Mike now. Michael Polk --
Thank you, Nancy, president and chief executive.
Good Morning, everyone.
Thank you for joining us.
Today, I will give a brief introduction to our first quarter results.
Chris will then share his thoughts and review in detail our financial performance and outlook for the rest of the year before we open your questions.
We have a good start this year.
Under our guidance, both core sales growth and net sales are moving towards the high end.
Despite the negative effects of inflation, tariffs and foreign exchange, standardized operating income dollars and profit margins have improved significantly, as we continue to successfully implement our plan, to address retention overhead opportunities related to reshaping our portfolio.
These results result in a standardized EPS of $0.
Far beyond our expectations.
We have also made significant progress in operating cash flow, using $0. 2 billion in the first quarter, an increase of $0. 2 billion over last year.
As mentioned earlier, our work is focused on five core areas.
First of all, our employees are working to bring the business back to a consistent delivery model.
This means setting the appropriate milestones and delivering them against them and strengthening our operational discipline to make the business more predictable and efficient.
In the first quarter, we achieved or exceeded the plan.
Second, we are working to optimize our cost structure by implementing our ongoing savings plan and extracting retention company costs associated with accelerated transformation program divestiture.
We have made significant progress in professional staffing and on-going operations, down nearly 16% from the previous year and more in 2019.
Third, we focus on increasing cash flow by driving profitable growth in the transformation of working capital, reducing the complexity of the entire business system through portfolio simplification, SKU rationalize, as well as the re-adjustment of some supply and sales arrangements in order to obtain more structural benefits in accounts payable and accounts receivable.
Over time, these activities should produce significantly improved working capital indicators and free cash flow productivity.
Fourth, our employees are reshaping the portfolio and focusing our investments on the most important priorities, implementing the divestiture described in the accelerated transformation plan, while, make sharp resource choices by moving people and funds to businesses with the greatest potential.
Finally, we continue to strengthen the organization to achieve more consistent and continuous operational performance, and invest some of the savings brought about by indirect restructuring in the first quarter in the new features of the supply chain.
So we had a good start this year, but we realized there was more work to be done.
Let me pass on his observations and outlook to Chris.
Christopher Peterson-
Thank you, Chief Financial Officer Mike.
Good Morning, everyone.
We are encouraged by the results of the first quarter, which are drawn as planned or ahead of schedule on all key indicators.
The first quarter is our lowest seasonal sales quarter,of-
The results of the first quarter of the plan and the proactive actions we are taking have strengthened our confidence that the company is on a solid track to achieve full-year guidance.
Before going through these numbers, I would like to provide some background for our goals.
Our vision is to transform the newwell brand into a leading brand.
Consumer goods company.
We will do this by strengthening market share leadership in important attractive categories of branding and innovation.
Build a company suitable for winning in fast competition
Driving the development of the Omni-channel world, creating the ability to excel, enabling us to take a leading position in the market, and constantly winning competition, motivating and motivating our employees.
Our goal is to grow sales faster than the industry average, increase operating margins according to Benchmark specifications, accelerate the cash conversion cycle, and strengthen organizational capabilities and employee engagement.
To achieve this vision in these goals, we have a lot of work to do.
We are taking positive action in all areas of the company and moving in that direction.
Now look at the results of the first quarter.
In the first quarter, net sales for continued operations were $1. 7 billion, a 5. Down 5% year on yearover-
Due to the unfavorable currency, about 60 Yankee Candle retail stores withdrew, with 2 in a year.
Core sales fell 4%.
Under the guidance of the company, core sales and net sales have entered the high end.
While the company has successfully implemented pricing actions and has benefited from the growing productivity funnel, the standardized Gross profit margin shrank by 140 basis points to 31 basis points compared to last year.
9% due to the adverse factors of foreign exchange, tariffs and inflation.
This result is planned because pricing is not meant to increase profits, but just to increase the impact of inflationary pressures on the dollar.
Compared with last year, the standardized operating profit margin expanded by 180 basis points to 4 basis points.
3% as progress in indirect costs is better --than-
Plan and exceed to offset the headwinds of gross profit margin.
We are in the process of implementing some indirect expense reduction programs and have initiated strict expenditure controls, including slowing down recruitment and requiring senior management approval to increase or replace employees;
Repurchase costs based on the ROI framework;
Develop stricter policies around C & E costs;
IT system rationalize and so on.
In the results of the first quarter, the benefits of these initiatives are emerging and we expect this trend to continue.
Annual net interest expenditure decreased by $36 millionover-
This year, thanks to the company's deleveraging actions.
Compared to $7 million in the previous year, the normal tax offer was $70 million.
The normal Net income from discontinued operations was $67 million, compared to $0. 138 billion in that year --
In the previous quarter, the change was driven primarily by the loss of contribution from businesses stripped off in 2018, including Waddington, Rawlings, Goody, pure fisheries and Jostens.
We ended the first quarter with 0. 423 billion shares and have not changed since last year --end.
Standardized Diluted earnings per share are $0.
14, high-
Due to strong net sales and high operating profit margin, the company's guidance range is over.
The loss of standardized dilution per share for continuous operation is $0.
01 year zero ratio-ago period.
Proceed With segmentation results.
The highest profit in the learning and development segment fell by 4. 2% year-over-
The year was $0. 581 billion, reflecting unfavorable monetary movements and 1.
Core sales fell 5%.
While the writing section maintained growth momentum, the decline in TRU shipments continued to drag down the baby business.
Starting from the first quarter, the downside of the TRU bankruptcy has weakened and we expect the baby to return to growth.
Net sales of food and appliances fell by 5. 6% year-over-
Driven by currency headwinds and $2, it reached $0. 504 billion this year.
Core top line fell 7%.
The strong growth in food has partly benefited from the increase in post-SAP sales in the preservation business in April 1.
The growth in home appliances and cookware offset this growth, affected by the reduction in US promotions and the difficult comparison between Latin America and 2018 sales in the first quarter before SAP implementation.
Household and outdoor income fell by 6. 4% year-over-
In the case of unfavorable foreign exchange, it reached $0. 627 billion this year, with about 60 poorly performing Yankee Candle retail stores exiting and 2 more.
The core of the impact results fell by 9%.
The weak expectations of the remaining retail stores and the loss of outdoor Distribution previously discussed offset the growth of connected homes and security.
Turn to cash flow.
The company started strongly this year with first-quarter cash flow ahead of the plan, with a significant improvement over last yearago levels.
Given the seasonality of the business, Q1 is always a cash use period.
Operating cash flow was $0. 2 billion, an increase of $0. 2 billion over the previous year.
This improvement is driven by the progress of current capital in inventory and accounts payable.
Although still in the early stages, we are encouraged by the progress made and have developed plans that will allow us to continue to release important working capital opportunities.
Before moving forward to the second quarter and the full year, I would like to highlight some of the operational achievements of the past few months.
In April 1, the fresh preservation business of the food department was converted to SAP without missing the beat.
The company is working to rationalize the number of ERP systems with the ultimate goal of getting 95% of the company's revenue on both ERP systems by the end of 2020.
We started implementing the SKU reduction program and launched around 3,000 SKUs in the first quarter.
By the end of 2020, the initial plan will reach the 50% reduction target.
We have taken a number of initiatives to drive improvements in the cash conversion cycle that will benefit in the coming period.
In terms of accounts payable, we have now identified our top 650 strategic suppliers, assigned procurement and financial owners to each vendor with the goal of meeting the benchmark terms.
For the thousands of small suppliers, I personally sent a letter to all of them modifying the terms of payment to reflect the benchmark level that came into effect on June 1.
In terms of inventory, we chose to sell out-of-stock to discounts and close channels to further work to reduce inventory levels and increase productivity in the supply chain.
As we pointed out in CAGNY, we used machine learning and data scientists to try out advanced forecasting techniques in some departments.
While these efforts are still in the early stages, promising results are shown in improving the forecasting accuracy of demand plans at SKU levels and should enable the company to reduce safety stock over time, overstocked and out of date while improving customer service.
This is not an exhaustive list, but rather gives you a taste of the work that strengthens the company's operations and financial performance.
Now, continue to guide.
So far, 2019 is rolling out as we expect, and our turnaround is on track.
We reiterate the guidance to 2019.
We expect net sales to be $8. $2 billion to $8.
4 billion, one yearover-
Driven by low orders, the annual decline was 3% to 5%
The core sales figures fell, and the currency pushed about 150 basis points.
Normal operating profit margin expansion of 20 basis points to 60 basis points in the year-over-
The normalized operating profit margin after the year is 9. 1% in 2018.
This outlook continues to believe that rising prices, lower productivity and indirect costs contribute to funding a & P Investments and offset the adverse effects of inflation, tariffs and foreign exchange.
We expect to continue operating at normal tax rates.
The company's diluted earnings per share range from $1. 50 and $1. 65.
In the first quarter, the company made further progress on divestiture, announcing the process solutions and Rexair deals that were closed earlier this week.
After this brought an estimate
The tax revenue for all transactions completed so far is about $6 billion.
Forecasts continue to believe that all divestiture work will be completed by the end of 2019.
We currently expect to complete the divestiture of the US poker business in the second half, similar to the remaining holding-for-Sales business.
Our plan continues to cost about $9 billion later.
Tax revenue from divestiture of all assets.
The 2019 outlook still reflects a slight decrease in unissued stocks and further progress has been made in debt repayment with the goal of a leverage ratio of around 3.
When we left five times a year.
While we have an encouraging start in working capital, we have a vision for further improvement, and we are maintaining our vision of operating cash flow across the company, in the range of $0. 3 billion to $0. 5 billion earlier this year.
This forecast continues to include the absence of donations from divested enterprises, the cost of cash taxes and transactions related to divestiture is approximately $0. 2 billion, and the cost of restructuring and related cash exceeds $0. 2 billion.
Now, let's move to the outlook for the second quarter.
Net sales are expected to reach $2. Between $1 billion and $2.
In the 15 billion range, core sales were flat, down 2%, and the currency dragged down about 150 basis points.
Q2 results should not be affected by the adverse factors brought about by the TRU bankruptcy, as the company is now completely free from the impact of salesin perspective.
However, this prediction does assume an expected shift --to-
Some customers' school orders range from June of 2018 to July of 2019, which will affect the following yearsover-
Annual comparison between the second and third quarters.
We expect standardized operating margins to be flat to a drop of 60 basis points compared to adjusted standardized operating margins 9.
7% from the year-ago period.
As we expect certain discrete projects in the quarter, standardized effective tax rates for ongoing operations are expected to be in their 20 s.
This will normalize the company's diluted earnings per share within $0. 34 to $0.
In the range of 38, the number of stocks is slightly higher than Q1 level.
We are encouraged by the good start of the year as the transition to a more focused consumer goods company is going smoothly.
We will also continue to focus on positioning the organization as a long-term ongoing operational performance and drive shareholder value creation by returning to core sales growth, operating profit margin expansion and improving the cash conversion cycle.
In 2019, we are taking decisive action to make the organization a success.
Plan to complete the divestiture plan within the year-
Ultimately, continuous delivery of improved core sales and operating profit margin results compared to 2018, while continuing to support the company's brand and innovation in the market, overcoming significant external resistance from inflation, customs and foreign exchange.
We also plan to strengthen the company's working capital indicators and drive operational discipline across the organization.
Before I turn the phone back to Mike's concluding remarks, I would like to thank him for his partnership over the past five months and for his enthusiastic leadership of the organization and our staff for nearly eight years. Mike? Michael Polk --
Thank you, President and CEO Chris.
Just a few comments before passing the lines back to Nancy for a Q &.
Over the past eight years, I have been honored to be chief executive of the Newville brand and to be a member of the board for nearly a decade.
I am most proud of the portfolio transformation we drive and the capacity and people agenda we pursue.
We have transformed our business from a $5 billion company that has a disjointed portfolio of consumer, industrial and commercial businesses with brands like blowbusiness;
Mimio, classroom projector business; Shur-
Line, paint and roll coating business;
Bulldog, a hardware store, costs $8.
5 billion consumer goods companies are leading the way in seven growing categories of global consumer durable goods.
With a huge portfolio of brands, hundreds of millions of consumers live better every day in places where they live, study, work and play.
Over the past eight years, we have completed 35 transactions to drive this portfolio transformation, and we will complete the accelerated transformation plan with a more attractive and focused portfolio.
Added a good brand like condigo to the drink;
Baby joggers with baby gear;
Elmer's written work
Sisters in food;
Yankee candles, Woodwick and Chesapeake Bay create a home fragrance business unit;
Coleman and Marmot will create our Department of outdoor and entertainment; and Crock-Pot, Mr.
Create coffee and Oster in our electrical and cooker departments.
In addition to our portfolio work, we also invest in strengthening our capabilities in brand building, innovation, design and e-commerce
Business, improve the skills of organizations in these areas by developing a cross-enterprise community of practice.
This method enables new people from outside and people from inside to grow and develop together and create favorable knowledge.
Newell's approach and capabilities in key areas that are critical to the company's strategic agenda.
The teams worked with our department and achieved results.
The market share of companies like baby gear in the US increased from just over 31% in 2011 to more than 37% in 52 weeks ending March 2019.
There are similar trends in food storage, glue and home fragrance.
Our global e-commerce
Business has more than doubled since we began to measure e-commerce
In 2011, with the commercial penetration of Amazon, our customer rankings rose from the global ranking in 2009 to the second place in 2019.
Clearly, there is more to be done for the future's big and exciting opportunities.
I believe that working with the new CEO, Newville's experienced and talented leadership team, leveraging the strength of 30,000 dedicated and committed colleagues from around the world, will unleash the value creation potential of the business.
Obviously, I suspect there will be more loud supporters on the sidelines cheering for Newville's future success.
With this, let's turn the phone to Q &. Nancy?
Nancy O'Donnell-
Senior Vice President of Investor Relations and Communications. Thanks, Mike.
Before we hand it over to the operator for a Q & A, I would like to remind you that we ask that everyone who calls is limited to just one question.
We will try to manage our time to get you out in about an hour while inviting as many callers as possible.
Thank you for your cooperation. Thanks.
At this point, operator, we are ready for your question.
Question and Answer: Thank you, operator. (
Operator instructions)
Our first question will come from
Steve Bowles of Deutsche BankSteve Powers --Deutsche Bank --
Sorry, analyst. I was on mute. So, thanks.
Mike, there are a lot of questions to ask about this quarter, but given your intention to retire and hear your comments at the end of the opening ceremony, I just hope you can-
We may benefit more from your long-term cooperation.
Perspective of terminology.
I think when you look back on your total time in Newville and assess what's going on today, whether it's the current state or the momentum of progress that seems to be forming, what advice did you make to the board, tell the board about the key attributes and expertise that the next Newville leader should have?
I think, when the new leader is selected, is that relevant?
What advice would you give him or her? Michael Polk --
The president and chief executive, well erwell, made only a few comments.
You should feel comfortable throughout the process.
This process is in progress.
This is driven by a search committee of the board of directors headed by the nom/gov committee.
As I announced when I retired, hedwick & Struggles has been assisting the nom/gov Committee and the search committee in a comprehensive process.
I think about the CEO search, you should rest assured that Chris, me and other leaders, and the 30,000 people I mentioned in my comments, are very, very focused on the business at hand, this is the delivery for the second quarter, laying the foundation for the rest of the year and for 2020 and beyond.
Driven by the power of the brand, I am very optimistic about the possibility of this industry.
In my experience, you need a strong brand and leadership position in order to make a profit through scale growth and profit, which we have done.
We have built it.
But in the same way, you need to be like us, really disciplined in the company to drive results.
Chris joining the company is a huge addition to us and you can hear it by the comments he made in the prepared comments.
You can see that he will have an impact on Russ and some others on the team, driving the operational delivery and commercialisation of the ideas brought about by the power of the brand.
So, I'm excited about the next thing.
The next CEO needs to recognize two aspects, the power of the brand, the power of marketing, the power of innovation, and the need to deliver business results.
So, as I said, I am confident that, based on the people I have had the opportunity to work with, they are currently in the lead and they will be able to move the action forward.
It's not easy.
The environment is hard.
What we need to accept is that in the next few years, the landscape will be more complex than in the past ---
Of course, in the first chapter of my role.
Therefore, professional knowledge and work knowledge are also very important.
I feel that if you don't have the power of the brand, if you don't have a leading share position in these categories, if you don't have an opportunity for international deployment, it could be a difficult shift. It's complex. It's got --
And a lot of work to do.
Chris has been down-to-earth and built bridges and partnerships that will keep the momentum going for the rest of the year.
No matter who the CEO is, it is necessary to develop this ability and continue to keep the organization focused on the delivery of the moment.
I believe Chris may have his own opinion on this based on his experience, but it is a real honor to know him and be able to work with him.
Of course, as I said, I am honored to lead the organization to where it is today and to recognize the great opportunities ahead. Steve Powers --Deutsche Bank --
Thanks, Mike.
You will be missed. Michael Polk --
Thank you Steve, president and chief executive.
Thank you.
The next question comes from Bill Chappell of SunTrust.
William Chapel-
Humphrey Robinson-AnalystThanks. Good morning. Michael Polk --
Good morning, president and chief executive.
William Chapel-
Humphrey Robinson-
Can you talk more specifically about Yankee?
Just want to know about the situation and trends of store closure.
I know it's not seasonal. -
This is probably the smallest quarterly season.
But this year on different retail channels, how does this change and where can you turn this around in a stable way.
I kind of understand other businesses, but does Yankee seem to be a more focused one in the near future?
Christopher Peterson-
Chief financial officer.
It was a pleasure to talk about it.
So, as we mentioned in our prepared remarks, we started last year with a network of over 500 stores, we have analyzed the poorly performing stores that have increased rental this year.
We announced a plan to close about 100 stores this year.
We closed a little over 60 in the first quarter.
In general, in retail business, a good time to close poorly performing stores is after the holiday season, not before the holiday season. So, we front-
Closed activity loaded.
At the same time, we are working hard to restructure our business and grow in wholesale channels, and we are making some very strong progress.
The company acquired several brands of Chesapeake and Woodwick and is expanding distribution on those brands, and we have gained a very strong appeal in this market.
We are still trying to turn the European business around.
This is a good start.
So while core sales in the home perfume business have declined in the first quarter, we expect that business will continue to improve as we grow throughout the year.
William Chapel-
Humphrey Robinson-AnalystGot it. Thanks so much.
Good luck, Mike. Michael Polk --
Thank you, president and chief executive.
Thank you.
The next question comes from Lauren Lieberman at Barclays.
Lauren Lieberman-
Barclays Capital-
Thank you. Good morning.
I'm curious if you guys can talk about pricing.
I think the first-line outlook for this year is a bit cautious, as volume can be a bit unstable as prices rise.
So, can you simply go through where the price is already on the market?
I know you mentioned some of the reduced promotions in the electrical industry.
And the impact you see on the volume.
Or, if we're still on the road to setting pricing for the whole year? Thanks.
Christopher Peterson-
Chief financial officer, of course. Thanks, Lauren.
So in terms of pricing, I think we are very satisfied with the pricing so far.
We need to take most of the price we have already taken.
Therefore, our view on pricing is that the customer's response to pricing is very good.
Consumer response is relatively good for our pricing as our pricing is related to tariffs, affecting inflationary pressures and/or transactional foreign exchange for all participants in the industry.
Perhaps, the most significant change in our outlook at the beginning of the year is that when we provide guidance for the last quarter of last year, we assume that the tariff on listing 3 will take effect on March 1, which is clearly not happening.
As a result, this has led to a reduction in tariff headwinds of about $20 million this year.
Because of this, we have abandoned the pricing of the tariff cancellation as we plan and are ready to accept the pricing, but we do not need to do so.
So, conceptually, I think it's positive.
At this point, we have not changed our view on this year, because I think we should be cautious in our methods, because only--
At the beginning of this year, we just came out from the first quarter, which is a seasonal low.
Lauren Lieberman-
Barclays Capital-
Thank you.
Thank you.
The next question comes from Wendy Nicholson of Citigroup.
Wendy Nicholson-Citigroup --AnalystHi.
Mike, actually, I want to go back and ask you ---
Follow up on your comments on Steve's question at the beginning. Vis-a-
Amazon and e-commerce
In my opinion, business is clearly one of the biggest changes that have taken place during your tenure in Newville.
How do you like online business?
I think it's only a matter of time before Amazon becomes your number one customer.
What do you think?
Do you think the company is ready to continue to execute well on the online strategy?
I know a few years ago, in CAGNY, you said more directly. to-
Consumer business in Newville.
Is this still a priority in your opinion?
As online components or parts of the business continue to grow, what are the biggest challenges do you think the company will face in the future? Thanks. Michael Polk --
The president and chief executive, well erwell, made only a few comments.
On Amazon, they still have a long way to go before they become number one.
Amazon and Wal-Mart have a considerable distance between one and two locations.
I think it's-and-
Now, Wal-Mart is developing well.
We did a good job in Wal-Mart.
So, I think this might be--
Even the next chapter, after the next five chaptersyear cycle.
Nevertheless, e-
Business is clearly a huge opportunity for the company.
Most of our businesses are in pure entertainment channels like Amazon and retail.
Like Wal-Mart and Target. Direct-to-
The proportion of consumers in our business is much smaller, and it is clear that there are different distribution of profits in this area.
But let me pass the future on to you.
Look at the comments ,(ph)
Terry, give it to Chris and ask him to provide you with his vision of the future.
Christopher Peterson-
Chief Financial Officer yesThanks, Mike.
I think this is a key area because I think the interaction between consumers and brands is more digital than in the past, and more think the interaction with brands is a full range of interactions --
Channel experience.
So if I step back and see where we are as a company and where we are going, I guess Mike's point is that the company is doing a good job in market e-commerce
Amazon, Wal-Mart and other commercial websites.
Com, etc. has penetrated into some kind of middle.
A teenager.
Business is growing at twice the rate.
The digital growth rate, including the first quarter, was positive. On the direct-to-
On the consumer side, I think we may take a different path.
So, at least my point is, we needto-
The consumer side is turning our direct consumer website into more marketing websites for most of our brands, showing the story of the brand, the innovation of the brand, but don't try to be a commercial site that competes with the market because I don't think consumers are interested in having hundreds of accounts with different brands and passwords and all these types of things.
So I think you will see us moving towards onethe-
Some of our technology or business-supported sites have shelf-Tech-type solutions, however, the number of sites associated with retailers and market sites has increased significantly in an attempt to drive purchases through that channel.
Another important thing in this area is that the company is trying to get more people involved in social and impact marketing.
So in terms of social and impact marketing, I think the company is lagging behind today.
Coming out of fashion and retail, I think those industries-
Beauty, these industries are generally one step ahead.
So, I have a lot of personal experience in this area.
I think the company has the opportunity to become more active in this area, trying to push the purchase intention in all directionschannel manner.
So, I think these are the topics that you will hear more about us on digital and e-commercecommerce.
Wendy Nicholson-Citigroup --
Do you think this still applies to international strategies?
I know there were some conversations about e-commerce in the past.
Business and networking may be a shortcut to increasing distribution in China, the UK or elsewhere.
Is this part of the story?
Christopher Peterson-
Absolutely chief financial officer.
I think the story of the international market will become more exciting through markets such as Tmall and Jingdong. com and others.
If you think of China, activate it through social platforms such as Weibo.
I think this is a path that allows us to release international growth opportunities in a more cost-effective way, and these channels are less risky for consumer goods companies than before.
Wendy Nicholson-Citigroup --AnalystGot it. Thank you.
Thank you.
The next question comes from Andre Tesera and J. P. Morgan.
Andre Tesera-J. P. Morgan --AnalystHi. Good morning. Thank you.
So, my question is about your ability to streamline SG &.
Especially in the first quarter, your dollar amount was reduced by $80 million.
So, I was wondering if there was a front --
Saved a lot of money and maybe allocated some marketing expenses ---
Will be allocated for the remaining quarter.
So, in other words, I want to know how sustainable is this cut?
Regarding this issue, I just wanted to know the rhythm of SKU rationalized and out-of-date stock sales you mentioned in your prepared comments.
How much should we expect to be implemented by the end of this year? Thank you.
Christopher Peterson-
Chief Financial Officer yes
So I will take these in turn.
So, in terms of overhead-
Or SG & A costs, in the first quarter our advertising and promotional spending as A percentage of sales was roughly the same as the previous year.
So SG & A's earnings in the first quarter are actually 100% related to indirect costs, and we expect this trend to continue.
In fact, as I mentioned in my prepared comments, we have taken more active actions to try to strengthen our spending controls and bring more in the cost spend process we buy
So, I think that's going to be the subject of what we're going to push.
At CAGNY, I mentioned what our benchmark is.
Our indirect expenses accounted for 21% of sales last year.
We think the correct benchmark is 15% to 16%.
Therefore, we believe that over time, we have the opportunity to make a meaningful reduction in indirect costs as a percentage of sales, and we expect an important first step in this fiscal year.
In terms of SKU reduction, we started with 90,000 SKUs at the beginning of the year.
We cut 3,000 in the first quarter.
We believe that by the end of 2020, our goal is to cut by 45,000 or 50%.
Frankly, we are still working on the details of the plan.
The first 3,000 We cut is a little low.
But we are working on a plan to review the plan with each of our departments and make greater progress in the year.
This will not be a straight line for SKU reduction, as some reduction time is related to the retailer's reset time, so it will be a bit choppy throughout the period.
We have not set specific targets for the end of this year and the end of 2020, because we believe that the most important thing is to implement this change with outstanding performance, so when we do this, we won't lose the ball. we believe we will.
Regarding the E & O issue we are doing a more rigorous review of the inventory and tightening the inventory, you see our cash flow for the first quarter, our inventory increased by about $50 million over last year --
The period when we use cash.
I think part of it is-
Part of the look and feel of the inventory is not just better managing the S & OP process, but also part of being more and more strict with excess and outdated inventory and trying to move it out, if you want, we will clean up our inventory.
I think we have made good progress in this area in the first quarter and I expect this to continue to be a focus area for our future.
Andre Tesera-J. P. Morgan --
Analysis is helpful. Thank you.
Thank you.
Our next question comes from Bonnie Herzog and Wells Fargo. Bonnie Herzog --
Wells Fargo Securities--AnalystHi. Thank you. Good morning.
So, a key issue for me is still your guidance.
I think I'm still trying to get to know your level of conservatism, especially organic sales, considering that you will be competing very easily.
Your guidance basically shows that things get worse even though you see continuous improvement.
Then, just in the early signs of improvement you mentioned, can you reconcile it for us?
Then, it's important why you expect profit to drop in the second quarter, especially in better casesthan-
What is the expected profit margin you reported this quarter? Thanks.
Christopher Peterson-
Chief financial officer, of course.
So if you look at the Revenue Guide for the second quarter, there are actually two things that affect that.
The first is to implement SAP in the New save business, where we pre-
Ship to customer in q1.
That's part of our plan, but that actually shifts some revenue from the second quarter to the first. shipped.
The second is that our second-quarter guide considers our back movement --to-
School delivery written--
Some customers from June to July.
So what will that be? -
The combination of these two things will lead to some kind of rebalancing between Q2 and q3.
This is part of the core sales growth plan for the second quarter.
So, we lead the flat down by 2%, which is better than in the first quarter, but we do have both.
Time resistance to negative impact on core sales growth in the second quarter.
I would say that with regard to operating profit margins, it is important that we have a variety of businesses that have changed ---
Some fluctuations in the base period.
So I think the combination of the two led to some fluctuations in the quarterto-
Operating margin quarter.
I think, in my opinion, the important thing is that we have started ahead of the plan in q1.
We will not change our guidance for this year because of the beginning of this year, but we--
Our confidence is based on our plan.
So, this is the profit of our business. Bonnie Herzog --
Wells Fargo Securities--
This is very helpful, analysts.
But I just wanted to ask quickly why this shift from June to July, at least when it comes back to school.
Have you heard from these customers what their plans are or why this shift has taken place?
Christopher Peterson-
Chief Financial Officer yes
So, I think what happened to some customers-
And, we haven't fully locked in yet, but what we 've heard from some customers is that they prefer delivery in early July, not at the end of June, because they are managing inventory and store reset times.
So, that's the reason for the impact. The back-to-
For us, the school season always has a critical mass shipment month in June and July, and there may be some shifts, however, in numbers or results, there is certainly nothing that can bring us to a halt in relation to the direction of the fiscal year guidelines.
In fact, as I mentioned, what we have seen in the results so far in the first quarter has enhanced our confidence in the scope of this year's guidance. Bonnie Herzog --
Wells Fargo Securities--
The analysis is correct.
Thank you very much.
Good luck, Mike. Thanks. Michael Polk --
Thank you, president and chief executive, Bonnie.
Thank you.
Our next question comes from Kevin Glenda, who holds that view. Kevin Grundy --Jefferies --AnalystThanks.
Good Morning, everyone.
Quick room service.
You estimate the industry growth rate for the quarter relative to 2.
Core sales fell 4%?
My bigger question, maybe for Chris, throughout the conference call, we 've talked about the various areas of this, but when do you expect to be able to officially determine the company's key value to these
Specifically, growth before the market is an ambition you are talking about;
Potential substantial profit opportunities, gross profit margin of 200 basis points to 300 basis points, indirect expenses of 400 basis points to 500 basis points, followed by working capital, a little less than $1 billion.
So, there are some comments.
When there is a transition in the middle, will this be
A year, can you be more clear?
When we look forward to the guidance of fiscal 20, will this be accompanied by a longer period of time --term targets?
So, I think any of your comments will be helpful to shareholders. Thank you.
Christopher Peterson-
Chief financial officer.
Let me start with a longer period of time
Semester opportunities.
So, one of the things I mentioned in CAGNY is that we 've started a process that does category strategy work on each of our categories, and that's a process that we're going to go through, decide specifically what role to play in each category and how to win the strategy.
We haven't done this in the company for five or six years.
The process is expected to happen in the summer.
So, I hope we-
We will have better visibility in the process.
This will allow us to step into a more specific company-wide strategy as we continue our business.
I think this will tell us the long term. term target-
Set up and longer
Term guidance on the specific time when we will achieve certain goals.
So that's what we're doing.
In terms of industry growth, I think the industry growth rate in the first quarter was a little less affected by changes in Easter time.
So, the growth rate in recent periods looks a bit lower, but if you look at it for a longer period of time
In the long run, category growth rates continue to grow positive.
So if you look at the past 52-
Weekly growth rate, which indicates that the market is growing at a rate of 1% to 2%, but in the most recent 4-week and 12-
These numbers are obviously not that positive because I think they are affected by Easter shifts.
We do not believe that recent trends suggest any fundamental changes in market attractiveness or the future prospects of the market. Kevin Grundy --Jefferies --
Analyst Chris, does the portfolio review suggest the possibility of further divestiture?
Christopher Peterson-
The CFO believes that we will look at what is the best way to maximize shareholder value. I think that --
Of course, Tucker-
In acquisitions made through divestiture and/or smaller pruning or portfolio actions, both may be part of it over time. Kevin Grundy --Jefferies --
Okay, I left it there. Thank you.
Good luck, Mike. Michael Polk --
Thank you, president and chief executive.
Thank you.
Our next question is from Rupesh Parikh at Oppenheimer. Rupesh Parikh --
Oppenheimer companyInc. --
Good morning.
Thank you for answering my question.
So on the gross margin line, I think the decline is much larger than many of us have simulated.
I think this is in line with your internal plan.
I'm just curious if we should expect a similar drop when we look forward to the rest of the year, or if Q1 has something more unique? Michael Polk --
The president and chief executive believes that we will not guide at the gross margin level. I think we've --
Our guiding practice is to guide at the level of operating margin.
If you look at the first quarter, I think the biggest impact is tariffs, commodity inflation and foreign exchange, and as I mentioned, we are pricing these items, but other than that, we are not pricing the margin.
So this leads to gross margin.
Depending on the growth rate, certain businesses will also have a mixed effect, which may cause it to fluctuate a little from one quarter to another, but this is largely planned.
As I mentioned, I think we still have strong confidence that we will achieve a higher operating profit this year than last year. Rupesh Parikh --
Oppenheimer companyInc. --
Very good. Thank you.
Thank you.
Our next question comes from Olivia tang of Bank of America. Olivia Tong --
Bank of America Merrill Lynch--AnalystGreat. Thank you.
Just wanted to follow up-
A little bit higher on the margin target, because it is clear that it assumes that at the midpoint, the situation will improve significantly.
And the second half price-
The second half of the positive.
So I know--
So far you have talked about some of the things here in a couple of answers.
So, can you make it a little more clear that taking this result from Q1 to Q2 first leads to such a big disagreement and then flipping it in the second half to a positive direction?
Christopher Peterson-
I think if you look at the operating margin, I think we--
As I mentioned, operating margins rose 180 basis points in the first quarter.
This is actually driven by strong advances in indirect costs.
We expect strong progress in indirect costs throughout the year.
In the second quarter, our guidance was flat and dropped by 60 basis points, which will increase our operating profit margin within our guidance in the first half of the year.
We expect operating margins to rise throughout the year, which means we will continue to rise in the second half of the year.
So, I think we have a very positive plan in terms of profit margins, the gross margin plan is around the project we started talking about, SKU productivity, the total productivity work we are doing the optimization of manufacturing plants and distribution centers and the innovation constraints we put forward in terms of gross margin value-added innovation.
In terms of overhead, I think we see significant opportunities for IT costs through the rationalizing of the IT system, buying costs by increasing the return on the investment framework, in terms of our indirect procurement, we are working on all these projects.
So based on the actions we are taking, I am cautiously optimistic, but we want to be cautious in guiding and planning gestures.
So that's what I think about our plans and guidance. Olivia Tong --
Bank of America Merrill Lynch--AnalystGot it.
Very helpful.
Then, if I can talk about the balance sheet.
Chris, I noticed that there is now a $0. 55 billion operating lease liability on your balance sheet.
So, just ask a few questions.
First of all, it's 3 for you. 5 times year-
End the leverage target?
If so, does this mean that you have to pay off more debt before the share repurchase enters the discussion? Thanks.
Good luck, Mike. Michael Polk --
Olivia, president and chief executive. thank you.
Christopher Peterson-
Chief financial officer.
So in the first quarter, we have adopted the new accounting standards for leases together with the industry, if you wish.
In fact, what the new accounting standards for leases do is that it makes you correctof-
Use the assets on the balance sheet and the lease liabilities on the balance sheet.
So, actually, both your balance sheet and your total liabilities have increased.
Since then, the impact on profit and loss has been minimal to zero.
We don't expect it to be bad for us from a rating agency perspective, and we don't expect it to have any impact on our debt leverage ratio or how people see it.
This is purely an accounting change that we have adopted this quarter with most other companies with rental liabilities.
Thank you.
The next question comes from Joe Altobello and Raymond James. Joe Altobello --
Raymond James and colleagues-AnalystThanks. Hey, guys. Good morning.
First of all, ask a few questions briefly.
Over $0. 4 billion
Current cash items for the quarter?
If not all, I can imagine that most of them are still in front of you.
Secondly, considering how much the guiding order of interest expenditure has dropped this year?
I know a lot will be decided by the time of divestiture?
Christopher Peterson-
Sorry I missed the second part of the problem, Joe.
Can you repeat the second part again? Joe Altobello --
Raymond James and colleagues-AnalystSure.
This year's guide to interest spending, knowing that it will depend to a large extent on the timing of the divestiture?
Christopher Peterson-
Chief Financial Officer yes
So, I think it's $2 in interest spending.
The £ 6 billion we submitted in the fourth quarter of last year will result in an interest expense savings of over $100 million this year, and I don't think we will give up on that.
I think the point that interest spending is good for us is that if we continue this trend, we will plan cash flow ahead of schedule in the first quarter, which will obviously affect our interest spending in a positive way.
We haven't considered that yet.
Because it is the beginning of the year, so this year's guidance.
But, as I mentioned, we are cautiously optimistic about cash flow, given the tremendous progress we made in the first quarter and the actions we are taking, these actions will produce results throughout the year.
With respect to the cash tax and restructuring, I think we have said that our projections contain approximately $0. 2 billion in restructuring and related expenses, as well as a cash tax of approximately $0. 2 billion.
In the first quarter, that figure was about $40 million.
So the first quarter only affected us about 10%. Joe Altobello --
Raymond James and colleagues-AnalystOkay.
If I could follow-
There is a quick, CEO search, and at the time of this, is there anything that gets in the way of the transformation plan, because the new CEO, whoever he or she is, may have other ideas? Michael Polk --
Yes, absolutely not.
The board fully supported Chris and I in pushing the agenda until we passed the baton.
You shouldn't-
You should rest assured that he and I, as well as our other leaders, have people focus not only on quarterly delivery, but we also need to make strategic choices around costs to build the latter half and 2020. Joe Altobello --
Raymond James and colleagues-AnalystGreat. Thank you.
Good luck, Mike. Thanks. Michael Polk --
Thank you very much to the president and the chief executive.
Thank you.
Our last question will come from Nik Modi, which owns the capital of RBC. Nik Modi --
RBC Capital Market-AnalystYes.
Good Morning, everyone.
I guess my question is, maybe you can provide some perspective on what happened in Coleman, not necessarily just trying to accurately understand the input and commitment of distribution losses, but more importantly, what is the engine of consumer insight and innovation?
Because this is a brand that I thought a few years ago should invest heavily in consumer insight and innovation to help stabilize the business.
So you can provide any context.
I know a lot has happened in the past two years.
I try to understand from what happened (inaudible).
This is a bit of a distraction. maybe investment will fall back.
Maybe you can explain it to me.
Christopher Peterson-
Chief financial officer.
So, I think the biggest thing about Coleman was the loss of distribution last year for one of our major cooler retailers, especially.
The loss of our distribution will expand.
I think we will run another lap at the end of the second quarter.
If we look at the POS data, the underlying trends have actually started to become positive, not our previous ones.
So I think we are cautiously optimistic.
We have a new cooler design that we have updated from an innovative point of view, whether it is a hard cooler or a soft cooler, we are planning to launch in the 2020 season.
Therefore, we will start shipping on December or January.
I think the work we do in terms of product upgrades, design aesthetics modernization is very eye-catching and starts to draw strong traction from retailers. Early days.
We haven't shipped yet, but we are cautiously optimistic.
Another closer thing in the outdoor and entertainment business is that we have a line in our beverage business and we will launch a range of condigo luxury range products in the second half of this year.
This is a range of premium heat and hydration beverage products we have designed to prevent spills.
So, I think you will see that the start of the beverage innovation in the second half is helpful to the business.
Then, when we calculate the distribution loss, the POS trend should start to improve, which will lead to the release of the main cooler in December and January. Nik Modi --
RBC Capital Market-AnalystOkay. Thanks, Chris.
Good luck, Mike. Michael Polk --
Thank you, president and chief executive, Nik.
Thank you.
This is the end of our Q & A time.
I want to give it back to Sir now.
Mike Polk's closing remarks. Michael Polk --
Thank you all for joining the president and chief executive.
For our team, thank you as always for your drive, determination and commitment to the business.
It has been an honor to lead you in the past few years.
Let's build on the success of the first quarter, and the strong performance of the second quarter has allowed us to now turn a new page back to our work on delivery and execution.
So, thanks again.
Talk to you soon.
Thank you.
Ladies and gentlemen
Our website newellbrands will replay today's call later today. com.
This is the end of our meeting.
You can disconnect now.
Participant: Nancy O'Donnell--
Senior Vice President of Investor Relations and Communications-
Christopher Peterson, president and chief executive--
Chief Financial Officer Steve Bowles-Deutsche Bank --
Analysis by William Chapel-
Humphrey Robinson-
Lauren Lieberman, analyst-
Barclays Capital-
Wendy Nicholson's analysis-Citigroup --
Teixeira analysis--J. P. Morgan --
Analyst Bonnie Herzog-
Wells Fargo Securities--
Analysis by Kevin Glenda-Jefferies --
AnalystRupesh Parrick--
Oppenheimer companyInc. --
AnalystOlivia Hall--
Bank of America Merrill Lynch--
Alberto Belo--
Raymond James and colleagues-
Modi analysis--
RBC Capital Market-
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