Newell Brands 2-06-2017 Earnings Calls

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Thanks, Mike, and good morning, everyone
As Mike noted, we made significant progress throughout 2016 in transforming our organization
We achieved 3.7% core sales growth while delivering over $210 million in synergies and Project Renewal savings and progressed deleveraging the balance sheet
We also refined our portfolio with some strategic divestitures and acquisitions
Our fourth quarter results were solid and in line with guidance
Fourth quarter reported net sales were $4.14 billion, a 165% increase versus last year, which was largely attributable to the Jarden transaction
Core sales increased 2.5%, driven by strong results from the Writing, Baby, Home Solutions, and Outdoor Solutions businesses
For the full year, core top line increased 3.7%
The year-over-year improvement in operating results down the income statement was driven by a number of overarching themes: strong operating income growth on the legacy business, the profit contribution from the Jarden and Elmer's acquisitions, and Project Renewal savings and synergies on the positive side
Partially offsetting those positives were the impact of increased advertising and promotion investment, negative foreign currency, increased amortization of intangibles, and higher interest expense, tax rate, and share count
Reported gross margin was 36.8% compared with 38.3% last year
Normalized gross margin was 37.2% compared with 38.5% last year
The declines in reported and normalized gross margins were driven by the negative mix effect related to the Jarden transaction, the deconsolidation of Venezuela, and the unfavorable effect of foreign currency, which more than offset the benefits of synergies, productivity, and pricing
We reported SG&A expense of $976 million, or 23.6% of sales, a 710-basis-point decline versus last year despite higher acquisition and integration costs
Normalized SG&A expense was $861 million, or 20.8% of sales, a 400-basis-point decline
The improvement in SG&A to sales ratios both on a reported and normalized basis is driven by the mix effect from the Jarden legacy businesses, which have historically carried a lower SG&A spend rate, as well as benefits from Project Renewal savings and transaction-related synergies, which more than offset the impact of incremental advertising and promotion investment in the quarter
During the fourth quarter, we increased our A&P investment by $40 million from the third quarter levels
Reported operating margin was 12.4% of sales compared with 6.5% in the prior year
Normalized operating margin increased 260 basis points to 16.3% of sales when compared to the prior year
Interest expense of $124 million rose $99 million year-over-year reflecting higher borrowings used to finance the Jarden and Elmer's acquisitions
We anticipate 2017 interest expense of around $475 million
Our reported tax rate was 57.7% compared with last year's reported rate of 14.1%, reflecting a $164 million onetime deferred tax charge related to the planned Tools divestiture, partially offset by $40 million deferred tax benefit related to foreign statutory rate changes primarily affecting Jarden-acquired intangibles
The normalized tax rate was 29.8% compared with 23.2% in the previous year, with the increase driven by the unfavorable mix impact of the Jarden acquisition and the absence of certain discrete tax benefits compared with the prior year
For the full year, our normalized tax rate was 27.3%, in line with our guidance
We now expect the 2017 tax rate to be about 23%, reflecting anticipated discrete tax benefits
We ended the quarter with 485.9 million diluted shares outstanding, up from 268.1 million shares in the prior year, with the year-over-year increase reflecting shares issued for the Jarden acquisition
For modeling purposes, we are now assuming weighted average diluted share count to be approximately 492 million shares in 2017. Reported EPS was $0.34 compared with $0.05 last year which was affected by charges associated with our deconsolidation of Venezuela
Normalized EPS, which excludes the transaction-related expenses and certain other charges, was $0.80, a nearly 43% increase versus last year
Now turning to our segment results, fourth quarter net sales in Writing declined 0.8% due to the negative impact of foreign currency and the deconsolidation of Venezuelan operations
Core sales in Writing increased 4.3%, reflecting strong results in the Writing & Creative Expressions, Dymo Office, and Elmer's businesses, partially offset by planned complexity reduction initiatives
Elmer's is included in core sales as of October 23. For the full year, core sales in Writing increased 8%
Net sales in Home Solutions declined 11.5% for the quarter, due primarily to the divestiture of the Decor business
Core sales, which exclude the Rubbermaid consumer storage totes business that is held for sale, increased 5.7%, largely driven by results from the beverage business and the launch of Rubbermaid Brilliance food storage containers in Food
For the full year, core sales in Home Solutions grew 2.6%
Net sales in Tools declined 4.6% due to the negative impact of foreign currency and ongoing macro-driven slowdown in Brazil
Core sales were less than $8 million since the vast majority of that business is held for sale
Net sales in Commercial Products grew 0.9% and core sales increased 0.8%, reflecting stabilization in North American distributive trade channel despite ongoing planned complexity reduction activity
For the full year, core sales in Commercial Products declined 0.4%
Net sales in Baby increased 1.6%, despite the impact of a planned transition from a distributor-led model to a direct selling model in Canada
Core sales, which exclude the Teutonia business that is held for sale, grew 3.6%, reflecting continued strong sales momentum in the U.S
from Graco and Baby Jogger
For the year, core sales in Baby increased 8.5%
Now turning to legacy Jarden segments, I will refer to net and core sales as compared with pro forma results for the same period in 2015. Full-year comments refer to results from April 16 through the end of the year compared with pro forma performance for the same period in 2015. Net sales in Branded Consumables declined 0.1% due to the negative impact from foreign currency
Core sales, which exclude the businesses that are held for sale, including Lehigh, Pine Mountain, and part of Diamond brands, increased 2.3%
Strong growth at Waddington, Yankee Candle International, and Yankee Candle eCommerce was partially offset by weaker performance in Yankee Candle's mall-based retail stores, related largely to lower holiday retail mall foot traffic
For the full year, core sales in Branded Consumables increased 2.9%
Net sales in Consumer Solutions were essentially flat, reflecting the negative impact of foreign currency
Core sales, which exclude the U.S
Heaters, Humidifiers and Fans business that is held for sale, grew 0.3%
as certain U.S
retailers adjusted their post-Black Friday replenishment orders despite high single-digit U.S
POS growth for our businesses
For the full year, core sales in Consumer Solutions grew 5.2%
Net sales in Outdoor Solutions increased 3.8%
Core sales, which exclude the Winter Sports business that is held for sale, grew 2.9%, reflecting strong performance in the Fishing, Marmot, and Rawlings, partially offset by declines on Coleman related to early 2016 distribution losses
For the entire year, core sales in Outdoor Solutions were flat
Net sales in Process Solutions decreased 0.6%
Core sales grew 0.8% compared with prior year due to increases in the plastics and zinc businesses
For the full year, core sales in Process Solutions increased 4.7%
During the quarter, we generated $991.5 million in operating cash flow compared with $278 million in the prior year
The significant increase reflects the contribution from the Jarden acquisition and improved working capital results
For the full year, our operating cash flow came in at $1.8 billion, up from almost $566 million in 2015. During the quarter, we distributed $92 million in dividends to shareholders, and for the entire year we returned $329 million
We ended the year with a gross debt balance of $11.89 billion, as we paid down over $800 million in debt during the quarter
We are right on track with our deleveraging plans
Since the Jarden transaction closed, we have repaid over $2 billion in debt and we continue to make steady progress towards our 3 to 3.5 times leverage goal ahead of the initial plan
We expect the Tools divestiture to be completed in the first quarter and we'll use the U.S
-based proceeds to delever further
In summary, we are pleased with the continued progress we have made during the quarter and we delivered on our commitments during a time of significant transition
At this point, I'll turn the call back to Mike
Bill, the run rate of interest expense going into the year is over $100 million
And then, we are planning to use the U.S
-based proceeds from the Tools divestiture to delever further
So, what you're seeing is basically the step-up from the full-year run rate because we pick up another three-and-a-half months of interest expense versus this year in terms of where we are in leverage, but then we'll be using the proceeds to delever during the year
So, you net out to the $475 million
proceeds, that's correct
Taxes
Steve, it's Ralph
Let me take your second question first
On the tax benefit, which is new information versus the last time we all communicated, that's from some work we've been doing on tax planning
and we've got a very good line of sight and confidence level in that
And just the nature of the tax planning that we're doing is it is one-time in nature, and we expect it to hit, as we look at it today, in the third quarter, as Mike said in his remarks
It is something, though, that is one-time in nature, but nonetheless a benefit
So we'll plan out the tax rate beyond 2017. I wouldn't expect us to be, though, in the rate of 23% ongoing
I think more back into the range that we had previously
Then as it relates to cash flow, I feel very good about the cash flow in the fourth quarter
It came in pretty much right where we expected it to, and we deleveraged the balance sheet as we expected
I'll give more insight on 2017 at CAGNY as we progress through
And maybe just a couple of comments I'd say underneath the results on cash flow, one is on working capital
We made probably more progress on payables than we did on inventory and receivables
So more opportunity there over time, but we did make good progress on payables, particularly as it relates to some of the procurement initiatives that we've been driving for on the synergy program
We've been able to make progress on the payables side there, and that should continue in the future
The longer-term benefits on working capital will come as we begin to look closer at our distribution network and our systems implementations, which are really further out on the timeline, which we've talked about before
Jason, on the FX side, what's really shifted in particular over the last several months has been the peso and the Canadian dollar in particular, and a little bit more so as we take the outlook on the pound on average
Those are the three big moves, but more on the peso and the Canadian dollar versus the last time we talked
Kevin, maybe I'll just start on the M&A side of it
Our capital priorities haven't changed
We need to continue to deleverage the balance sheet as we promised and committed to and supporting the dividend and the payout ratios that we've talked about
Those are our capital priorities
We look at M&A in this window of time for things that are bolt-on in nature in our core categories
And that was Sistema and with WoodWick are good examples of that
So we're always looking at those kinds of opportunities and things, but the priorities are what I mentioned earlier
As it relates to border adjustment tax reform and all those things, obviously, we are looking at our entire network and where there are different opportunities and risks and given the variety of different proposals, we're assessing that, but aren't taking any action because there's lack of clarity as to where all that will play out