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Note: More details to come; changes are highlighted. Except where highlighted, no other sections of this report have been updated.
Reason for Report: FLASH UPDATE: 1Q18 Earnings Release
Prev. Ed.: Feb 15, 2018; 3Q17 Earnings Update
Flash Update [Earnings update in progress; to follow]
On May 4, 2018, Newell Brands Inc. reported mixed first-quarter 2018 results wherein the company’s bottom line surpassed the Zacks Consensus Estimate while the top line marginally lagged the same. While this marked the company’s second straight earnings beat, sales however, delivered a negative surprise after surpassing expectations in the fourth quarter of 2017. Further, management retained its 2018 view.
This Hoboken, NJ-based company posted normalized earnings of 34 cents per share, which outpaced the Zacks Consensus Estimate of 26 cents but remained flat year over year. The bottom line gained from cost savings, favorable pricing, gains from acquisitions and a lower tax rate, compensated with the lost earnings from divested operations, fall in core sales and commodity cost inflation.
On a reported basis, earnings per share came in at 11 cents compared with $1.31 earned in the year-ago quarter.
Net sales of $3,017.4 million fell short of the Zacks Consensus Estimate of $3,039 million as well as declined 7.6% year over year on account of the adverse impact of last year’s divestitures, net of buyouts. Also, the top line was hurt by the disrupted business of the Baby division along with a considerable inventory destocking in the Writing division’s office superstore and distributive trade channels. Further, core sales fell 3.5%, mainly due to Writing and Baby.
Normalized gross margin contracted 120 basis points (bps) to 33.3% while normalized operating margin declined 190 bps to 8.7% in the quarter under review.
Segment Performance
Live segment net sales inched up 0.4% to $1,071.6 million from the year-ago period. However, core sales decreased 3.1% on account of improvement in Appliances & Cookware, which was more than offset by a high-single digit fall in Baby business.
Net sales at Learn segment came in at $495.4 million, down 13% from the prior-year period. Core sales dropped 14.3%, mainly due to decline in Writing business.
Work segment net sales of $640.7 million grew 4.4% year over year. Also, core sales rose 5.5% on account of continued strength in Waddington and Safety & Security.
Net sales at the Play segment came in at $616.8 million, down 1.8% from the prior-year period. Core sales dipped 2.6% due to fall in Outdoor & Recreation, compensated with sturdy growth registered in Team Sports.
The Other segment net sales of $192.9 million plunged 50.2% from the prior-year quarter on account of the divestitures of the Tools, Winter Sports, Fire Starter and Fire Log plus Cordage businesses. Core sales declined 4.1% due to weakness in Process Solutions, partly offset by improvement in U.S. Playing Cards.
Transformation Plan Update
In line with its Accelerated Transformation Plan, Newell inked a deal to divest its packaging maker, The Waddington Group, to Novolex for roughly $2.3 billion. The transaction, anticipated to close within 60 days, is likely to generate after-tax proceeds of about $2.2 billion, which will be further used in deleveraging and share repurchase. Moreover, Newell adds Jostens and Pure Fishing brands to the list of potential divestitures.
The above positive moves are expected to speed up value creation and transform the portfolio to leverage the company’s abilities with respect to innovation, design and e-commerce. Also, it will help improve operational performance, deleverage the balance sheet as well as enhance the shareholder value.
The key aspects of this Transformation Plan are restructuring the company into a global consumer products’ entity, valued at more than $9 billion along with major brands in seven consumer segments; offloading non-core businesses that account for nearly 35% of the company’s sales, utilizing $10 billion after-tax proceeds from divestitures and a free cash flow to lower debt plus make share repurchase as well as retaining investment grade rating and an annual dividend of 92 cents per share through 2019, targeting 30-35% payout ratio.
The above will likely generate net sales of above $9 billion, boosting shareholder value and financial flexibility. Newell progresses well with its divestiture operations and anticipates the same to be completed by the end of 2019. Thereafter, management projects sales of roughly $9.5 billion with normalized operating margin expansion of more than 15% by 2020.
Other Financial Details
Newell ended the first quarter with cash and cash equivalents of $459 million, long-term debt of $9,623.5 million and shareholders’ equity of $14,130.9 million, excluding non-controlling interests of $36.4 million.
The company reported negative operating cash flow of $401.7 million compared with negative $263.6 million in the prior-year period. During the quarter under review, the company returned $112.6 million to shareholders in the form of dividends.
Outlook
Following the mixed quarterly results, management reiterated its guidance for 2018. Net sales are still projected in the band of $14.4-$14.8 billion with core sales to be flat to down low-single digit rate.
Further, management continues to expect normalized earnings per share in the band of $2.65-$2.85 and envisions operating cash flow in the range of $1.15-$1.45 billion for 2018. However, the company estimates both the metrics’ outlook to come in at the lower end of the guided range.
MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON NWL.
Portfolio Manager Executive Summary [Note: only highlighted material has been changed]
Newell Rubbermaid, known as Newell Brands (NWL) since its merger with Jarden Corp., is a global manufacturer and marketer of staple consumer products. Its brands include Rubbermaid, Calphalon, Goody, Graco, Lenox, Sharpie, Parker, and Waterman.
Of the 16 firms covering the stock, five provided positive ratings and 11 assigned a neutral rating. None of the firms rendered a negative rating to the stock.
The following is a summarized opinion of the diverse brokerage viewpoints:
Neutral or equivalent outlook (68.8%; 11/16 firms): These firms believe that Newell has been progressing well with various restructuring programs and cost savings, which in turn will provide cushion to the company’s bottom line. Moreover, the firm expects the Project Renewal program to help control costs and lead to expansion in margins.
The firms believe that while on the one hand, Newell is likely to gain from its Project Renewal Program, synergies from Jarden’s integration and mergers and acquisitions, it remains susceptible to the tough macro environment and intensifying competition in key segments.
Positive or equivalent outlook (31.2%; 5/16 firms): Newell is progressing well with its Project Renewal program, which aims at attracting savings, while making investments to drive business growth. With the first two phases of the program complete, the company is in the third phase that targets cost savings in the areas of procurement, manufacturing and distribution, along with further overhead reduction. These savings will facilitate investments going forward and help the company’s business to grow. Moreover, the bullish firms believe that the company is gradually moving toward the accelerated phase of its strategic plan and will likely deliver better top- and bottom-line results, backed by strong cash flows and efficient cost-cutting initiatives.
The firms remain confident of Newell’s performance, given its enhanced product pipeline, amended marketing program, efficient cash flow deployment strategy and extension of the Project Renewal Program. Further, these firms are optimistic about the company’s potential to boost organic sales and earnings growth, on the back of its reinvestments, sponsored by its cost-saving initiatives.
Further, the company’s transformation plan also looks promising. In a move to accelerate the pace of transformation, the company is looking to exit non-strategic assets, reduce complexity and focus on key consumer-focused brands. This will help improve operational performance and enhance shareholder value, amid a rapidly changing retail backdrop.
Also, the bullish firms are confident of Newell’s business transition, buoyed by reinvestment in significant areas, long-term growth strategies and reorganization of its underperforming businesses. Moreover, these firms believe that the Jarden acquisition will aid the company’s earnings growth and also generate cost synergies.
Feb 15, 2018
Overview [Note: only highlighted material has been changed]
Atlanta, GA-based Newell Rubbermaid, known as Newell Brands since its merger with Jarden Corp., is a global manufacturer and marketer of consumer and commercial products, including Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer’s, Coleman, Jostens, Marmot, Rawlings, Irwin, Lenox, Oster, Sunbeam, FoodSaver, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert, Waddington and Yankee Candle. The products cater to indoor and outdoor organizations and include storage and cleaning products, stationery, art supplies, hand tools, power and industrial tool accessories, manual paint applicators, cabinet hardware, propane torches, outdoor recreation and sporting goods products, household staples, aluminum and steel cookware, hair care accessory products as well as infant and juvenile products. Acquisitions play a major role in the company’s growth strategy.
In line with its Growth Game Plan and organization goals, management realigned reporting structure (as of Mar 31, 2017), bringing its 15 reporting operating units under five segments: Live, Learn, Work, Play and Other. The divisions under the newly created segments will be classified as follows:
Live (Appliances & Cookware, Baby & Parenting, Food, Home Fragrance), Learn (Writing & Creative Expression, Jostens, Fine Writing), Work (Consumer & Commercial Solutions, Waddington, Safety & Security), Play (Outdoor & Recreation, Fishing, Team Sports) and Other (Home & Family, Process Solutions, Held for Sale). These segments contributed 40.3%, 17.5%, 20.1%, 16.6% and 5.5%, respectively, to net sales, in the last reported quarter.
Further, the company’s latest reporting framework includes four regions – North America; Latin America; Europe, Middle East and Africa and Asia Pacific.
Key investment considerations as identified by the analysts are as follows:
Key Positive Arguments / Key Negative ArgumentsSelective and positive pricing: Selective price increases have been successfully implemented to mitigate the rise in raw material costs.
Strong pipeline of products: The company has a strong pipeline of new products, which will accelerate its top-line growth, going forward.
Gearing up Project Renewal Program: Newell’s Project Renewal Program remains on track, and the company, which cumulatively achieved annualized savings of nearly $360 million through 2015 end. The third phase of the program is primarily focused on saving costs in the areas of procurement, through year-end 2017, by reducing the complexity of its business and simplifying the manufacturing and distribution processes, and through further overhead reduction.
Enhancing Shareholder Returns: Newell boasts a strong balance sheet that offers financial flexibility to drive future growth. Further, the company remains committed to enhancing shareholder returns, as is evident from its robust dividend payment history and share repurchase programs. / Depending on a Few Target Customers: The company is heavily dependent on a handful of customers. This considerably reduces its pricing power against giant retailers, thereby exerting pressure on margins and limiting profitability.
High commodity costs: Due to the long life of its contracts, Newell remains vulnerable to commodity cost pressures.
Currency risk: Newell’s results are affected by unfavorable fluctuations in currency, as a significant amount of sales are derived internationally.
Macroeconomic Issues: The firms believe that the company is susceptible to macroeconomic conditions and pricing pressure, which can impact results.
The company’s website is http://www.newellrubbermaid.com. The company’s fiscal year ends on Dec 31.
Feb 15, 2018
Long-Term Growth [Note: only highlighted material has been changed]
Newell is benefiting from savings generated from its restructuring plan, which helped it in controlling costs, especially promotional and advertising expenditures for new product launches. The company hopes to continue reaping the benefits of its multi-year restructuring program in the quarters ahead. Moreover, the company’s numerous product launches and initiatives such as moving production to low-cost areas are also encouraging.
The firms remain optimistic about the company’s sustained focus on enhancing core business activities and optimizing capital allocation. Further, Newell remains focused on simplifying operating structure and making prudent investments in areas with higher growth potential. Notably, the company is on track with its plan of exiting product lines with annual sales of $200−$300 million across its combined business with Jarden, over the next two to three years.
Additionally, Newell Brands has been keen on the execution of its transformation plan through market share gains, point of sale growth, innovation, e-commerce improvement, and cost-savings plans. In a move to accelerate the pace of transformation, the company is looking to exit non-strategic assets, reduce complexity and focus on key consumer-focused brands. This will help improve operational performance and enhance shareholder value, amid a rapidly changing retail backdrop. The company is accelerating the pace by restricting Newell’s portfolio on nine core consumer segments that can garner nearly $11 billion of sales and $2 billion of EBITDA.
Further, it is looking for strategic alternatives for assets in its industrial and commercial product, as well as smaller consumer businesses. The strategic alternatives for these brands will significantly lower the company’s operational complexity by reducing 50% of its global factory and warehouse presence. Additionally, it will reduce the company’s customer base by 50% and result in consolidation of 80% of global sales on two ERP platforms by end of 2019. The completion of these plans will aid in making Newell a nearly $11 billion focused portfolio company with leading consumer-facing brands, attractive margins and significant growth potential in global categories.
Newell’s Project Renewal Program remains on track, and the company expects annual cost savings from this program to approach $700 million by 2017 end or 2018 beginning. As previously revealed by the company, the third phase of the program is primarily focused on saving costs in the areas of procurement, through year-end 2017, by reducing the complexity of its business and simplifying the manufacturing and distribution processes, and through further overhead reduction. The company intends to use a major portion of the savings to accelerate growth by investing the same in business, while the remaining cost savings are expected to reflect in earnings.