Newell Brands Announces Third Quarter Results

Newell Brands Announces Third Quarter Results

Net Sales Growth of 158.5%; Core Sales Growth of 3.0%

New Strategic Plan Transformation into Action

Raises 2016 Guidance to Top Half of Range

Provides 2017 Initial Outlook

Newell Brands Inc. (NYSE: NWL) announced its third quarter 2016 financial results today.

Third Quarter 2016 Executive Summary

• Net sales growth of 158.5 percent to $3.95 billion; core sales growth of 3.0 percent.
• $0.38 reported diluted earnings per share compared with $0.50 diluted earnings per share in the prior year, primarily attributable to core sales growth, earnings contribution from acquisitions, cost and tax synergies related to Jarden acquisition and Project Renewal savings, offset by Jarden transaction-related expenses, including a one-time inventory step-up charge of $0.19, increased amortization of intangibles and higher interest expense, and by a higher share count.
• $0.78 normalized diluted earnings per share compared with $0.62 in the prior year, a 25.8 percent increase driven by core sales growth, earnings contribution from acquisitions, cost and tax synergies related to the Jarden acquisition and Project Renewal savings, which more than offset negative foreign currency impact, increased interest expense and higher shares outstanding resulting from the Jarden transaction.
• Operating cash flow was $511.4 million compared with $339.9 million in the prior year; gross debt of $12.75 billion, reflecting a $231 million reduction in debt during the third quarter; net debt of $12.08 billion.
• Reported net sales for 2016 are projected to grow between 122.5 and 128.0 percent and reported earnings per share to be $1.15 to $1.20, after absorbing approximately $1.18 of one-time costs related to the Jarden and Tools transactions. Raised lower end of both 2016 full year guidance ranges to 3.5 to 4.0 percent core sales growth and normalized earnings per share of $2.85 to $2.90 from previous guidance of 3 to 4 percent core sales growth and normalized earnings per share of $2.75 to $2.90 per share.
• Initial outlook for 2017 core sales growth is 3 to 4 percent and normalized earnings per share is $2.85 to $3.05. 2017 normalized earnings per share outlook includes $0.20 of dilution, net of interest benefits, related to the planned divestiture of about 10 percent of the company’s portfolio.

“We delivered very good performance in the third quarter while simultaneously driving substantial organization and portfolio change,” said Newell Brands Chief Executive Officer Michael Polk. “Our third quarter Writing, Baby, Food, and Appliances growth was once again very strong, resulting in competitive levels of quarterly core sales growth and leading levels year to date. Our strong savings and cost synergies programs are now in full flight, which when coupled with growth in the underlying business are driving exceptional normalized earnings per share and operating cash flow growth. With very strong year to date results, we have raised our 2016 guidance for both core sales growth and normalized earnings per share into the top half of our previous 2016 guidance ranges.”

Strategy Update – New Growth Game Plan

Newell Brands recently announced an update of its corporate strategy designed to capture the unique value creation opportunity related to its new larger portfolio and broader geographic and retail presence. As part of this new strategy, the company plans to transform Newell Brands from a holding company to an operating company, consolidating 32 business units to 16 Global Divisions while investing to extend its design, innovation and brand development capabilities across a broader set of categories. The organization changes were initiated in the third quarter and this major phase of the transformation will be completed by year end. The 16 Global Divisions will become the key commercial nodes in the company, including a new Global eCommerce Division, which will have responsibility for all ecommerce activity across the enterprise. The Divisions will generally align to the four areas of strategic focus for the company of Live, Learn, Work, and Play. The new structure will be effective January 1, 2017.

The new strategy also establishes a sharp set of investment priorities and portfolio choices. As part of its portfolio optimization, the company plans to divest businesses representing about $1.5 billion of annualized revenue. On October 12, 2016 the company announced a definitive agreement to sell the Tools business for $1.95 billion to Stanley Black & Decker. The sale is subject to customary conditions, including regulatory approval, and is expected to close in the first half of 2017. The company intends to use the available cash proceeds from divestitures primarily for accelerated debt repayment, with the goal of achieving the targeted leverage ratio of 3 to 3.5 times, faster than the original commitment of two to three years from the date of the Jarden combination.

“Newell Brands is an exciting new company with a portfolio of leading brands that make life better for hundreds of millions of consumers every day where they Live, Learn, Work, and Play,” said Polk. “Our new strategy, the Growth Game Plan, is designed to accelerate performance and deliver leading levels of growth and returns. We have established a clear set of investment priorities, strengthened the portfolio by making sharp choices that we are decisively driving into action, and have begun to reset the organization for growth by transforming the company from a holding company to an operating company while simultaneously extending our design, innovation, ecommerce, and brand development capabilities. This Growth Game Plan algorithm has a strong and proven track record, and the combination of Newell Rubbermaid and Jarden creates a unique opportunity to reapply this transformative value creation formula across a broader set of categories and geographies.”

Third Quarter 2016 Operating Results

Net sales increased 158.5 percent to $3.95 billion, compared with $1.53 billion in the prior year, primarily due to the inclusion of net sales from the acquired Jarden business.

Core sales grew 3.0 percent driven by strong results on the Writing, Baby, Food, and Appliance businesses partially offset by declines in Commercial Products and Outdoor Solutions.

Reported gross margin was 32.2 percent compared with 39.1 percent in the prior year, as a result of a $145.8 million charge for the inventory step-up, a negative mix effect related to the Jarden transaction and the deconsolidation of Venezuela, and the adverse impact of foreign currency, only partially offset by the benefits of synergies, productivity and pricing.

Normalized gross margin was 36.0 percent compared with 39.5 percent in the prior year, driven by the negative mix effect from the Jarden acquisition and the deconsolidation of Venezuela, and the impact of adverse foreign currency, only partially offset by the benefits of synergies, productivity and pricing.

Reported operating income was $323.9 million compared with $186.6 million in the prior year. Reported operating margin was 8.2 percent of sales compared with 12.2 percent of sales in the prior year. In addition to the factors cited in the explanation of gross margin, reported operating margin was negatively impacted by transaction-related costs, acquisition-related amortization costs and costs associated with the integration of the legacy Newell Rubbermaid and Jarden businesses.

Normalized operating income was $608.9 million compared with $232.4 million in the prior year. Normalized operating margin was 15.4 percent of sales, a 20 basis point improvement compared with prior year, as the negative mix effect from the Jarden acquisition, the absence of Venezuela and negative foreign currency was more than offset by Project Renewal savings and cost.

The reported tax rate for the quarter was 6.8 percent compared with 16.1 percent in the prior year as a result of current year discrete tax benefits exceeding the prior year. The normalized tax rate was 22.5 percent, compared with 20.0 percent in the prior year, a reflection of the inclusion of the Jarden business with its historically higher tax rate, partially offset by tax synergies and certain discrete tax benefits.

The company reported net income of $186.5 million compared with net income of $134.2 million in the prior year. Reported diluted earnings per share were $0.38 compared with diluted earnings per share of $0.50 in the prior year. The operating income contribution from the acquired Jarden business and strong operating income growth on both legacy businesses were more than offset by expenses related to the Jarden transaction, including inventory step-up, increased amortization of intangibles and increased interest expense, and by a higher share count.

Normalized net income was $376.9 million compared with $168.1 million in the prior year. Normalized diluted earnings per share increased 25.8 percent to $0.78 compared with $0.62 in the prior year. The improvement was driven by the contribution from the Jarden and Elmer’s acquisitions, strong core sales growth on the company’s Writing, Baby, Food, and Appliance businesses, and strong savings and synergies delivery, partially offset by negative foreign currency impact, a higher normalized income tax rate, increased interest expense and increased shares outstanding.

Operating cash flow was $511.4 million compared with $339.9 million in the prior year, reflecting the contribution from the Jarden acquisition, improved operating results and favorable working capital movements.

A reconciliation of the “as reported” results to “normalized” results is included in the appendix.

Third Quarter 2016 Operating Segment Results

Writing net sales increased 14.5 percent to $526.3 million, with strong core sales growth and the benefit of the Elmer’s acquisition partially offset by the deconsolidation of Venezuelan operations and the negative impact of foreign currency. Despite the acceleration of approximately $15 million of net sales from Q3 into Q2 to support Back-to-School merchandising, Writing core sales increased 7.7 percent, reflecting a strong Back-to-School season behind innovation such as Paper Mate^® InkJoy™ Gel Pens and increased advertising and promotion support. Reported operating income was $131.5 million compared with $114.1 million in the prior year. Reported operating margin was 25.0 percent compared with 24.8 percent in the prior year. Normalized operating income was $136.7 million versus $116.4 million last year. Normalized operating margin was 26.0 percent of sales, a 70 basis point increase versus last year, as volume growth, pricing and productivity more than offset increased advertising and promotion spending and the negative mix impact of the deconsolidation of Venezuela.

Home Solutions net sales decreased 19.1 percent to $371.8 million primarily due to the divestiture of the Décor business. Home Solutions core sales, which exclude the Rubbermaid consumer storage totes business that is held for sale, declined 0.5 percent, primarily attributable to the timing impact of the transition of a key distribution center in the Beverage business. Reported operating income was $56.1 million compared with $76.0 million in the prior year, due largely to the divestiture of the Décor business, lower Beverage volume and unfavorable foreign currency. Reported operating margin was 15.1 percent of sales, a 140 basis point decrease compared with the prior year. Normalized operating income was $62.1 million versus $76.5 million last year. Normalized operating margin was 16.7 percent of sales, flat compared with last year.

Tools net sales declined 5.7 percent to $185.5 million driven by continued challenges in Brazil and negative foreign currency, partially offset by growth in Europe. Tools core sales, which exclude the portion of the business held for sale, increased 4.6 percent. Reported operating income was $22.1 million compared with $20.5 million in the prior year. Reported operating margin was 11.9 percent of sales, a 150 basis point improvement compared with the prior year. Normalized operating income was $23.2 million versus $20.5 million last year. Normalized operating margin was 12.5 percent of sales, a 210 basis point increase versus last year as geographic mix, productivity and pricing more than offset the challenging growth environment and negative foreign currency impact in Brazil.

Commercial Products net sales declined 3.7 percent to $199.2 million, primarily due to the divestiture of the Rubbermaid medical cart business, the negative impact of foreign currency and softness in the North American distributive trade channel related to ongoing planned complexity reduction activity. Core sales decreased 1.8 percent. Reported operating income was $33.7 million compared with $29.5 million in the prior year. Reported operating margin was 16.9 percent of sales, a 260 basis point improvement versus the prior year. Normalized operating income was $35.2 million versus $31.4 million last year. Normalized operating margin was 17.7 percent of sales, a 250 basis point improvement versus last year as pricing and productivity offset the negative impact of foreign currency.

Baby & Parenting net sales increased 11.3 percent to $231.1 million, largely due to continued strong sales momentum in North America from Graco and Baby Jogger. Core sales, which exclude the Teutonia business that is held for sale, increased 10.6 percent. Reported operating income was $34.6 million compared with $10.2 million in the prior year. Reported operating margin was 15.0 percent of sales, a 1000 basis point increase compared with prior year. Normalized operating income was $36.8 million versus $10.2 million last year. Normalized operating margin was 15.9 percent of sales, an 1100 basis point increase versus last year. The normalized operating margin improvement was attributable to strong volume growth, the timing of advertising and promotion spend and productivity.

Branded Consumables net sales were $957.3 million. On a pro forma basis, net sales increased 5.2 percent versus prior year. Pro forma core sales, which exclude the Lehigh Rope and Cordage business which is held for sale, increased 0.6 percent compared with prior year, as growth at Waddington, Home & Family in North America and Yankee Candle was partially offset by weak performance of the Safety & Security business outside North America. Reported operating income was $122.3 million and reported operating margin was 12.8 percent, reflecting the positive impact of product mix and the benefit of synergies, partially offset by inventory step-up, integration and other costs related to the Jarden transaction. Normalized operating income was $164.8 million and normalized operating margin was 17.2 percent of sales.

Consumer Solutions net sales were $650.0 million. On a pro forma basis, net sales increased 7.9 percent versus prior year. Pro forma core sales, which exclude the U.S. Heaters, Humidifiers, and Fans business that is held for sale, increased 9.3 percent compared with prior year, driven by strong growth in both North America and Latin America. Reported operating income was $38.0 million and reported operating margin was 5.8 percent, reflecting strong sales growth and fixed cost leverage partially offset by inventory step-up, integration and other costs related to the Jarden transaction. Normalized operating income was $92.0 million and normalized operating margin was 14.2 percent of sales.

Outdoor Solutions net sales were $731.9 million. On a pro forma basis, net sales increased 12.1 percent versus prior year primarily due to the Jostens acquisition. Pro forma core sales, which exclude the Winter Sports business that is held for sale, declined 3.2 percent compared with prior year with growth in Pure Fishing more than offset by declines on Coleman. The segment had a reported operating loss of $18.7 million, as solid business performance was more than offset by inventory step-up, integration and other costs related to the Jarden transaction. Reported operating margin was not meaningful due to the operating loss. Normalized operating income was $83.6 million and normalized operating margin was 11.4 percent of sales.

Process Solutions net sales were $101.5 million. On a pro forma basis, net sales increased 11.4 percent versus prior year. Pro forma core sales increased 12.4 percent compared with prior year, due to volume growth and commodity based pricing. Reported operating income was $7.4 million and reported operating margin was 7.3 percent. Normalized operating income was $12.4 million and normalized operating margin was 12.2 percent of sales.

Outlook for the Twelve Months Ending December 31, 2016

Newell Brands raised the lower end of its 2016 full year guidance ranges for core sales growth and normalized earnings per share versus its previous earnings guidance of 3 to 4 percent core sales growth and normalized earnings per share of $2.75 to $2.90. The updated guidance metrics are as follows:

As of April 15, 2016, Newell Brands core sales include pro forma core sales associated with the Jarden transaction as if the combination occurred April 15, 2015. Core sales exclude the impact of foreign currency, acquisitions (other than the Jarden acquisition) until their first anniversary and planned and completed divestitures (including the deconsolidation of Venezuela). Newell Brands now expects to exit product lines with annual sales of $75 million to $125 million by the end of 2018, which will be reflected as a negative impact on core sales. Beginning with the second quarter of 2016, the company is excluding the amortization of intangible assets associated with acquisitions from its calculation of normalized earnings per share.

The company now expects the full year weighted average share count to be approximately 425 million shares and the effective tax rate for 2016 to be about 27.5 percent.

Outlook for the Twelve Months Ending December 31, 2017

Newell Brands provided 2017 core sales growth and normalized earnings per share guidance metrics as follows:

2017 normalized earnings per share outlook includes $0.20 of dilution, net of interest benefits, related to the planned divestiture of about 10 percent of the company’s portfolio. The 2017 guidance assumes a January 1, 2017 completion of all transactions, the current share count of 488 million shares and a tax rate of 26 to 27 percent.

The company has presented forward-looking statements regarding normalized earnings per share and core sales growth for 2017, each of which is a non-GAAP financial measure. These non–GAAP financial measures are derived by excluding certain amounts, expenses or income and/or certain impacts, including the impact of foreign exchange or business portfolio determinations, from the corresponding financial measures determined in accordance with GAAP. The determination of the amounts that are excluded from these non-GAAP financial measures is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts recognized in a given period. We are unable to present a quantitative reconciliation of the aforementioned forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures because such information is not available and management cannot reliably predict all of the necessary components of such GAAP measures without unreasonable effort or expense. The unavailable information could have a significant impact on the company’s full-year 2017 GAAP financial results.

Conference Call

The company’s third quarter 2016 earnings conference call will be held today, October 28, 2016, at 8:30 a.m. ET. A link to the webcast is provided under Events & Presentations in the Investor Relations section of Newell Brands’ website at www.newellbrands.com. A webcast replay and a supporting slide presentation will be made available in the Investor Relations section on the company’s website under Quarterly Earnings.

Non-GAAP Financial Measures

This release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission and includes a reconciliation of these non-GAAP financial measures to the most directly comparable financial measures calculated in accordance with GAAP.

The company uses certain non-GAAP financial measures that are included in this press release and the additional financial information both in explaining its results to stockholders and the investment community and in its internal evaluation and management of its businesses. The company’s management believes that these non-GAAP financial measures and the information they provide are useful to investors since these measures (a) permit investors to view the company’s performance using the same tools that management uses to evaluate the company’s past performance, reportable business segments and prospects for future performance and (b) determine certain elements of management’s incentive compensation.

The company’s management believes that core sales provides a more complete understanding of underlying sales trends by providing sales on a consistent basis as it excludes the impacts of acquisitions (other than the Jarden acquisition, which is included in core sales on a pro forma basis starting in the second quarter of 2016), planned or completed divestitures, the deconsolidation of the company’s Venezuelan operations and changes in foreign currency from year-over-year comparisons. As reflected in the Currency Analysis, the effect of foreign currency on reported sales is determined by applying a fixed exchange rate, calculated as the 12-month average in the prior year, to the current and prior year local currency sales amounts (excluding acquisitions and divestitures), with the difference in these two amounts being the increase or decrease in core sales, and the difference between the change in as reported sales and the change in constant currency sales reported as the currency impact. The company’s management believes that “normalized” gross margin, “normalized” SG&A expense, “normalized” operating income, “normalized” earnings per share, “normalized” interest and “normalized” tax rates, which exclude restructuring and other expenses and one-time and other events such as costs related to certain product recalls, the extinguishment of debt, certain tax benefits and charges, impairment charges, pension settlement charges, discontinued operations, costs related to the acquisition, integration and financing of acquired businesses, amortization of intangible assets associated with acquisitions (beginning in the second quarter of 2016), advisory costs for process transformation and optimization initiatives, costs of personnel dedicated to integration activities and transformation initiatives under Project Renewal and certain other items, are useful because they provide investors with a meaningful perspective on the current underlying performance of the company’s core ongoing operations. The company defines net debt as total debt less cash and cash equivalents. The company believes net debt is meaningful to investors as it considers net debt and its components to be an important indicator of liquidity and a guiding measure of capital structure strategy.

The company determines the tax effect of the items excluded from normalized diluted earnings per share by applying the estimated effective rate for the applicable jurisdiction in which the pre-tax items were incurred, and for which realization of the resulting tax benefit, if any, is expected. In certain situations in which an item excluded from normalized results impacts income tax expense, the company uses a “with” and “without” approach to determine normalized income tax expense.

While the company believes that these non-GAAP financial measures are useful in evaluating the company’s performance, this information should be considered as supplemental in nature and not as a substitute for or superior to the related financial information prepared in accordance with GAAP. Additionally, these non-GAAP financial measures may differ from similar measures presented by other companies.

About Newell Brands

Newell Brands (NYSE: NWL) is a leading global consumer goods company with a strong portfolio of well-known brands, including Paper Mate®, Sharpie®, Dymo®, EXPO®, Parker®, Elmer’s®, Coleman®, Jostens®, Marmot®, Rawlings®, Oster®, Sunbeam®, FoodSaver®, Mr. Coffee®, Rubbermaid Commercial Products®, Graco®, Baby Jogger®, NUK®, Calphalon®, Rubbermaid®, Contigo®, First Alert®, Waddington and Yankee Candle®. For hundreds of millions of consumers, Newell Brands makes life better every day, where they live, learn, work and play.

This press release and additional information about Newell Brands are available on the company’s website, www.newellbrands.com.

Caution Concerning Forward-Looking Statements

Statements in this press release that are not historical in nature constitute forward-looking statements. These forward-looking statements relate to information or assumptions about the effects of sales, income, earnings per share, operating income, operating margin or gross margin improvements or declines, Project Renewal, capital and other expenditures, cash flow, dividends, restructuring and other project costs, costs and cost savings, inflation or deflation, particularly with respect to commodities such as oil and resin, debt ratings, changes in exchange rates, expected benefits and financial results from the Jarden transaction and other recently completed acquisitions and related integration activities and planned divestitures and management’s plans, projections and objectives for future operations and performance. These statements are accompanied by words such as “anticipate,” “expect,” “project,” “will,” “believe,” “estimate” and similar expressions. Actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, our dependence on the strength of retail, commercial and industrial sectors of the economy; competition with other manufacturers and distributors of consumer products; major retailers’ strong bargaining power and consolidation of our retail customers; changes in the prices of raw materials and sourced products and our ability to obtain raw materials and sourced products in a timely manner from suppliers; our ability to develop innovative new products and to develop, maintain and strengthen our end-user brands, including the ability to realize anticipated benefits of increased advertising and promotion spend; product liability, product recalls or regulatory actions; our ability to expeditiously close facilities and move operations while managing foreign regulations and other impediments; a failure of one of our key information technology systems or related controls; our ability to attract, retain and motivate key employees; future events that could adversely affect the value of our assets and require impairment charges; our ability to improve productivity and streamline operations; changes to our credit ratings; significant increases in the funding obligations related to our pension plans due to declining asset values, declining interest rates or otherwise; the imposition of tax liabilities greater than our provisions for such matters; the risks inherent in our foreign operations, including exchange controls and pricing restrictions; our ability to execute our new corporate strategy; our ability to complete planned divestitures, including our ability to obtain the regulatory approvals required to complete the Tools divestiture; our ability to successfully integrate acquired businesses, including the recently acquired Jarden business; our ability to realize the expected benefits and financial results from our recently acquired businesses and planned divestitures; and those factors listed in our filings with the Securities and Exchange Commission (including the information set forth under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K). Changes in such assumptions or factors could produce significantly different results. The information contained in this news release is as of the date indicated. The company assumes no obligation to update any forward-looking statements contained in this news release as a result of new information or future events or developments.