諾威品牌 (NWL) 2017 Q4 法說會逐字稿

Good morning, and welcome to Newell Brands' Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded. A live broadcast of this call is available at newellbrands.com on the Investor Relations homepage under Events & Presentations. A slide presentation is also available for download.

I will now turn the call over to Nancy O'Donnell, SVP of Investor Relations. Ms. O'Donnell, you may begin.

Good morning, everyone. Welcome to today's fourth quarter conference call. On the line with me today are Mike Polk, Newell Brands' Chief Executive Officer; and Ralph Nicoletti, our Chief Financial Officer, who will discuss the company's financial results and management outlook for 2018.

Before we begin, I'd like to point out that we will refer to certain non-GAAP financial measures, including, but not limited to, core sales and normalized EPS. We provide a reconciliation of non-GAAP financial measures with the most directly comparable financial measures determined in accordance with GAAP in today's press release and in the slide presentation on the Investor Relations section of our website at newellbrands.com.

Let me remind you also that we will include forward-looking statements in today's discussion. Actual results could differ materially due to a number of risks and uncertainties, which are described in our press release and in the Risk Factors section of our filings with the SEC. The company undertakes no responsibility to update any forward-looking statements.

Thank you. And I'll now turn it over to Mike.

Thank you, Nancy. Good morning, everyone. Thanks for joining our call. Our fourth quarter performance was in line with the preliminary results announced on January 25 with a particularly strong outcome on operating cash flow, yet work to do on some other metrics. The entire board and management team recognize what needs to be done. And we've taken a set of decisive actions designed to deliver the results and value shareholders expect.

2017 was a transformational year for Newell Brands. We restructured the company from 32 discrete business units to 15 operating divisions. When coupled with procurement benefits, this resulted in over $350 million in savings and synergies that have flowed to the P&L. We broadened our competitively advantaged design and innovation capability and we tripled the value of the innovation funnel on the legacy Jarden businesses with ideas that will begin to flow to market in the second half of 2018. We invested to scale our new enterprise-wide e-commerce division, opening our e-commerce offices in the talent-rich New York metro area. This new team doubled the budgeted growth rate at our leading e-commerce retail partner and has already established a profitable $1.6 billion global e-commerce business that grew over 25% this year.

In 2017, we further sharpened the portfolio, completing 3 bolt-on acquisitions and 8 divestitures, which generated a combined EBITDA multiple of 12x. We used the net proceeds from these divestitures in combination with our over $900 million in operating cash flow to repay $1.4 billion in debt. At the same time, we returned over $580 million to shareholders in the form of dividends and share repurchases. Despite significant disruption in the U.S. retail landscape that has encumbered the sell-in of our products, the consumer macros have strengthened through the year as has the growth rate in our markets.

In the U.S., we increased market shares by 71 basis points, resulting in sell-out growth of 3.5% for the full year. Our U.S. market share growth was broad based with share growth of 22 basis points on Fresh Preserving, 40 basis points on beverage containers, 55 basis points on Writing, excluding glue, 77 basis points on vacuum sealing, 109 basis points on Outdoor & Recreation equipment, 180 basis points on Food Storage, 193 basis points on baby gear, 273 basis points on Home Fragrance, 300 basis points on Fishing, 418 basis points on Team Sports and really, really strong increases on glue from Slime.

Consumer takeaway has accelerated through the year from 1.5% sell-out in the first half to 3.5% growth in Q3 and nearly 5% growth in Q4. Despite these good results, sell-in, in the second half of the year was exceptionally choppy. For the most part, the gap between sell-out and sell-in has been event-driven and is transitory. As we come through the first half of 2018, we should move past the disruptions we've experienced since September.

Core sales in the fourth quarter would have been roughly flat versus prior year had it not been for 2 customer category cells. First, on Baby, invoice sales at our largest baby care customers were down nearly 45% versus prior year related to inventory liquidation in advance of their Chapter 11 store closures, which are slated for Q1 and Q2 2018. And second, on Writing, invoice sales at our third-largest customer were down over 55% related to a trade dispute we hope to resolve by the second quarter of 2018.

These specific issues were compounded by general inventory liquidation across a broader set of customers. While we've taken pricing to recover hurricane-related resin and transportation inflation, the majority of these price increases did not take effect until early 2018. And as a result, pricing continued to have a negative effect on net sales and margins. Margins were affected also by steps we took to reduce inventories, including the reduction of production line time in Writing, Foods and Commercial Products.

We made a conscious decision to prioritize cash generation and working capital reduction ahead of our other key performance metrics. And that helped in our delivery of nearly $1 billion of cash flow from operations in the fourth quarter. I'm pleased with the way the organization responded to the call to reduce working capital and increase cash. This choice enabled higher-than-expected repayment of debt in the fourth quarter. Since the completion of the Jarden transaction, we have now repaid $3.4 billion of debt, including $1.4 billion in 2017.

So 2017 has been a transformational year for Newell Brands, a year of transition from both the Newell Rubbermaid and Jarden legacy models to a new Newell Brands model; a year of significant change in organization, operating models, leadership and ways of working; changes that are now 1-year-old with organizations and leadership teams just recently into a familiar rhythm of working. Of course, all of this has happened during a period of disruption in segments of the U.S. retail landscape that we're particularly exposed to, given our category footprint. While our second half promotional outcomes did not live up to internal and external expectations, we've put in place a new organization with a strengthened set of capabilities that will outperform our subscale single category competition over time.

Our capabilities in e-commerce, innovation and design are yielding results and will deliver value to shareholders that other approaches simply cannot and will not deliver organically. I say this with a sense of certainty based on my 35 years of consumer goods experience in all kinds of different organization models and based on my team's proven track record of strengthening the financial performance of the companies we've worked at. We believe sustained margin development and cash generation is dependent on building leading brands with differentiated value propositions, winning with winning customers and in growing channels and driving cost out of the business to provide both the fuel for growth and the funds for margin development.

With that as preamble, let me now hand the line over to Ralph for a more detailed discussion of 2017 results. And then I'll return to provide more perspective surrounding our outlook for 2018 and our plan to accelerate the transformation of the company.

Thanks, Mike, and good morning, everyone. Our full year 2017 results were in line with the preannouncement on January 25. During the fourth quarter, our core sales declined 1.9%, largely due to temporary customer disruptions in Baby and Writing while normalized EPS came in at $0.68 as compared to normalized EPS of $0.80 from the year-ago period.

Please note the year-ago figure includes approximately $70 million of pretax income associated with divestitures that were completed earlier this year. Our focus on cash flow delivery in the quarter drove solid results as the business generated $990 million in operating cash flow compared with $992 million in the prior year due largely to favorable working capital movements.

Turning to the details. Fourth quarter reported net sales were $3.7 billion, a 9.5% decline versus last year, driven by divestitures net of acquisitions as well as the 1.9% decline in core sales. Foreign exchange was a tailwind. Reported gross margin was 32.8% compared with 36.8% in the prior year while normalized gross margin was 33% compared with 37.2% last year.

The $33 million benefit from synergies and cost savings that was recognized in cost of goods sold was more than offset by several factors: unfavorable net pricing and mix, primarily in Writing, Food and Appliances; commodity and transportation cost inflation; and reduced fixed cost absorption, driven by our focus on reducing inventories. We've begun to take pricing actions to help offset the impact of inflation.

Reported SG&A expense of $876 million represented 23.4% of sales as compared to last year's ratio of 23.6%. Normalized SG&A expense was $735 million or 19.6% of sales versus 20.8% of sales in the year-ago quarter. The year-over-year decline in the SG&A-to-sales ratio reflects the $42 million benefit from the cost synergies and renewal savings, lower incentive compensation expense, which more than offset the impact of incremental investment behind e-commerce.

Reported operating margin was 8.6% of sales compared with 12.4% in the prior year. Normalized operating margin was 13.4% compared to 16.3% in the prior year. Net interest expense of $116 million was below last year's level of $124 million, reflecting a lower debt balance as we paid down $1.4 billion of debt during 2017. The reported tax rate for the fourth quarter was a benefit of 715% compared to an expense of 58% in the year-ago period, reflecting a onetime net tax benefit of $1.4 billion stemming from the Tax Cuts and Jobs Act in the U.S.

The majority -- the major components of this noncash tax benefit include the remeasurement of deferred tax liabilities at a new 21% rate versus 35% previously, which results in a benefit of $1.5 billion, which is partially offset by a onetime transition tax expense of $108 million related to the mandatory repatriation tax on historical foreign earnings that have not been repatriated to the U.S. The normalized tax rate was 12% compared with 29.8% in the previous year, primarily due to a favorable geographic mix of income and a discrete tax planning benefits. For 2018, we anticipate a tax rate of 20% to 21%, which reflects the benefit from the tax reform as well as our tax planning work.

We repurchased 5 million shares and ended the fourth quarter with 489 million diluted shares outstanding as compared to 486 million in the prior year with the year-over-year increase stemming from the shares issued in early July as part of the resolution of dissenter lawsuits. Reported earnings per share were $3.38 versus $0.34 last year. Normalized earnings per share were $0.68 compared with $0.80 last year.

Shifting gears to our segment results. Net sales in our Live segment came in at $1.72 billion, increasing 2.7% relative to the year-ago period. Core sales fell 1.8% as declines on Appliances and Baby more than offset growth in Home Fragrance and Fresh Preserving. In Baby, we expect the impact from inventory destocking by our leading baby retailer related to their reorganization proceedings to continue in the first half of 2018 as the retailer works through inventory issues caused by significant reduction in its store count, as has been publicly announced.

Net sales for the Learn segment were $551 million, an 8.9% year-over-year decline. Core sales contracted 9.7% as low single-digit growth in Jostens was offset by a double-digit decline in the Writing segment, which is primarily driven by retailer inventory destocking in the office superstore and distributive channels and a significant trade terms dispute with one of Writing's large customers in the U.S. For the Work segment, net sales were $705 million, representing a 3% decline year-over-year. Core sales decreased 1.2% as growth in Waddington and Safety & Security was more than offset by lower sales in the Consumer and Commercial Solutions business.

Net sales for the Play segment were $563 million, which represent a 6.6% increase versus the prior year. Core sales grew 5.4%, driven by growth in Outdoor & Recreation division, reflecting strong performance in Coleman, Contigo and Marmot. Net sales for the Other segment were $198 million as compared to $596 million in the prior year with the year-over-year decline reflecting the divestitures which were completed earlier in 2017. Core sales were down 0.8% as growth in the Process Solutions business was offset by weakness in Home & Family. Importantly, the business generated $990 million of operating cash flow in the fourth quarter, about even with the year-ago period despite the divestitures.

Although still early days, we are pleased with the responsiveness of the business towards working capital improvement, particularly on inventories, which declined about $350 million from the end of the third quarter. We expect to make further progress on working capital during 2018. During the fourth quarter, we returned $264 million to shareholders through a combination of share repurchases and dividends.

I'll now turn the call back to Mike.

Thanks, Ralph. This morning, we reaffirmed our initial guidance for 2018, which calls for normalized earnings per share in the range of $2.65 to $2.85 and operating cash flow of $1.15 billion to $1.45 billion. We also provided a net sales guidance range for 2018 from $14.4 billion to $14.8 billion. This net sales range is provided using the new 2018 revenue recognition standards.

Importantly, our current forecast assumes continued ownership of all businesses for the entire calendar year. Our guidance also assumes our leading Baby customer executes its restructuring plans as publicly announced with no further weakening of its financial condition and that we resolve our differences with our third-largest Writing customer in the second quarter of 2018. We expect both Baby and Writing to have negative core sales growth in the first half of the year.

We also expect our first half results to sequentially improve from Q1 to Q2 with Q1 2018 results roughly in line with the quarter just reported. Our guidance assumes the divergence between sell-in and sell-out growth is transitory and returns to more typical levels in the second half of 2018 with the first half negatively impacted by the dynamics in Baby and Writing and the lapping of the 2017 Slime pipeline fill in the second quarter.

Our guidance assumes an improvement in gross margin and operating margin with positive price and about $275 million of incremental savings and synergies more than offsetting bonus replenishment and inflation in sourced finished goods, resin and transportation. We expect operating cash flow to increase substantially, driven by further working capital improvement, about a 50% reduction in normalized cash cost and the absence of cash bonus payments, partially offset by higher cash taxes related to the deferral of some 2017 taxes into 2018. The most significant risk to our 2018 outlook relates to the U.S. retail landscape and the financial health of our leading baby gear customer.

We're committed to building a leading consumer goods company that delivers strong results and significant value for our shareholders. On January 25, we announced our plans to accelerate the transformation of the company. The board has expressed unanimous support for management's recommendation to explore strategic alternatives to the balance of our commercial and industrial businesses and our smaller consumer businesses. The accelerated transformation of the company will result in a simpler, faster and stronger Newell Brands. We will create an $11 billion portfolio of leading consumer brands with the entire portfolio responsive to our advantaged capabilities in design, innovation and e-commerce. It'll be a portfolio that maintains the scale advantage built for the Jarden acquisition in our consumer channels with a business that's roughly twice the size of legacy Newell Rubbermaid with a substantially higher operating margin of nearly 15%.

Importantly, the proposed portfolio simplification will significantly reduce operations complexity, lowering our global factory, warehouse and customer footprints by about 50%, eliminating virtually all of the unbranded businesses and all major cyclical businesses, consolidating nearly 80% of our global sales on 2 ERP platforms by the end of 2019 from over 30 today and dramatically reducing our resin exposure. We do not expect to lose more than $50 million of the remaining synergies and savings to be delivered and expect any potential dis-synergies resulting from the divestitures to be offset by an additional savings opportunity unlocked by the simplification. So optimizing the portfolio will not compromise our ability to deliver the remaining synergies and savings committed to as part of the Jarden transaction.

We expect to generate about $6 billion in after-tax proceeds from the transformation program with roughly 2/3 of the proceeds to be used to delever the balance sheet to just below 3x leverage and sufficient capital available to help offset the loss of earnings associated with the divestitures. The businesses we're looking to potentially exit are high-quality franchises with good teams that simply do not fit our consumer branded goods business model and would play more of a strategic role to others. Multiples in the commercial and industrial space are quite high as evidenced by the roughly 13x multiple we achieved on the divestiture of our Tools business last year. The processes associated with actioning the portfolio of changes under consideration have begun. And there's been substantial interest expressed.

Despite the challenges in our business, we believe we're on the right track. Our confidence is grounded in the knowledge that we have a leading portfolio of brands, advantaged capabilities in innovation and design with the commercial impact on the legacy Jarden brands still to come. We have a peer group-leading e-commerce organization that will only be getting stronger in 2018. We have a long list of opportunities for core distribution and international deployment and a pipeline of synergies and savings that are largely undisturbed by our actions to reshape the portfolio. And as importantly, we have a forward-looking, seasoned and proven consumer goods leadership team that's adapting our playbook to the current market realities. We could not be more committed and driven to deliver the transformative value-creation story that's inherent in Newell Brands.

Before I turn to Q&A, I would like to briefly comment on a recent development. As many of you are aware, Starboard Value recently notified us of its intention to nominate 10 director candidates to stand for election to the Newell Brands' Board of Directors at our 2019 Annual Meeting. Our Nominating/Governance Committee has a formal process in place to review all nominees and is considering the nominations as part of this process.

As you've heard today and as you'll hear more about at CAGNY next week, we have a clear plan in place to drive value. The accelerated transformation strategy is designed to enable us to improve our operational performance and accelerate capital allocation optionality. We continue to take actions that are in the best interest of our shareholders and enable us to maximize shareholder value. I won't be able to provide more commentary on this today. I would appreciate your understanding and would ask that you focus your questions on the topics we can discuss: earnings results and our transformation strategy.

With that, let me pass the line back to the operator to help facilitate questions.

(Operator Instructions) We'll take our first question from Steve Powers with Deutsche Bank.

Maybe we can just start by taking just a step back and revisiting the logic of the plans announced on the 25th of January. I guess, just from the outside, it seems a fairly strong departure from where it felt we were heading even just exiting the third quarter. So some more comments on the logic, the process and the timeline that led you to the decision, specifically on the asset sales decision. And I guess, related to that, your -- just some more color on how confident you are in achieving the valuations implied in the $6 billion after-tax leakage proceeds estimate? I think that implies sales prices of 11, 12x EBITDA, so just your confidence there. And then finally, any color on what -- if you could, any color on what you expect core sales growth and ideally free cash flow to be next year on a pro forma basis, in other words, excluding the assets that are now effectively held-for-sale.

Steve, that's a lot of questions. But I'll take them one at a time. The actions on portfolio were actually the continuation of a theme. If you go all the way back to 2011 and look at the choices my team and I have made on legacy Newell Rubbermaid and the choices through 2017 into 2018, you see this thread that you can pull through those -- that history that's pretty well integrated. We've sold most of our industrial and -- legacy Newell Rubbermaid industrial and commercial businesses. Starting right when I joined the company in the middle of 2011, we sold BernzOmatic, which was a torch business. We subsequently sold Endicia, which was an online mail order, a mail fulfillment business. We sold Bulldog, which was a hardware business. We subsequently sold the Décor business, which was the Levolor brand, which was a remodeling business. We subsequently sold the Rubbermaid medical business, which was a business oriented towards hospitals. We sold Mimeo, which was a business oriented towards schools and municipalities. We then sold our Tools business. And so the assets that are in the commercial and industrial space are really just continuation of a theme. We've been moving aggressively as a company, as Newell Rubbermaid and now as Newell Brands, to pivot the company to become more consumer-facing and less cyclical. And so the choice to sell the commercial and industrial assets is driven by that strategic orientation. The moment we're in is an attractive one to be considering an acceleration of that activities, given historic multiples on commercial and industrial businesses. If you go back and look at what we generated on the Tools business, we generated nearly 13x on Tools last year, which was a surprise for most folks in terms of the value generated through those assets. And that was a really good win-win situation for us and Stanley Black & Decker. We expect the same types of outcomes on the commercial and industrial businesses. We executed 8 divestitures in 2017 of subscale, small consumer businesses as well. So you've got -- largely subscale, small consumer businesses. So you've got the 3 businesses that are consumer-facing that we're considering selling that are a continuation of those choices. The reason to keep a business or to not keep a business from my perspective is grounded in whether those businesses can benefit strategically from the commitments we're making in capabilities and the flexibility we have within the P&L to invest behind the brands. And the choices we've made are driven to focus our portfolio around the assets that can benefit the most from these capabilities we built in innovation, design and e-commerce. The percentage -- all of the businesses that we left in the portfolio will benefit from those capabilities. And as I said, even the consumer-facing assets that we'll sell would have -- while they could have benefited from those capabilities, they would have featured much lower down the priority list in terms of funding for investment. And so we've made the choice to do this now and get it behind us, so we could focus on, first, fixing the assets and the core that are underperforming and then getting on with deleveraging the balance sheet and also applying the capabilities we have invested to create against the assets that would benefit the most. So I think that's how I'd answer your question broadly. With respect to how we got to the announcements we've made, there's a whole series of dynamics that underpin the sequencing of events that I don't think I'll get into today.

And we'll go next to Bill Chappell with SunTrust.

Mike, just I'm going to follow up on Steve's question and ask another one. I guess, on the timing, I'm just trying to understand much like others, 6 months ago -- or 2 years ago, you did a full kind of portfolio review, came up with a group of brands to sell and did it, and then kind of said, "This is the new group going forward." You could have, I guess, sold these brands you're talking about then 2 years ago. So I mean, I guess, what we're trying to understand, what changed in the past 6 months to accelerate this? And then also with this in plan, what does it change in terms of restructuring costs? And can you kind of give us a timeline of will restructuring end this year? Will it wind down this year by accelerating this program? And what does that do from a serial restructuring kind of comment?

Sure. So let me answer the last part of your question first. As I mentioned in my comment, operating cash flow will benefit from a significant step-down, roughly 50% step-down, in the normalized cash cost in 2018 versus 2017. A significant portion of that step-down relates to the cash cost associated with the restructuring and restructuring-related activities. So we've organized our synergy and savings delivery through what we call the transformation office. Those costs get normalized out of the P&L. Those costs will come down year-over-year by about $50 million, '17 to '18. And we have a whole series of other normalized cash costs that will reduce from '17 to 18, some related to deal bonuses, some related to M&A fees, some related to the debt extinguishment costs associated with the tender we issued earlier in the year. But as I said, normalized cash cost will come down by about 50% year-over-year. And then they will sequentially decrease in the out-years. They don't stop this year. The program was never designed that way. The program is designed to deliver savings and synergies through 2021. So there are cash costs that come out of the business associated with the delivery of those savings and synergies. But you should kind of think of it as a sequential deceleration in those costs from 2019 onward. I think the one point I would like to make and reemphasize that I made in the script is that the disposal activities will not compromise the synergy and savings deliveries that we've committed to as part of the Jarden transaction. As I said, we're going to deliver about $275 million in 2018, which would bring our cumulative savings and synergies to over $840 million by the end of the year. And we're committed to the $1.3 billion savings and synergy numbers that we articulated over the last year and have a line of sight to deliver them in the context of the new $11 billion portfolio, which gives us -- will give us some very interesting flexibility for both investment behind the brands and the capabilities, we will continue to invest in e-commerce, for example, and also simultaneous margin development. And that's a really important part of the story. If you go back and look at Newell Rubbermaid's legacy results, we accelerated core growth through the deployment of this model while simultaneously increasing gross margin from 37.5% to 39.4%, operating margin from 12.5% to 14.4% while more than doubling the A&P investment in the business. We have a line of sight with this new business that we're creating to deliver a similar profile of performance. What's changed is the retail environment. And what's unique about our portfolio and that does not change with the change in portfolio footprint is the exposure to the stressed segment of the U.S. retail landscape. And that will continue to be a bit of an overhang on the business with probably episodic events, like the ones we're dealing with right now. But as we continue to scale our e-commerce business, if you do the math on that, and you expect double-digit growth going forward off of a $1.6 billion base as a result of creating a community of practice in a high-talent geography, like we have in the New York metro area, you get a mix effect to growth and margin development over time that is very, very positive. And so I think in large part, the scenario we put forward is very, very attractive scenario. We have to get through sort of this transitory and disruptive period that we're in, which is really largely a first half dynamic. And then we get on with building the business from there in a way that's similar to what you've experienced from the legacy Newell Rubbermaid business from the second half onward. And that's -- we're clear in that point of view. We're clear that our plans should deliver that with the one variable being sort of the episodic dynamics within the retail landscape that we will have to accept and do a better job of anticipating, quite frankly.

We'll go next to Wendy Nicholson with Citi.

My first question, could you comment kind of just on the allegation that's been made by Starboard that the execution has been a big problem internally at the company? I mean, that's always been, in my understanding, a real strong suit of Newell over the last few years. But the allegation that sort of the left hand doesn't know what the right hand is doing internally, is that your assessment as well? Is there area for improvement? Or is that just an off-based allegation? And then my second question has to do with your confidence in the recovery of the core sales growth in the back half. I mean, obviously the stock is trading where it is because nobody believes you. And I get that there are easy comps. But is it a particular set of innovations that you have? Is it just the hope that things get easier in the retail environment or more stable in the retail environment? Or maybe if you could just address that and make us feel comfortable about the outlook for brighter days in the back half.

Yes, thanks, Wendy, for the question. So let me start with the second question, I'll come back to the first question. So the second question was about what gives you confidence in the back half of the year. Well, I said all along that the investment we were making in brands and innovation on the legacy Jarden businesses would have an 18- to 24-month gestation period. And so I mentioned the fact that we've tripled the value of the innovation funnel on the legacy Jarden businesses. So the work that's gone down over the last 18 months has been focused on building the ideas, building the products and building the commercial launch plans associated with the innovation that was basically underleveraged in those Jarden assets. And so we come to market, we begin to come to market with some big ideas in the second half of 2018 that leverage those investments. And so our confidence is built on what we know is coming to market. We've already presented all of those ideas to customers. And we actually have already begun to present 2019 ideas to customers. So that has -- we have a clear line of sight to that. It's about commercially doing what we have the potential to do. And that's always -- that's in the hands of the operating divisions and the brand development teams. And for the most part, our history would suggest that we, in fact, do, do well with new, big, differentiated ideas. So that's part of the confidence. The other bit of the confidence is grounded by the fact we made a big investment in e-commerce in 2017 and we populated an organization here that is -- has been building through 2017. In 2018, we will continue to invest in that organization to scale its presence from the U.S. to outside of the U.S. And we're -- despite what is a big, profitable and rapidly growing e-commerce business, we didn't get the full benefit of those -- of that organization build-out in 2017. And so we expect as the year goes on to get an increasingly important impact from that organization. And so those 2 things inspire confidence. The other thing that the team has to deliver is it has to deliver margin improvement in 2018 and working capital reduction. And I would say, connected to your first question, I think on working capital management in 2017, we could have done better. With respect to margin development, we had the flow-through of synergies, but we were dealing with a very difficult environment with respect to pricing. And we had some real difficulty with the slow creep in inflation in the first half of the year and customers pulling inventories out. It was very, very difficult to get pricing implemented in 2017. And so you've got inflation beyond what we planned, pricing more negative than what we planned. And the combined effect of that on margins was not good. So I think there's plenty of things we can do better, there always are for every leadership team and for every company I've ever worked in. But I think the things that will be the determinant factors in our '18 performance will be the speed with which we can get the margin development happening. I don't think it really does in Q1, knowing what I know about pricing, timing and inflation. But I think we start to make real progress in Q2, and from that point forward, on the margin front. And then with respect to innovation activity and e-commerce activity, we'll get a consistent build on e-com and a step change in innovation impact in the back half of the year that'll contribute to our overall performance. I'm going to keep my comments though, Wendy, focused on an internal way as opposed to an external way. And I'd prefer not to comment on what other people are saying. This team's just focused on doing what we need to do to drive the business and improve the performance of the company. And we're not going to be distracted by all the other things outside of that context.

I appreciate that, and that's very fair. If I can just sneak one more in, the trade dispute that you're having in the Writing business, just hypothetically if that does not resolve well, can you kind of quantify or dimensionalize how much of a risk to sales that is?

Well, in my comments about first half performance on Writing, we've captured the first quarter impact of that not being resolved, but we do assume a second quarter impact. For this particular customer, our brands represent over a 40% share of their retail footprint. And so we have a mutual need to resolve the conflict in advance of Back-to-School. And I suspect that's how things will play out. And like all of these things, you really have to be true to principle. Otherwise, you end up compromising in a structural way your gross margins when you are in a situation where you disagree about performance for the payments that have been made. And I think we're on the path to resolution. But I don't expect that to occur really in the first quarter. I expect, as we come into the second quarter, we'll get on a more -- into a more virtuous space with each other. And this will be resolved and we will build out a strategic plan going forward, at least that's what I hope we can find a path to deliver. We've taken a big hit in the fourth quarter. I told you that the Writing business globally was down 55% as a result of this one cell. So that gives you a sense for whether we were shipping inventory or not. That continued into the first quarter. And that had 2 effects on our overall performance. One, it obviously impacted core sales. As I said to you, the combination of that Baby one customer interface and the Writing one customer interface explains 200 basis points of the decline versus prior year and the fourth quarter. I said that the business would have been flat effectively had it not been for those 2 events. We experienced more of that on Writing and Baby in the first quarter. And then things will turn, assuming that the Baby business doesn't face any more disruptions associated with TRU's restructuring plans.

And we'll go next to Olivia Tong with Bank of America Merrill Lynch.

I guess, can we start with why do you think that sell-through and sell-in will eventually start to converge? Because it's been 4 quarters since this started getting called out, not just by you, of course. But in theory, if online keeps growing and retailers become more efficient on inventory, this should be a secular dynamic which should continue. I mean, your own online growth is sort of proof of that. And thank you for giving the 25% growth number, helpful to get that. But could you provide a bit more granularity on how that compares to your recent trends? I suspect that's a bit of a deceleration. And what are your expectations going forward?

Yes. So Olivia, thanks for the question. I want to be -- I want to clarify something if that was the net impression I gave. I'm not suggesting that the sell-in and sell-out, the divergence converges to parity. I'm suggesting that it converges to a more historic relationship, like what we've experienced in the first half of the year. I think you're right. There's huge differences in the inventories that particular formats carry in the retail landscape. So as the mix of our business shifts, we will see a mix effect on retailer inventories. And that's why you have a pretty steady divergence between sell-out and sell-in. The issues we faced in the back half of the year were more event-based at specific retailers, where that underlying disconnect between sell-out and sell-in was compromised by much more acute dynamics, either related to Baby or related -- in our leading customer's Chapter 11 filing or related to this particular trade dispute. So you're right to assume that there's going to always be a disconnect. And your question on whether that is an accelerating divergence structurally, I think, is something I can't really answer at this point. The thing to remember though in all of these calculations is that it's not the absolute reduction that matters, it's the change in the rate of change that matters and impacts revenue. So theoretically, you could have an issue. But I think it's very modest in relative terms to some of these events-based dynamics, like Walmart's actions over the last 4 quarters, which is now behind us, where they took double-digit reductions from a percentage standpoint in their inventory positions or a reset of a particular customer's point of view. We have one large distributor in Writing that made the choice in the middle of the year to change their inventory algorithm from holding over 23 weeks of inventory as a distributor to deciding they can only hold 12 and that they were going to take 18 months to get there. Those types of events, I think, are discrete things that you have to kind of work through. I don't -- I think we just have to be better at anticipating when those are going to come at us by making sure that our connections to particular retailers are sound and firm and that we are listening actively for the signals that are being sent to us. But the structural stuff, I think, is more gradual and more manageable, to be honest with you.

That's helpful. I guess, within your -- embedded within your guidance, particularly in Baby and Writing, I mean, for Baby, how -- like do you assume a continued drain? Or once you lap that -- the Toys "R" Us issue, things stabilize? And then similarly for Writing, does it stabilize at a lower base? Or does that also continue to see some drain, given all the issues that are going on?

Yes. Well, I think the thing that we think -- we look at and we consider probably one of the most important metrics in any one of these businesses is how our brands are doing from a market share perspective because that's an expression of consumer involvement with the business. So as TRU goes through its changes, it's not like the consumer isn't going to go buy her baby gear. There's no real material -- I wouldn't expect a material change in the value of the market. What does happen is that there are differences in price continuums by retailer. There are differences in brand strength by retailer. And so it's really incumbent upon folks like us to make sure that as those stores come out, that we're actively marketing to the consumer and trying to drive her to an alternative location, where she can find our products in the price tier that she's shopping in. And so that's a little bit of the inside baseball type of details that are going on in the Baby business right now. The other thing that's really important is we compete against subscale single category competitors typically. And so when somebody as big as the leading baby gear provider in the U.S. faces challenges like the ones it's facing, we have the flexibility as an enterprise to absorb those hits and invest to create that switching behavior I just described in a way that our competitors just simply can't afford to do. So this is where the scale of our consumer franchise really matters. This is where, even in the future context, we'll have a huge scale advantage versus almost every one of our competitors in the categories we will be competing in. And we get a leverage factor through scale that is really, really important in a situation like this. So my sense is that we should see continued share consolidation. As I mentioned, baby gear shares were up 193 basis points in the U.S. in 2017 despite the back half turmoil created at the leading retailer. And the teams mobilized to try to sustain that level of share improvement year-over-year in '18 despite the disruption they're experiencing. And that's why I described it as transitory because on the back end of whatever that restructuring looks like, people are still going to be buying baby gear. Consumers are still going to be making brand choices based on the value propositions that those brands have. And we want to be within arm's reach of every one of those consumers, whether it's in brick and mortar or whether it's online. And we've invested to create this advantaged capability in e-commerce that should serve us really, really well through this period. So there's a lot to do in those moments. But the capability agenda we've invested to create over multiple years at Newell Rubbermaid and the extension of those capabilities in the new -- in the context of Newell Brands, the doubling down of investment we've made on e-commerce, they will all serve us well through this period of disruption, particularly relative to our subscale single category competitors.

We'll move next to Lauren Lieberman with Barclays.

I want to ask a little bit about gross margin and the outlook there. So first was just in terms of continuing to work through inventory. I mean, you definitely made, obviously, a ton of progress in the fourth quarter. But seasonally, I would have probably expected inventory levels to come down in a normal environment, probably $250 million Q4 versus Q3 anyway. So one, how do I think about the gross margin impact of continuing to work through inventories? Two, resin, just both given that polypropylene is still inflationary and the length of your supply chain and how much was probably already in your inventory at the time of the hurricanes, I was wondering how long you expect resin to persist as a headwind to gross margins in '18.

Sure. So good questions, Lauren. We delivered 4 more days of inventory reduction in the fourth quarter than we did in the fourth quarter a year ago. So we've outperformed what we typically...

About $100 million.

About $100 million more came out in the fourth quarter of '17 than in the fourth quarter of '16 because your observation is right, there's always this bleed-down of inventories. But it was worth about 4 more days. The other thing that the team did a great job of in the fourth quarter was progress on receivables and extension of payables. But really the receivables number was probably the most important contributor, beyond the inventory, to working capital movements. And that had to do with really getting into the details of customer compliance with respect to our agreed trade terms and fighting for our cash. Obviously, that's an ongoing dynamic. But the team really kind of put the full-court press on and made good progress. And it's an interesting bit of learning for us in that, that may offer opportunities going forward. Every day of receivables is about $49 million of cash. Every day of payables and inventories is about $29 million of -- $28 million, $29 million of cash. So these are really, really important levers for us. And there's a huge amount of opportunity tied up in working capital. Next year, we expect to continue to make progress on inventories. We've got roughly about 7 days of inventories planned to come out in 2018. We'll continue to make progress on payables. Our payables days are in the mid-60s. And most consumer goods benchmarks are in the low 70s. Unilever would be in the low 90s. So there's a lot of opportunity here on payables. We're working that in a structural way through the procurement activities we've got going on, on synergies. They're not only negotiating rate-based benefits but also terms benefits. So we should be able to make more progress there. I think if I look at our working capital metrics versus any consumer goods benchmark, there's a ton of opportunity, there was at legacy Jarden and there was at legacy Newell Rubbermaid. We have today made some good progress after a really bad Q3 as a result of the top line miss. And that gives us encouragement and gives the organization kind of the energy boost and the confidence to kind of really go for this. Next year, our incentive schemes approved by the board and I think probably released, I think, publicly today -- the 8-K -- later on today that our compensation scheme for the total corporation will be cash flow-based and earnings-based. The divisions will have a stake in the corporate performance. That will be roughly 50-50 against our external goals. And then the divisions will have their own set of metrics that are operating income-based. They'll be focused 75% of their incentives around division target, 25% tied to the corporate performance. So we're going to put skin in the game for the entire organization on continued progression of working capital improvements. As I said in my comments, we have significant -- a significant step-up in operating cash flow projected for 2018. Lauren, what was your first question that I didn't answer?

That's okay. Yes, it was the overall gross margin outlook for '18 and the trajectory because of both the inventory drawdowns and then also resin pressure.

Yes, well, I think that's a really good point. I think our gross margins in the first quarter will look very much like what our gross margins looked like in the fourth quarter because we're pushing production time out of Q1 on Writing. Typically, we would start to build inventory in the month of March for Back-to-School sell-in at the end of June. The teams have found a constructive way to do that without having to start those builds so early. And we want to get -- keep the momentum going with respect to working capital movements versus what we were able to deliver year ago right from the beginning of the year. We'll take the hit because we're going to prioritize cash above gross margin in the first quarter. But we'll take the hit on fixed cost absorption to gross margin in the first quarter to enable the movement of that inventory and the production plans out later into the year. We think that's the right call to make. We will pay a mix penalty in the first quarter because we'll continue to struggle with the one retailer I was referring to in Writing. And Writing has obviously a positive mix effect on the overall company. But I think the way to think about gross margin progression is Q1 looks a lot like Q4 and then things really begin to flow. We get the resin pricing implemented more broadly by about February 1. Most of those actions begin to get traction. So we'll get a bit of that benefit in Q1 and the flow-through of that benefit into the second, third and fourth quarters. We will get the mix benefit from less of a downdraft related to this one particular retailer on Writing. I think one of the interesting business stories that's sort of lost in the cloud of discussions from 2017 is the progress on Yankee Candle in Home Fragrance. And that business delivered growth in 2017 with a decent margin despite the challenges of Yankee retail. And so we've got some really interesting learning out of the pop-up store that we did in the holidays in New York. We got interesting learning from the personalization work we did. The team is really energized and focused around leveraging those insights for profitable growth going forward. We've extended the shoulders of the portfolio into wholesale, which is yielding tremendous results as represented in the 273 basis points of market share growth on Home Fragrance. So I think this is an interesting story. We will continue to have to phase into the headwinds associated with retail, Yankee retail. But the shoulders of that business are performing well. And Yankee has the potential to mix the company up if we're able to sustain the growth performance. Another hidden gem in 2017 was the performance of the Jostens business, which grew nearly 2%, which is a credit to Chuck Mooty and his team and some of the investments we've made in building out not only the scholastic and high school, grade school, college aspects of the business but also the professional aspects of the business. And that's an interesting story that also has the potential to mix us up as we go forward. So there are lots of factors that will contribute to the margin progression. You should expect Q1 to look very much like Q4 and then things to really kind of get back into the more -- the zone you would normally expect because the choices on manufacturing activity will get into more of a normal rhythm and we will get more pricing leverage. We'll continue to get procurement benefits through the synergy work we're doing and then we get into a more virtuous delivery. We expect gross margin improvement year-over-year. And I think you should expect us to continue to deliver gross margin improvement from this year onward. It's the lifeblood of the business.

Okay, that's great. And then I just had one for Ralph on cash flow. So you did mention the cash tax theme and some on divestitures. I was just curious if you paid any cash tax on the Tools divestiture in '17 or a lot of it has been deferred into '18 is one. And then two, is there any benefit to cash flow from any of the deferrals on bonuses or the kind of Q4 versus what you had expected at the time of the last conference call, if that was all P&L issue?

Yes, so first, we did pay some cash taxes in 2017 related to disposals, but we are -- included in our cash forecast for 2018, we are reflecting the fact that there's more -- the majority of the taxes related to the Tools divestiture are hitting 2018. So that's factored into our guidance on cash flow that we talked about. And then in terms of Q4 and how we came in above where we thought, I think 2 things in principle. One, admittedly, we sort of at the top hedged back a little bit on our forecast on inventory. And the business units were running -- were operating at a target that was more aggressive than what we were projecting. Frankly, some of that was just we wanted to make sure we're getting the right traction. And we saw that come through. And you saw that in the change in working capital and as well as the effects on the gross margin in the quarter on absorption. So that was one piece. And then the second piece was really on receivables that -- and Mike alluded to it. But the team really did a nice job of stepping up on a lot of internal processes and practices that really paid some dividends in terms of -- relative to our own forecast on receivables. The other piece admittedly just within the forecast accuracy is the pace in which our sales occurred during the quarter were more front-loaded. And therefore, you'll collect more within the quarter. So that had some influence in it as well. But operationally, we feel really good about what the receivables group did and that capability sustaining going into this year.

And our last question will come from Jason Gere with KeyBanc Capital Markets.

I guess, just kind of continuing on Lauren's question. Maybe on one part of the gross margin, if you could talk on the price. So just I know some of the pricing is coming through. I wondering if you could lay some context to the pricing that you're taking now, like what type of pricing you've taken on these products before. Is there pricing coming with some of the bigger innovation in the back half of the year? So I'm just trying to think about price versus volume, how we think about core sales being up modestly for the year, just how you can kind of put that into context.

Yes. So I mean, most of the pricing that we're taking right now is related to resin inflation that spiked, as you know, with the hurricanes in late August into September. So you have a 60- to 90-day lag with retailers on price implementation from announcement date. So most of the announcements were made in early October. The big retailers are just -- you end up with a negotiating posture that probably pushes implementation dates back. As I said, they will go 2/1 for the most part. And those increases are designed to recover the resin spikes we saw in the fourth quarter. Inflation has moved negatively on us since then. So we will likely have to do more pricing. But I don't know that we will do that through invoice price changes. We'll probably do that through customer programming adjustments, which are another way to capture pricing. So those things are underway. Those are the types of discussions the divisions are having. Just to be clear and transparent, the divisions are pursuing more price increases than we've captured in our assumptions and in our guidance. So I think it's going -- it is a tough environment out there to get these things landed. It will continue to be a tough environment to get these things landed. Divisions build plans that are typically ahead of what the corporation assumes in its guidance. And we've hedged some of their assumptions back, given the risk profile on some of them. So I think this will be an ongoing discussion. You've heard it from a lot of people, it was difficult to get pricing in the fourth quarter. That was true. I think the inflation spikes that occurred on resins make it more palatable and easier for us to engage in pricing discussions than the gradual inflation we saw through the first half of the year. So my confidence is higher this year that we'll get things done that we couldn't get done last year. We've also pulled back on some of the programming activity we had last year that didn't yield the kind of returns we thought were appropriate. That also is a path to positive price. Now you should not expect us to be giving up volume. This will be a year of a blend of price and volume. And we expect -- once we get through this very, very volatile period that we're in the first half of the year, we expect to see a blend of both in the back half contributing to a meaningful improvement in the underlying growth on the business. So I don't know if that answers your question, Jason, or whether it was too vague but probably the best I'm going to offer today.

No, that was -- actually, it hit on all the touch points. And then just the last -- I guess, the last follow-up would be just as you're thinking about with the acceleration of the program, and good to hear that the synergies are going to be largely intact, how does that make you think about the reinvestment rate that what you set out maybe when you guys combined this company -- and I think at CAGNY last year, you talked about the incremental $500 million kind of coming through. So as you see the changing landscape in terms of the investments you're making in e-commerce and other capabilities, has that changed dramatically? Or how do you think about what will be reinvested as opposed to what flows to the bottom line for EPS?

Yes. Well, I mean, we will continue to invest in e-commerce in 2018. But the way you should think about it is that we've got to do the things we need to do within our overhead structure to fund that investment from the business units that are experiencing the tough declines in their brick-and-mortar businesses. And so the difficult conversations, like the one I described with the Writing customer, are in part designed to enable the reallocation of resource to where the most significant return on investment can be generated. And those are tough things to do. But that's how I'd characterize how the investment in e-commerce occurs in 2018. And so this won't be a big spending year because we have to calibrate spending to the environment we're in and the growth dynamics that are out there. And with the volatility we'll experience in the first half of the year, we have to be very cautious to not spend beyond an appropriate level tied to the revenue we believe we'll be able to generate. But we can fuel the big investment bets we want to make, whether that's innovation, whether that's the investment in e-commerce, by challenging the businesses that are having the more stressed performance, to look at the return on investment they're getting on the choices they're making. And we're a more engaged and actively involved leadership team than the design that Newell Rubbermaid used to have as a holding company, where we delegated all that authority into the divisions. We don't think that's the right approach in this environment we're in. You have to be prepared to shift resources to the winning channels, the growing channels and the winning customers. And that is a very difficult thing for divisions to embrace because of the risk associated with it. So if you disaggregate those choices to the lower levels in the organization, what you do is you compromise the pathway to making the whole greater than the sum of the parts. Because people will aim off those choices whereas the corporation can accept those risks with involvement in the business. And so it's a different operating model, it's a different way of working than either the legacy Newell Rubbermaid prior to my joining in 2011 or the legacy Jarden organization prior to Jarden becoming part of Newell Brands. But we're quite clear, this is the right model for the moment we're in. And we don't believe the moment we're in changes very much with respect to the shifting dynamics in consumer purchasing activities and approaches and the impact that's had on the retail landscape, forcing companies like ours to pivot their resources from where they've historically been focused to where the market is moving towards. And companies that don't do that aggressively and proactively will end up experiencing real trouble because their top lines will compress and the fixed cost absorption associated with declining top lines will be profound on their margin structure. So this is a very, very important topic. And it's at the heart of why we've built our operating model the way we have and why we operate the way we do. So Jason, I don't know if that answers your question, but I think it was sort of an important thing to put out there.

No, it definitely did. And we'll see you down in Florida.

Okay, Jason. I guess, that's our last question. I just have a couple of final comments before we sign off. Just a thank you to all of my Newell colleagues. This has been an incredibly challenging year. And you've probably never worked harder. I want to thank you for your perseverance, for your drive and for your determination. And while we may not be happy with the outcomes we delivered, we put in place and built an organization and a set of capabilities that are going to serve us very, very well into the future. Let's stay focused on the here and now and not be distracted by all the headlines and be uncompromising in our drive to reach our long-term potential. Thanks so much for the support and for your drive and attentiveness. That's it for me, operator.

Thank you, sir. A replay of today's call will be available later on our website, newellbrands.com. This concludes our conference. You may now disconnect.