諾威品牌 (NWL) 2018 Q4 法說會逐字稿

Ladies and gentlemen, good morning, and welcome to Newell Brands' Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, today's conference is being recorded. A live webcast of this call is available at newellbrands.com on the Investor Relations homepage under Events & Presentations.

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

Thank you. Welcome, everyone, to Newell Brands' Fourth Quarter Conference Call. I'm Nancy O'Donnell. And with me today are Mike Polk, our President and Chief Executive Officer; and Chris Peterson in his debut call as our new Chief Financial Officer.

Please recognize that this conference call includes forward-looking statements. These statements are subject to certain risks and uncertainties, and our actual results may differ materially from management's current expectations and plans. The company undertakes no obligation to update any such statements made today. If you review our most recent 10-Q filing and our other SEC filings, you will find a more detailed explanation of the risks, uncertainties and inherent limitations in such forward-looking statements.

During the call today, we will focus our discussion on non-GAAP financial measures, including those which we refer to as normalized measures. Management believes providing insights on these measures enables investors to better understand and analyze our ongoing results of operations. The comparable GAAP measures and a reconciliation between the 2 measures can be found in our earnings release tables as well as on the Investor Relations area of our website and our filings with the SEC.

With that, I'll turn the call over to Mike.

Thanks, Nancy. Good morning, everyone, and thanks for joining the call. I want to start by welcoming Chris Peterson, our new CFO, to his first Newell Brands earning call. Welcome, Chris, and thanks for joining the team. I hope you felt, in your first 9 weeks here, a warm welcome from all of us at Newell. I'm personally very pleased to have Chris on board, and I look forward to working together to strengthen our operating and financial performance while simultaneously shaping the future of the company.

Today, I'll offer a brief perspective on our fourth quarter results as well as the progress we're making on our key strategic priorities. Chris will then provide a detailed review of our financial performance and our outlook for 2019 before we open it up for your questions.

Let me start by saying that our performance is beginning to turn the corner. And for the second consecutive quarter, we've made good progress. We made a series of organization and leadership changes starting in May that have served us well, been right for the organization and with strong leadership increasingly in key positions and investable teams in place, our progress should accelerate through 2019.

Some of our leaders are own grown like Laurel Hurd in Writing, Rich Wuerthele in Home Fragrance, Tom Russo in Connected Home and David Hammer in Appliances & Cookware. And some have come to us from the outside like Chris Peterson, our new CFO; and Mike Donohoe, who runs Outdoor & Rec, having joined us from Kraft Heinz where he led the flagship cheese and meat business; and Russ Torres, who's driven the cost work over the last couple of years, establishing our new supply chain organization while simultaneously leading our Baby business through the turbulence of the Toys 'R' Us bankruptcy. And Dennis Senovich, our company's new supply chain transformation leader, who's recruited and built a team of professionals who will, in partnership with our talented leaders in the division, transform our supply chain over the coming years.

This blend of own grown and new talent are driving our transformation, and they and their teams have exhibited the grit and determination to deliver results through adversity over the last 6 months. They believe in our capacity to transform while simultaneously reigniting our growth and performance and are busy driving that commitment into action.

Their work is focused in 5 core areas. First, returning the business to a consistent pattern of delivery. This means setting appropriate milestones and delivering against them and strengthening our operating discipline to make the business more predictable and efficient.

Second, they're working hard to optimize our cost structure by delivering on our ongoing savings programs and extracting the retained corporate costs related to the Accelerated Transformation Plan divestitures. We've made good progress on costs over the summer and into the fall, with more actions to follow in 2019.

Third, they're focused on increasing cash flow by driving profitable growth and transforming our working capital by reducing complexity across our business system. Over the next 2 years, we expect to reduce our continuing operation SKU count by over 35%. This effort, coupled with other working capital initiatives, should yield significantly improved working capital ratios and free cash flow productivity.

Fourth, they're shaping and focusing our portfolio on the most attractive businesses, executing the divestitures as described in the Accelerated Transformation Plan. And perhaps, more importantly, they're making sharp choices, allocating the most resource to the most attractive businesses, deploying more A&P and innovation activity to those businesses with the greatest potential for accelerated growth and performance.

And fifth, they're repositioning the organization for more consistent and sustained operating performance, restructuring division and function designs while simultaneously strengthening and upgrading talent.

In the fourth quarter, we made progress in all 5 of these areas. Specifically, we delivered sequential improvement in core sales growth in all segments. Learning & Development growth strengthened in the fourth quarter driven by Writing. Excellent holiday merchandising of Sharpie and Elmer's gift sets, the launch of Glow in the Dark Slime from Elmer's and new metallic colors from Sharpie, coupled with the expansion of Slime around the world and good growth on Fine Writing in the U.S. and Asia, yielded strong core sales growth.

Baby continued to make progress against year-ago comparators that include Toys 'R' Us, delivering innovation and distribution-led share growth on Graco swings and high chairs and NUK sippy cups and bottles.

Food & Appliances results also improved substantially, driven by the launch of a new line of Calphalon Appliances, Year 2 support on Calphalon Space Saving Cookware, distribution-driven share gains on Rubbermaid TakeAlongs and Oster growth in blending in the U.S. and Brazil.

New Crock-Pot innovations in express cooking solidified our #2 share position in the express cooking segment. However, we were late to this segment and faced formidable competition. More progress is needed here.

Home & Outdoor Living made good progress in the fourth quarter as a result of strong share growth on Yankee Candle, Chesapeake and WoodWick in the U.S. FDM channels; our return to growth on Home Fragrance in Europe; excellent innovation-driven growth in Contigo behind the launch of couture thermal beverage containers; and continued strong growth on First Alert. These gains were offset by the impact of loss distribution on coolers and air beds, which we will continue to face into through the second quarter of 2019.

And Home Fragrance was also burdened by Yankee Candles mall-based retail store footprint, which continues to be a drag on growth and margins. We intend to exit unprofitable mall-based retail stores as their leases expire and expect to end 2019 with just over 400 stores.

Beyond our sequential progress on growth, we delivered increased normalized gross margins and operating margin percentages versus prior year in the fourth quarter despite higher inflation related to resins and transportation, the imposition of tariffs on many of our businesses and the increasingly negative impact of foreign exchange. The operating margin increase was delivered in the context of our highest A&P investment levels of the year at nearly 5% of revenue.

Pricing and productivity were positive contributors in the quarter, with particularly good progress in securing sourced finished goods cost concessions in the face of tariffs and strong value engineering cost-reduction impact, particularly in packaging materials. We also made substantial progress on overheads. We were pleased with this outcome, but our progress needs to continue as we expect the headwinds we faced in Q4 to stiffen in the first half of 2019.

On cash, we delivered about $500 million of operating cash flow, bringing our second half operating cash flow to nearly $1.1 billion. This result was less than what we forecast, driven in part by the completion timing of the Jostens and Pure Fishing deals, higher cash taxes and transaction-related costs as well as lower accounts payable balance. We expect to deliver more sustainable performance on payables going forward as we're making very good progress integrating the extended payment terms into our source finished goods contracts. This work began in earnest in late 2017 through our procurement organization, with measurable progress in 2018 and more to come over the next 2 years.

With respect to portfolio changes in the quarter, we completed the divestitures of Jostens and been passing back over $1 billion to shareholders through repurchases and dividends, while reducing debt and exiting the year at our target leverage ratio of 3.5x.

On our fifth priority, we've actioned the difficult but necessary decision to restructure the organization. And those changes contributed to our professional head count in the continuing businesses being down by about 14% compared to prior year at the end of 2018.

There is more work to do, particularly in our back-office operations where global business services implementation should drive significant cost reduction in the transactional areas of finance, IT and HR over the next few years. Chris and his team will lead this work on behalf of the company.

We're laser-focused on strengthening the operational performance and financial flexibility of the company. While we know we have much more work to do, the fourth quarter was another quarter of sequential progress.

Let me pass the call now to Chris to walk through a deeper review of our financial results and our outlook for 2019, then I'll return for some closing comments. Chris?

Thanks, Mike, and good morning, everyone. I'm pleased to have joined Newell Brands as the company's CFO and look forward to connecting with many of you over the coming weeks.

Over the past 2.5 months, I've taken a very aggressive on-boarding approach, which included meetings with each of the 7 continuing divisions in Atlanta, Boca Raton and Deerfield, Massachusetts; visiting key manufacturing plants in Maryville, Wichita, Mogadore and Juarez, Mexico; visiting distribution centers in Brimfield, Shelbyville and El Paso, Texas; visiting stores for each of the company's top 10 retail customers; investor meetings with a number of both buy and sell side analysts; meeting with each member of the company's Board of Directors and finalizing the 2019 budgeting process with each business unit and corporate function.

While it's still early days for me, I've come to quickly appreciate both the complexity of the organization as well as the opportunity for significant shareholder value creation over time.

At a high level, my initial observations are as follows: the continuing business comprises a leading group of brands with strong market share positions and brand equities in their respective categories with the right to win relative to subscale competition. A disruptive external business environment, in combination with significant organization change within the company, have weighed on the underlying performance with the full potential of the company yet to be seen.

There is an opportunity for operational discipline improvements in areas including sales and operations planning, working capital management and IT infrastructure, to name a few. The ultimate goal is to return the company to consistent and sustainable core sales growth, accompanied by operating margin expansion and improved cash conversion cycle. I'm committed to partnering with Mike and the team to drive improvements in these areas.

Moving on to financial results. Net sales from continuing operations in the fourth quarter were down 6% year-over-year to $2.3 billion, driven by headwinds from foreign currency, the adoption of the 2018 revenue recognition standard and a decline in core sales. For the year, net sales came in at $8.6 billion, modestly below the company's expectations due to a stronger-than-anticipated dollar.

In Q4, core sales from continuing operations declined 1.2% year-over-year, in line with the outlook, with sequential progress made in each of the company's 3 segments.

Normalized gross margin increased 170 basis points versus last year to 34.7% as the benefits from the company's productivity efforts, pricing actions and the impact of the revenue recognition standard, more than offset inflationary pressures, including the effect of tariffs.

Normalized operating margin improved 70 basis points versus last year to 11.4%, reflecting the improvement in gross margin as well as the benefits of ongoing cost management. These benefits were partially offset by increased levels of incentive compensation as well as currency headwinds.

Consistent with the plans to drive consumption, A&P spending moved up sequentially in Q4, both on an absolute basis and as a percent of sales. In the second half of 2018, the company delivered normalized operating margin at the midpoint of the guidance range.

Net interest expense of $104 million was down from $116 million a year ago as we ended the year with a net debt balance of $6.5 billion as compared to approximately $10.1 billion a year ago. In 2018, we made significant progress strengthening the balance sheet by deleveraging.

The normalized tax rate was negative 30%, favorable relative to the year-ago rate of 3.7%, reflecting discrete tax items. Normalized net income from discontinued operations was $107 million, down from $196 million in the year-ago quarter, largely due to the loss of contribution from businesses that have been divested throughout the year, including Waddington, Rawlings, Goody, Pure Fishing and Jostens.

We purchased 44 million shares during the fourth quarter. The weighted average diluted share count for the quarter was 452 million, down 7.6% year-over-year. At the end of the year, the company's share count approximated 423 million shares.

Normalized diluted earnings per share were $0.71 versus $0.68 a year ago. Normalized diluted earnings per share from continuing operations were $0.47, up from $0.28 last year. Normalized diluted earnings per share from discontinued operations were $0.24 versus $0.40 last year.

Let's now switch gears to segment results. Net sales for the Learning & Development segment decreased 3.2% versus the prior year to $707 million. Core sales inflected back into positive territory and grew 1.7%, driven by healthy growth in Writing, which cycled against significant retailer inventory destocking in the office superstore and distributor trade channels in the year-ago period. The Baby business remained under pressure, reflecting continued headwind from the TRU bankruptcy.

Net sales for Food & Appliances declined 7.2% year-over-year to $824 million as core sales contracted 1.7%, largely reflecting reduced promotional activity in Food, partially offset by Appliances' growth in Latin America and the early impact from new appliance innovation in the U.S.

Revenues for the Home & Outdoor Living segment were down 7.2% versus last year to $809 million, with core sales falling 3%. Continued strength in the Connected Home & Security business and a return to growth in Home Fragrance in Europe were more than offset by the ongoing headwind from Yankee retail stores and distribution losses on coolers and airbeds in the U.S.

In Q4, the business generated operating cash flow of $498 million compared to $990 million a year ago, largely due to loss of cash flow from businesses that have already been divested, higher cash taxes and transaction-related costs as well as a lower accounts payable balance.

During the fourth quarter, we announced and closed on 2 transactions, Jostens and Pure Fishing, and applied the proceeds to share buyback as well as deleveraging. We successfully completed tender offers for over $2.6 billion of debt and reached the company's targeted leverage ratio of 3.5x in 2018. During Q4, we also returned $1.1 billion to shareholders through share repurchases and dividends, with the full year figure at over $1.9 billion.

Before moving onto the outlook for 2019, I wanted to briefly discuss 2 new practices that we are adopting this year. First, in order to offer more visibility, particularly in light of the moving parts associated with the divestiture program, during 2019, we will provide guidance both for the full year as well as the upcoming quarter. Once we complete the asset sales, we will revisit whether to continue quarterly guidance.

Second, we are updating the company's normalization practice effective first quarter 2019. Thus far, the company has excluded from normalized results the cost of its Transformation Office, consisting of employees fully dedicated to executing the integration of the merger of Newell Rubbermaid and Jarden and other costs associated with the integration and startup of the combined entity, such as advisory costs for process transformation and optimization initiatives. Now that nearly 3 years have passed into the transaction, beginning in 2019, the company will no longer exclude these expenses from its normalized results.

Please note that for ease of comparability, our commentary for 2019 will refer to the year-over-year metrics, adjusting the reported normalized 2018 figures for the new methodology. And in 2018, for the continuing operations, these expenses amounted to $96 million or approximately 110 basis points as a percentage of sales. The discontinued operations included additional $12 million of such expenses. You can find the quarterly split in the press release tables issued today.

As we look out to 2019, we expect to stabilize and then reignite the core business, executing on an aggressive cost savings agenda and improving the company's working capital metrics. Although we generally see healthy macros in the U.S., they are accompanied by continued disruption in the retail landscape, headwinds from currency, uncertainties stemming from tariffs and related price increases, as well as continuation of commodity and transportation inflation. We are planning the business prudently for the year to account for these factors.

This morning, we issued an initial outlook for 2019, which calls for net sales of $8.2 billion to $8.4 billion, which represents a decline of 3% to 5%, underpinned by a low single-digit decrease in core sales as well as an approximately 150 basis point headwind from foreign exchange.

We expect normalized operating margin to expand 20 to 60 basis points year-over-year versus the adjusted normalized operating margin of 9.1% from 2018, despite higher investment in the business and significant headwinds from inflation, currency, as well as bonus true-up. This forecast assumes that the inflationary pressures from tariffs, commodity and transportation cost, as well as unfavorable foreign exchange, amount to approximately $200 million. We plan to mitigate this by pricing actions, productivity and reduced overhead cost as we optimize the company's cost structure.

Normalized effective tax rate for the continuing operations is anticipated to be in the high single-digit range in 2019. Normalized diluted earnings per share for the total company are expected to be between $1.50 and $1.65 for the year.

The earnings per share outlook also reflects an updated time line from asset sales. We've made considerable progress on the divestiture front throughout 2018 and have completed transactions that have generated over $5 billion of after-tax proceeds.

As we embark upon the final wave of divestitures, we have decided to split up the Consumer & Commercial Solutions business and sell the Mapa and Spontex businesses in a separate transaction from the remainder of Consumer & Commercial Solutions, which is largely Rubbermaid Commercial Products, along with Rubbermaid outdoor, closet and garage and Quickie. As a result of this decision, we now expect the divestiture time line to extend until the end of 2019, and our guidance assumes these 2 businesses are sold in the second half of the year.

Current plans assume that the remaining transactions, which include U.S. Playing Card, Rexair and Process Solutions are completed by the end of the second quarter. We've also modified assumptions surrounding the total expected proceeds to reflect recent market movements in valuations for commercial assets and other conditions. We now expect the combined after-tax proceeds from all of the ATP divestitures to be approximately $9 billion.

The earnings per share outlook that we shared reflects the aforementioned timing of asset sales and the expected deployment of the proceeds toward further debt paydown and share repurchases. Given the expected timing of the transactions, we currently anticipate a modest reduction in diluted shares outstanding in 2019 relative to the year-end position of 423 million shares in 2018.

We currently forecast $300 million to $500 million in cash flow from operations for the total company for 2019. Within this outlook, we are accounting for a meaningful year-over-year loss of cash flow from the assets that have been sold or will be sold throughout 2019, approximately $200 million in cash taxes and transaction costs related to divestitures, and over $200 million of restructuring and related cash costs. One of our key priorities is to make significant progress on working capital by improving the cash conversion cycle.

Turning to Q1 2019, it was important to keep in mind that it is seasonally the smallest quarter of the year, both from the top line and profitability perspectives, and the business typically uses cash during the quarter.

The company's guidance contemplates the following assumptions for Q1: net sales of $1.66 billion to $1.7 billion, which represents a decline of 6% to 8%, with core sales down 2% to 4% and an approximately 300 basis point drag from foreign exchange. Recall that Toys 'R' Us announced the complete liquidation of its stores in the U.S. in late March 2018, which means the company will not fully lap this disruptive event until the second quarter.

Normalized operating margin is expected to improve 10 to 50 basis points relative to the adjusted normalized operating margin of 2.5% from Q1 2018. Normalized effective tax rate for the continuing operations is anticipated to be around 10%. Normalized diluted earnings per share for the total company are expected to be within a $0.04 to $0.08 range, with share count similar to the year-end position. We are assuming full quarter contribution from the businesses that have not been sold yet.

Given the reshaping of the portfolio and significant changes in the external environment, we have started a category and company strategy update process, which we expect to complete later this year. As such, we believe it is premature for us to provide specific long-term financial goals. Our long-term goal remains to drive shareholder value improvement through a return to consistent and sustainable core sales growth, operating margin expansion and improved cash conversion cycle as we reshape the portfolio and create a more focused company.

While 2018 was a challenging year for Newell Brands, we are encouraged and energized by early signs of a turnaround. As the organization continues to execute the Accelerated Transformation Plan, I am excited about the opportunity to help Mike and the team create a simpler, faster and stronger Newell Brands. We expect to make further progress in 2019 through completing the divestiture program, delivering sequentially improved core sales and operating margin results versus 2018, while continuing to support the company's brands and innovation in the marketplace and overcoming significant external headwinds, strengthening the company's working capital metrics and driving operational discipline across the organization.

I will now turn the call back to Mike for closing remarks.

Thanks, Chris. We entered 2019 with building confidence but also a pragmatic view of the complexity of executing such a broad transformation agenda in a turbulent environment.

As Chris laid out in his comments, our outlook for 2019 contemplates a couple of key challenges: the tariff impact on margins and the Toys 'R' Us impact on our top line. On tariffs, we've priced and taken actions through procurement to mitigate some of the negative margin impacts of tariffs, and we'll complement this with further work in overheads and aggressive complexity reduction. On top line, we've prudently guided core sales growth with the negative consequence of Toys 'R' Us bankruptcy to our top line in Q1 2019 embed in our outlook. TRU creates an unavoidable 250 basis point headwind for our total company core sales growth in Q1 2019.

Despite these challenges, we're confident in our agenda and our vision for the company. We have leading brands in large global and growing categories that positively impact hundreds of millions of consumers' lives every day where they live, learn, work and play. We've invested to build advantaged capabilities in innovation, design and e-commerce to further strengthen these brands. We've funded strategic research and done the product development work to significantly strengthen our innovation funnel and our ideas for growth.

We've proven that a brand and innovation-led strategy, coupled with strong commercial selling capabilities that reach consumers where they shop, can yield further market share growth in our home markets. We have much more opportunity to release the trapped capacity for investment in our brands and margin development that's tied up in overheads in working capital.

And we have a massive opportunity to deploy our portfolio outside our home markets. And the development of new channels of distribution make the cost of deployment much lower than it's ever been in my time in this industry. And we're strengthening our leadership team at Newell so that we successfully operationalize this broad agenda and unlock the value-creation potential of the company.

My underlying optimism is grounded in the power of our brands and the green shoots of growth we see in many of our businesses; the strength of our innovation funnel and the increasing capacity to spend behind these ideas; our leading e-commerce footprint relative to our competition and others in the consumer goods space, which should mix our growth rates up relative to others; our strengthening supply chain capability with their very aggressive cost and cash agenda, which should fuel investment while simultaneously driving margin and cash flow improvements; and the unwavering determination and desire to win of our people.

This is a powerful formula for growth and performance. While we play for that future, our focus today is on doing what we say we're going to do. Both the third and fourth quarters of 2018 were good examples of this commitment in action. We are confident we're on the right path to reigniting growth and driving operating performance.

With that, I'll turn it back to Nancy to set up the Q&A.

Thanks, Mike. (Operator Instructions) We're going to try to manage our time and get you out in approximately 1 hour and, at the same time, to fit in as many callers as possible within that time limit. So we appreciate your cooperation. Thanks. And at this time, operator, we're ready to take questions.

(Operator Instructions) And your first question comes from Bill Chappell with SunTrust.

Just a question around kind of your top line outlook for '19 on the core business. Just trying to understand what's baked in, in terms of pricing, in terms of SKU rationalization, how that impacts the outlook and does that carry on for beyond this year? And with tariffs and kind of pricing-related tariffs, do you anticipate it -- I'm not saying this is going to happen, but if there's any rollback in tariffs that you have to roll back pricing? Or so in general, what do you expect on price versus volume for this year? And what is SKU rationalization impact on that top line outlook?

I'll answer part of that question and then Chris can build. On pricing, we're pricing to cover the absolute tariff impact, dollar for dollar, and we've had reasonably good success in landing that. And so while that will create an issue for us from a margin percentage standpoint, from a dollar-for-dollar standpoint, I think we're going to be okay. And that pricing is built into the plan. Right now, we've got the 10% tariff rate on Category 3 tariffs in place for January through March, and we're currently planning to increase again on March 1. Our customers are aware of that. We've communicated that. If the tariffs get delayed, we will push that price increase out, and we'll price appropriately when the tariff increase occurs, if it occurs. We've built into our modeling for top line the volume impact as best we can of what is a substantial amount of pricing. That's a bit of uncertainty that we have because the kinds of price increases we're talking about typically go beyond the model tolerances for predictability, but we've done our best job of estimating that. On SKU rat, I'd pass this -- that on to Chris maybe to kind of build on my comments.

Yes. I guess, the thing I would add to Mike's comments are, in the prepared remarks, I mentioned that we have $200 million of headwind from FX, commodities and tariffs combined. And so in addition to the pricing that Mike's talking about on tariffs, we're also pricing for commodity inflation and transactional FX. So when you put the 3 of those factors together, we've got a fairly significant amount of pricing built into the guidance. We're not pricing for margin on top of that, so there is a bit of a margin headwind from the pricing baked in, but that's included in the guidance. If the tariffs did get rolled back, I think it would be of benefit to us as a company, but hard to say how that would flow through because we probably -- we wouldn't take the pricing for the tariff if the tariff gets rolled back, as Mike said. On SKU rationalization, we're working very hard from a sales and operations planning standpoint. We think there's a big opportunity to unlock cash conversion productivity in the supply chain through the SKU rationalization opportunity. And we're working very hard to manage the phase-in and phase-out of that SKU rationalization effort. And I think that will be a theme that we'll be talking about for the next 18 months to 2 years or so.

Your next question comes from Wendy Nicholson with Citigroup.

Just following on that exact line of questioning. One of the pressures, I know, that you've seen on the top line has been choices that you have made to leave some distribution, either unprofitable distribution or channels that you didn't think represented good partners for the future. So can you talk about the impact of those choices from a distribution perspective? How much distribution -- forget about Toys 'R' Us, but ongoing other retailers, you've left some retail on the appliance side, how much of a headwind is that? Because I guess, just looking at the guidance, I totally get the first quarter guidance for core sales, but I'm a little bit surprised that you're not expecting more of a ramp-up in core sales growth in the back half when you've lapped some of that.

Well, let me just give you some of the details on the things that are in the base that we need to lap. There's 2 areas where we've got loss distribution, and that's business that we didn't pursue aggressively through line reviews because of the margin structure in our need to cover inflation and price the businesses. But there really are a few areas. One is in the Outdoor category, where in coolers and in airbeds, we chose not to price down those businesses because of the margin consequences. They would have been nearly unprofitable at gross margin had we chosen to do that, so we took the hit on top line. We lap -- that -- those choices, in particular, have turned out to be good ones as we come into 2019 because the alternatives that our customers chose to pursue, haven't worked out for them. And so there's likely to be some benefit going back to us later in the year. But we have to lap those losses through the second quarter. The way the Outdoor category works is the seasonal sell-in will happen in that March/April time frame. And until we get to that, you don't get to the resets of the aisles. And so we've got that issue to lap into the second quarter. On Appliances, we continue to look at the tail of that business and ask questions about whether these are businesses we should be in at the margins they currently have. And we certainly stepped away from some of the lower-end opening price point offerings that existed in nonstrategic product families last year. Again, the timing of that is -- those choices were Q2. We will continue to prune this business. There just are portions of that portfolio that don't make sense from either a cash-generative standpoint or from a margin perspective, and that will be an ongoing headwind that's contemplated in our guidance. But the big changes we made last year, we lap in the second quarter and will have a little bit longer tail that drags on through the back half of the year. Our goal -- our long-term goal is to drive profitable core sales growth ahead of our markets and build market share, and we think we can do that. We want to simultaneously increase our margins and also significantly improve the cash flow productivity in the business. Some of these choices that we've made on distributions are designed to enable those outcomes. And so yes, we've been prudent on our guidance, and we think that's the right posture to take. And we will do everything we can to do better than that. But for now, given the uncertainty regarding tariff pricing impact on volumes, we think this is the right posture to take.

Your next question comes from Steve Powers with Deutsche Bank.

Welcome aboard, Chris.

Thank you.

So hey, I'm not sure how far you can go here on the fly, but I guess I'm wondering if there's any way for you to break out the anticipated cash flow guidance, continued versus discontinued ops, maybe allocating the pro forma interest expense you expect to pay down through the divestiture program to the discontinued bucket? I mean, even some directional commentary would help because it's just -- it's really hard to unpack it all and contemplate the cash earnings power of the RemainCo business without having that detail. So any further transparency there, whether today or just going forward, would be really helpful.

Yes. Let me try to provide a little bit of help in this regard. So the operating cash flow guidance that we issued of $300 million to $500 million for the year is the total company operating cash flow. Within that guidance, there's $200 million of costs that are related to divestitures, which are basically the tax and deal costs related to the divestitures. And there's over $200 million of restructuring costs. So those 2 things are effectively onetime-ish in nature. So if you were to back those out, that would give you the operating cash flow to the company, excluding those 2 things, of $700 million to $900 million. If you look at what's embedded in that guidance, we expect operating cash flow from continuing operations in 2019 to be significantly better than operating cash flow from the continuing operations was in 2018, and that's because we see an opportunity for cash conversion improvement. When we look at the cash conversion cycle, our -- and benchmark versus our competitors, our days sales outstanding are relatively high, our days of inventory are relatively high and our days payable are relatively low. And so we are putting -- and have put, but are putting a aggressive push on each of those areas. And we think that there is opportunity to go after each of them. We think we can do better at resolving deductions with customers and ensuring that customers comply better with our terms, which will drive our days sales outstanding improvement. We think on inventory, the SKU rationalization program that we've talked about and cutting some of the tail, can drive significant improvement in days inventory. And on payables, we think that we've got an opportunity to negotiate extended payment terms that are more in line with what the competitive set has been able to do. And when you put that together, I think we've got a multiyear cash opportunity on working capital. So...

Yes, Steve, and the only thing I'd build is I think Chris brings a real energy to the space. And his partnership with Russ and the supply chain leadership teams on strengthening our working capital metrics, I think, is going to make a huge difference for us going forward. So it's -- I think the disciplines around these 3 areas are the things that Chris will drive into the organization, and I'm really excited about the possibilities for progress here.

Your next question comes from Kevin Grundy with Jefferies.

I hope I can sneak in just 2, but the first one is just a data point. Mike, what do you think the category growth rate is for the business at this point in time, understanding the core business declining, we have destocking issues, et cetera, et cetera, but I think that's really important for folks in terms of when you can get back to sort of the normal rhythm here? And then -- but the broader question is really how you'd like investors to think about productivity and the cost savings opportunity? Because Mike, as you're well aware, I mean, it was a key reason to own a stock once upon a time with the $500 million synergies going up to $1 billion. But given the challenges, it just -- frankly, it's been lost. And really, there's nothing discounted in the stock, I would argue, for any sort of material upside from it. And if I'm not mistaken, the number now is like $750 million. That is like $600 million from synergies and renewal and $150 million in stranded overheads, which is a huge number. It's greater than 8% of sales, but it also doesn't seem like there's much commitment in terms of getting after it and any sort of flow-through for investors that they can rely upon in a meaningful way. So sorry for being a bit verbose, but maybe if you can kind of help us think about that, that would be helpful.

Sure, Kevin. I'll start, and then I think it'd be helpful for you to get -- to hear Chris' perspective on what's going on in this area. So just on your first question on category growth. As you know, we only measure category growth in the U.S. We really don't have a good way to measure it outside the U.S. Historically, these categories have grown in line with the GDP growth. But there are things that can happen in a market that create catalytic events that drive either expansion or decline. We -- it's interesting in our numbers in the U.S. in 2018, we see the sort of bifurcated profile where we've got some categories with really excellent category growth, and that's generally connected to a broadened category distribution for flagship brands or it's driven by provocative innovation that drives consumer interest in a product family or a segment. Best example for that on us is if you look at the Calphalon Appliances launch in the fourth quarter and you look at the category growth in the toaster oven product family, you see massive shifts in category growth because of the power of that hero item. And we're getting share growth on top of that, coupled with that category expansion. That's sort of the model in this space. When you bring news and it's an exciting consumer idea, you can create market growth. And we see that on Home Fragrance as we make Yankee and WoodWick and Chesapeake more broadly available. We see that when we nail an innovation like we have on the toaster oven platform between what we're doing on Oster and what we're doing on Calphalon. And so the key in most of our businesses is for us to accept -- because of our leadership position from a brand perspective, we have to accept our responsibility to drive market expansion. And where we've done that well with good ideas, executed well in the marketplace, we can do really interesting things. And so I think that's in our hands. When we've had a sort of a bifurcated year where in Baby gear, you've got market contraction because of the shifts going on with Toys 'R' Us bankruptcy; and then on the other side, you have really vibrant market growth in some categories like Home Fragrance where there's a lot of activity going on. But I think the way to plan the business is to think about our category growth globally weighted for our sales based on GDP growth, and that's historically how this has played out. As we come through next year and as we continue to work on margin development, we'll have more capacity to spend, and that should enhance our category growth dynamics as well. On costs, I'll pass it to Chris to give you his impressions. I personally think there's an awful lot of stuff going on here, and you see it in the way we've overcome some of the headwinds on FX and on inflation. But Chris has fresh eyes, and I think you'd benefit from his perspective.

Yes. I think the company has a very aggressive focus on productivity in the cost of goods area as well as overhead cost reduction. And let me take them sort of each in turn. From the productivity in the supply chain, we think we've got opportunities that we're actioning on manufacturing plant consolidation, distribution center consolidation. We have opportunities to increase forecast accuracy at the SKU level, which will allow us to plan better and take costs out of the system. We've got opportunities in automation of lines that drive cost savings. We've got opportunities through the SKU rationalization work that we've talked about. And I think that embedded in our guidance is a fairly significant help from that already in 2019. It's being masked, as Mike mentioned, by the inflationary pressure of commodities, foreign exchange and tariffs. But I think as those items get behind us, I think you'll start to see the gross productivity work come through in a much more meaningful way. On overheads, the company likewise has a very aggressive plan at cost reduction and rightsizing the organization for the size of the company, post the ATP plan. And that really is looking at a lot of different areas. We mentioned in the prepared remarks some of the opportunities that the company has on implementing things like GBS, rationalizing our IT system. For example, when Newell bought Jarden, the company went from 1 to, I think, 43 ERP systems. We have a plan to get from the 43 ERP systems down to 3 by the middle of next year. And so that drives significant opportunity. And the 3 that we're going to have are SAP across the majority of the business, Oracle for the Home Fragrance business and SAP Retail for Marmot because it's a retail-oriented business. So I think we'll be in a much better place to drive scale, synergies through a lot of the activities that we're moving on across the organization.

And the only thing that I would build is to call your attention to the guidance, which, if you look at the operating margin guidance that we've provided on the continuing operations and reflect on Chris' comments in the script where he laid out the fact that we have $200 million of headwind connected to tariffs, FX and inflation, you see us committing through guidance to operating margin progression in that context. And so I think that's sort of the lead indicator of progress from my perspective. But I think it's an important question, Kevin, and it is really going to be one of the centerpieces of what we have to focus on, not just in '19, but in '20 and '21 as we continue to take the retained costs out of the business, but more importantly, give ourselves room in the P&L to invest at higher levels for growth. And that -- I think we're on the right track, but I think it's right to continue to challenge us with those types of questions.

Your next question comes from Bonnie Herzog with Wells Fargo.

I just wanted to ask about divestiture proceeds. You extended the timing, and the total proceeds now you're expecting to be slightly lower. But I guess, help me understand if your priorities for debt paydown versus buybacks have changed at all. And then just wanted to clarify that your EPS guidance does consider both of these, and how we should think about maybe the phasing, first half versus second half.

Sure. So we have updated our guidance on the total proceeds from $10 billion previously to $9 billion is what we're expecting in total. To date, our after-tax proceeds that the company has received has been $5.2 million through the end of last year. And our EPS guidance does contemplate the update of the divestiture timing. And as I mentioned in my prepared remarks, because we're separating out the Mapa/Spontex business from the CCS business, we're expecting those 2 deals to happen in the back half of the year. So the guidance reflects that. The U.S. Playing Card, Rexair and Process Solutions business effectively we're expecting to happen by the end of the second quarter. And as a result, that changes the timing of when the proceeds are coming in versus what the original plan assumed, which is why we're guiding the share count to be only modestly lower this year because we're expecting a significant amount of the proceeds from CCS and Mapa/Spontex toward the end of the calendar year. So all of that is embedded in the guidance, but that's the update on where we are on the divestiture program.

And then just quickly to clarify the split between the proceeds, is it still 45-55 in terms of debt paydown versus buybacks?

Yes. So on that, if you look at what we've done through 2018, I think we've used about 30% of the proceeds for share repurchase. We're committed to investing in the business, and we're committed to returning excess cash to shareholders and maintaining a strong balance sheet. I think we're continually looking at the company's capital structure, and I think we will make progress on both debt paydown and share repurchase. But given the moving parts here, it may not be as straight a line as what it was previously.

Your next question comes from Lauren Lieberman with Barclays.

So you guys mentioned that you were kind of starting the strategic review process. So 2 questions off of that, recognizing it's early days. One is, to what degree you're thinking through geography? I feel like when you had acquired Jarden, part of the conversation was around the geographic opportunities that opened up for some scaling events for you in some markets. So to what degree geography is still sort of an interesting vector if there's a likelihood of kind of scaling some of that back? And then the second piece is just to think about the longer-term margin profile of the continuing businesses, because I understand there's the big headwind that you've called out for 2019 on commodity costs and so on and then lower share count. But it also feels like there's implication that there is now a view that the margin structure of the continuing businesses is probably lower than you might have thought previously. So if you could just comment on that or maybe my math is kind of off and it's too early to pass judgment on that.

Great question, Lauren. So with respect to the future development of our business, there are really 3 things that we're focused on. One is continuing to build out our brand and innovate brand-building innovation agenda for each one of these -- each one of the product families that has the best potential to contribute to both our growth and our margin development. And we're obviously investing to shift our selling capabilities to reach consumers where they shop. And then clearly, there's a huge mark -- product deployment or category deployment opportunity for some of our categories around the world. And so if you think about the 3 drivers of growth going forward, it's brands and innovation; it's leveraging our selling capabilities, both in brick-and-mortar but also as increasingly in e-commerce as a result of the scale we have there and the capability we've invested to create; and then deploying the portfolio. In my comments, I mentioned that that's a huge opportunity and that the cost of deployment is coming down as a result of the emergence of new ways to deploy your portfolio and as a function also of consumers' ability to get to know brands prior to them arriving onshore. And so we are committed to deploying the portions of our portfolio that make the most sense to deploy into the markets where the people and the economic development in the world is going to occur. And so we've begun that process, particularly with a focus on Writing. We will do that with Baby over time. And there's opportunity in the balance of our portfolio as well to look forward and make some of those choices. Chris referred to the category strategy work that we're doing. We call it cat strat activity in the divisions. That's a process that we've launched that we'll culminate with the board in the summer that will help us make a series of choices that is below the division level, that product family level, on which categories are most attractive and offer the greatest potential and which categories deserve disproportionate resourcing. And so that work is underway. It's going to be division-led with insight and help from some of our corporate resources, but it's essential to road mapping the next 3 to 5 years of the company. And it cuts across -- it's not just a growth-oriented discussion. It's what kind of supply chain do you need to be able to support the ambition, what kind of capabilities are you going to need to be able to strengthen the potential outcomes that come through some of those choices. And so Chris, Rich Mathews, Russ Torres, the division leaders, will really drive that process through the summer. And I think it's going to be really exciting for our people to begin to do this kind of thinking and work -- and important work for us, as we define the road map forward.

Yes. I guess, what I would add, Lauren, just on the numbers is the company reported, I think, in 2018 an operating margin for the year of 10.2%. When you adjust that for the normalization practice change, that becomes 9.1% because of the 110 basis point differential in the normalization practice. And we're guiding to 20 to 60 basis points up from the 9.1% for 2019. Given the work that we're doing on the category strategy work, as Mike mentioned, and how that ladders into the company strategy work, we think it's premature for us to issue long-term guidance. So we are not issuing margin guidance for 2020 or beyond at this point because we think that, that work will help us have better visibility into that. That being said, we see a clear opportunity to take the operating margin on the continuing business higher over time. The pace and path of that, I think, is what will be informed by the strategy update work that we're doing.

Yes. And the 2 levers for that will be in overheads, which are still quite high for the company as a percent of revenue; some of that due to the retained costs associated with the disposals; and the other being gross margin development, which, in today's environment, is pretty tough, although I was pleased with what we saw in Q4. And we will work hard next year to overcome the headwinds we've talked about. But if you look backwards, Lauren, at the period between 2011 and 2015 for Newell Rubbermaid and look at that story, you saw really meaningful gross margin improvement in that window through innovation and through smarter deployment of our programming against the businesses with the best potential for growth, which tended to be the higher-margin businesses. You should be looking for us to demonstrate that same dynamic, which has been difficult over the last 2 years to do as a result of the negative mix effect of the Writing reset that occurred in '18 and because of the challenges now that the business has with the retained costs associated with the divestitures. But our orientation is going to be to drive those very similar sets of outcomes.

Your next question comes from Olivia Tong with Bank of America Merrill Lynch.

Wanted to talk a little bit more about cash flow. And first, in terms of the divestitures, how you're feeling even with the amended $9 billion expected after-tax proceeds. And I guess, if you don't end up seeing offers at what you believe are fair prices, what would you consider in terms of other levers to shore-up cash, especially given that the dividend is obviously building well above market. First goal still are 30 to 35 payout. And then just as you think about the cash longer term, after fiscal '19, where do you think is sort of the right level to get at?

Yes. So thanks, Olivia. So I think our focus is on driving shareholder value. And so to your question, if we don't get a deal value that we believe drives shareholder value for the company, we're not going to sell the assets at fire sale prices. So we've done the analysis to look at what the keep value is for the assets, and our $9 billion assumes that we get valuations that exceed that keep valuation, is the first point there. So that could change if we get offers that are below what we think the value of the enterprise is because we're focused on shareholder value creation. Relative to how we deploy the proceeds for our debt repayment versus share repurchase, I think it's the same answer, which is we're focused on shareholder value creation. We continue to be committed to having a sustainable balance sheet and leverage ratio and returning excess cash to shareholders. And we'll make those decisions as we go along through the process here.

And then just on the dividend?

We have no plans to change the dividend.

Your next question comes from Nik Modi with RBC Capital Markets.

Mike, this is Russ Miller on for Nik. We just wanted to ask on Writing, and specifically now with the Staples and Essendant deal closed, is there any more perspective you could provide on the impact that may have to the Writing business?

We're very pleased with the progress in Writing. Laurel Hurd and her team have done a remarkable job; Russ Torres on the sideline sort of providing some guidance and input to them as they've come through a very, very turbulent period of time. As you know, that whole landscape reset in the middle of -- starting in the middle of 2017 and through the first half of 2018, the -- under new leadership and new ownership, the traditional channels within Writing established a new set of inventory targets for themselves, which we have worked with them to make progress on achieving. And we have a little bit more work to do there in 2019, but the real pain of that transition is behind us. And we start to see the kind of opportunity you would hope to see in this business. Business has made very good margin progression, recovering the step-down from '17. And the team is mobilized now on reigniting growth, and you start to see some of that occurring over the last 2 quarters. So we're quite optimistic about where the Writing business is. Very proud of the team for fighting through that adversity and delivering a very, very good 2018 in that context and are excited about the future. They've got some great innovations coming in the back half of 2019 that will serve us well into '20. And we've got very good momentum on Slime now around the world. So if you want to create Slime in Europe, you can. If you want to do it in Australia, you can. And we're looking at new markets every day for that opportunity. So look, I love this business. I think it's a great business. I think it's an important business in terms of the role it plays in socio and economic development in the emerging markets. And we're very committed to making this business bigger and building the equities in these brands around the world.

Your final question comes from Joe Altobello with Raymond James.

So welcome, Chris. Welcome aboard.

Thank you.

Looking forward to working with you. I just want to circle back to your earlier line of questioning. And I know, Mike, you mentioned that Newell earlier was turning the corner. But the core sales outlook for '19, obviously, it doesn't really show that at least on the top line? I would think that if I asked you that question 6 or even 3 months ago what your 2019 core sales guide would be, it wouldn't be down low singles. And I'm guessing the delta is probably, call it, 4 points from where we are today versus where we would have been maybe 6 months ago. How much of the change is macro? And how much of the change is the decisions you guys have made? And I know you've mentioned lapping TRU and the loss distribution in Appliances and Outdoor, but you've known those for a couple of quarters now. So I'm just trying to figure out what's changed from a macro level and what are you guys doing differently that has caused that outlook to come down.

Yes, we don't have a different view on the macros. I mean, there is some slowdown in Europe and in parts of Asia, but we don't have a big footprint in those geographies that would cause me to have that factor into our guidance on core sales. We've got the realities of what we've described, which is Toys 'R' Us in the first half of the year. And we've got the realities of the distribution issues, which will continue to govern the upside. We felt that coming into this year that this was the right way to plan the year. It will enable the continued progress on margin development and set the stage for growth reignition on this business going forward. The year will be a little different in terms of its flow. Q1 obviously steps down from the sequential result improvement in Q4 and Q3 before it, and we've guided 2% to 4%. That is an artifact of Toys 'R' Us. There's really nothing we can do around overcoming 250 basis points of top line headwind. But from that point forward, once we lap the distribution, you should see sort of the normal progression you would expect to see in our business. We will always ask questions about relative attractiveness of businesses. And we're going to give ourselves the room in our guidance to be able to make choices around some of those activities. An example of a choice we've made that impacts top line, not really core sales, but impacts top line, that is the right choice to make, is the choice to exit about 100 stores on Yankee out of the mall-based retail from Yankee Candle. That's -- those are not attractive stores. They lose money. As the leases expire, there's an efficient way to get out of those businesses. That will help us in our margin development going forward and is the right choice to make, irrespective of the consequences to the top line. And so we're going to do the right thing. Our long-term goal is to drive profitable core sales growth ahead of our markets to build market share, to increase our margins and to significantly improve the cash flow productivity in the business. And we have a tremendous opportunity on all of these fronts.

We have reached the end of the time allotted for our question-and-answer session. I will now turn the call back to Mr. Polk for closing remarks.

Well, thank you, everyone, for all the questions and for sticking with us through the call. Chris and I look forward to seeing many of you next week at CAGNY. And to our team, thank you, as always, for your drive, your determination and your commitment to Newell Brands. Chris and I couldn't be prouder of the energy and effort you put into this business and are very gratified with the progress we're making in a difficult environment. And we see the green shoots we've been talking about, and we're optimistic and excited about the prospects going forward. Thanks so much. Talk soon.

Ladies and gentlemen, a replay of today's call will be available later today on our website, newellbrands.com. This concludes our conference. You may now disconnect.