Good morning, and welcome to the Newell Brands Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. A live webcast for this call is available at ir.newellbrands.com.

I will now turn the call over to Sofya Tsinis, Vice President of Investor Relations. Ms. Tsinis, you may begin.

Sofya Tsinis - Vice President of Investor Relations

Thank you. Good morning, everyone. Welcome to Newell Brands Fourth Quarter and Full Year Earnings Conference Call. On the call with me today are Ravi Saligram, our CEO; Christopher Peterson, our President; and the newest member of the executive team, Mark Erceg, our CFO.

Before we begin, I'd like to inform you that during the course of today's call, we will be making forward-looking statements, which involve risks and uncertainties. Actual results and outcomes may differ materially and we undertake no obligation to update forward-looking statements. I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K, Form 10-Q, and other SEC filings available in our Investor Relations website for a further discussion of the factors affecting forward-looking statements.

Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those referred to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures are available and available reconciliation between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as other materials on Newell's Investor Relations website.

Thank you, and now I'll turn the call over to Ravi.

Ravi Saligram - Chief Executive Officer

Thank you, Sofya. Good morning, everyone, and thank you for joining us on our year end call. Fourth quarter results were in-line with our expectations and brought to a close, a difficult second half. The business continued to be impacted by a tough operating environment, including slowing consumer demand for general merchandise categories as well as inventory reductions at retail. Our team remain focused on executing our strategic priorities with excellence, while navigating these challenges. They did a great job in reducing inventories in the fourth quarter and drove sequentially stronger cash flow performance.

For the year, Core sales declined 3.4% against a very demanding year ago comparison of 12.5% growth and softer volumes more than offset favorable pricing. Two-year stacked growth exceeded 9%. The Writing and Commercial businesses delivered core sales growth in 2022, while core sales for the other businesses declined. The company's core sales and domestic consumption exceeded 2019 levels even as home and outdoor categories are continuing to normalize from peak pandemic levels. Many of our major brands such as Rubbermaid, Sharpie, Paper Mate, Rubbermaid Commercial Products Ball, EXPO, Elmers and Contigo showed strength.

Despite a much tougher than anticipated operating and macroenvironment in 2022, which weighed heavily on the company's results, we made tangible progress across a number of focus areas. First, many pharma iconic brands were recognized for the innovations. For example, Ball, Stack and Store innovation and Good Housekeeping, Cleaning and Organization Award. Graco won the JPMA Innovation Award for Child Restraint Systems with Graco [Indecipherable] Coleman RoadTrip 285 Stand-Up Propane Grill, most recently ranked by Outdoor Gear Lab as the best portable grill in 2022.

In the US, new innovation on the Mr. Coffee Latte 4-in-1 received a Good Housekeeping, Best Gear and Best Coffee award. Our latest innovations in Writing Elmer's Squishies launched exclusively in Q4 at a major retailer with very strong results. In three months, it became Newell's top activity item, outpacing slime sales over 3:1. National launch of Squishies across US retail will begin in late March 2023.

In April of '22, we launched new creative kitchen by a unique, efficient social media vehicle that allows us to take a annual approach to connect our brands across consumer life moments and occasions and bring curated content to target consumers, allowing them to to repost to their own followers. We've seen a four-fold increase in engagement through our live presentation's at a 90% higher click-through rate to our branded website since creating Newell Creative Kitchen.

Second, we continue to build operational excellence across our organization by transforming our supply chain through Project Ovid and automation. And earlier this year we announced the next major step in this journey as we are unifying our global supply chain and centralizing manufacturing, which we expect to drive meaningful margin improvement in the long term.

Third, we made significant progress on complexity reduction, ending 2022 with about 28,000 SKUs as compared to approximately 36,000 in 2021 and over 100,000 in 2019. Our revenue per SKU has more than tripled versus 2019. We will continue reducing SKUs and accelerate SKUs productivity.

Fourth, we drove another year of strong productivity savings and around 3% of cost, which in combination with pricing actions helped to mitigate the high single digit headwind from inflation. We will further accelerate our productivity efforts in 2023.

And last, but certainly not least, we advance our corporate citizenship agenda as we continue to galvanize our employees to be a force for good. We strengthened our people first One Newell culture, maintain strong employee engagement at world class norms and committed to carbon neutrality by 2040 for all Scope 1 and 2 emissions across our global portfolio. I'm also pleased to share that for the second consecutive year Newell Brands has been named one of Fortune's 2023 World's Most Admired Companies.

While we're proud of the operational achievements and believe we are much more agile company today, we also recognize that the macros have put considerable pressure on our business. We have been taking proactive and decisive actions to effectively navigate the current environment while positioning the organization for long-term success. In late January, we announced Project Phoenix, a major evolution in our operating model and a restructuring program that is expected to drive significant savings. Phoenix will further simplify and strengthen our company by leveraging the scale and power of One Newell to optimize our cost structure and operate more efficiently.

Let me shed more light of Project Phoenix,. There are five key tenets. First, we will combine business units into three operating segments based on consumer dynamics and customer commonalities. Second, we will centralize our sales efforts for our top four customers. Third, we'll go to one new go-to-market approach in key international geographies. Fourth, we will centralize and unify manufacturing globally. And fifth, we'll strengthen key capabilities, reduce duplication, enhance role priorities and drive standardization of processes, tools and measurements.

We're bringing the Food, Home Fragrance, Home Appliances and Commercial businesses under one umbrella, Home and Commercial Solutions led by Mike McDermott, the segments CEO. Lisa McCarthy has assumed a new role as Chief Operating Officer of the Home business, reporting to Mike. Learning and Development, which includes Writing and Baby, is led by Kris Malkoski. Jim Pisani will continue to lead our Outdoor Recreation business.

Through this evolution, we will honor the differences and nuances among our businesses and unify around commonalities related to the consumer and customer, while leveraging our scale and enabling better opportunities for internal mobility. Our iconic brands play a key role in the lives of nearly every US household. We expect the new operating model to unlock additional growth opportunities for the business over time. We will leverage the power of our brands to meet consumers daily needs, in and out of their homes, through their major life moment vacations.

Our international business remains an important priority for Newell. In 2023, core sales for International increased by 0.4%, significantly outpacing North America despite macro and geopolitical pressures. As part of Project Phoenix, we're continuing to reduce international fragmentation by moving to a One Newell go-to-market approach in key geographies such as Australia and New Zealand, LATAM, Japan, and as announced last fall, Canada. We're also evaluating the structure in consultation with Employee Works Councils in Europe. This should dramatically reduce fragmentation, accelerate growth and profit trajectory for our international business over time and increase depth and breadth of franchise outside of the US.

As part of Project Phoenix in the US, we're also moving to a One Newell SaaS model for several of our top customers. Centralizing these teams will simplify our customer interaction, significantly improve the customer experience and strengthen our position as a best-in-class partner. I'm proud that we've built high, wide, deep and enduring relationships with key customers and are increasingly perceived as a valuable strategic partner. Based on the success of Project Ovid and in the spirit of One Newell, we are moving to a unified global supply chain organization, which Chris will elaborate on later.

As we focus on optimizing our cost structure, we are taking decisive action on our real estate. In a hybrid work environment, we have the opportunity to close or consolidate offices and adopt new ways of working. We just announced closure of our corporate offices in Boca Raton and South Deerfield earlier this year, the consolidation of our Huntsville campus. We're in the process of assessing other actions. In total, project Phoenix is expected to result in the elimination of approximately 13% of office positions. While this was a very difficult decision and one we as a leadership team did not take lightly, we made every effort to treat our departing colleagues with respect and dignity, and we're doing all we can to help with their transitions.

The actions we are undertaking are continuation of the simplification agenda that we've driven over the last four years, and in response to the difficult macroenvironment. We expect Phoenix to yield annualized pre-tax savings in the $220 [Phonetic] million to $250 million when fully implemented. At its core, Phoenix is not just about restructuring, it is about leveraging our scale, it is about significantly evolving our operating model to strengthen the company and prepare for the future. As macro conditions remain unfavorable to topline growth, our prime focus in the near-term is cash flow and gross margin improvement. I know Chris is working hard to get his nickname back as the billion dollar man.

Speaking about the future, this morning we also shared that I will be retiring on May 16th. This is a very bittersweet moment for me. While I'll look forward to pursue new interest as spending more time with my family, including my first granddaughter, Lis, who was born just few weeks ago. I'll certainly miss everyone at Newell Brands. It's been a distinct honor and privilege to lead the company over the last several years and I have loved every day at work. I remain inspired by our talented employees, so passionate, resilient and courageous.

I'm very proud of our strong World-class Executive leadership team who made significant progress in strengthening the company by reducing complexity, are on the journey to rejuvenate our iconic brands to be more modern than relevant, launching successfully innovations that leverage pandemic trends, building e-commerce and omnichannel as a competitive advantage and transforming our supply chain. The team is working diligently to implement Project Phoenix and make our new segment-based operating model a major success.

I want to congratulate Chris on his well deserved elevation to the new CEO of Newell. He's been a true partner to me in the turnaround, and I believe he is the right person with the right skill set and right temperament to take Newell to the next level. I know our leadership team respects Chris, and will strongly support him to deliver our key priorities. I'll be partnering closely with Chris to ensure a smooth and seamless transition, and will focus my efforts on ensuring the successful execution of Project Phoenix, accelerate momentum on International and rallying the organization to overcome macro challenges with speed and dexterity. I'm also pleased to welcome Mark to Newell's leadership team, his first earnings call with us. I believe has multiple experiences as CFO will add significant value to Newell Brands, and I'm confident that he and Chris will be a powerful combination to move Newell forward.

Despite the macro headwinds the company faces, I am optimistic about the future of Newell. We have great brands that consumers love. We have built e-com and omnichannel service. We have excellent customer relationships and are reigniting the processes and passion to drive meaningful innovation. We believe we will return to driving sustainable profitable growth once the economy turns in our favor. Our best days are ahead of us, onwards and upwards, and now I turn over to Mark for his remarks.

Mark Erceg - Chief Financial Officer

Thank you, Ravi, and good morning, everyone. Over the last four weeks, I've immersed myself in the business and the organization and during that time, in many ways, I felt like I was getting reacquainted with an old friend. I say that because after spending the first 18 years of my career at Procter & Gamble, I spent the next 13 years learning the ins and outs of building products, transportation, luxury goods and healthcare information technology. Those unique experiences I believe prepared me well, as I now come full circle and return to my first true business love, which is consumer products, where deep consumer insights, differentiated innovation, creative 360-degree marketing, operational excellence and the first moment of truth all reigns supreme. I undoubtedly, still have a great deal more to learn, but in my brief time at Newell Brands I've already made some high level observations, which I'd like to share with you.

First, it is clear to me that over the last couple of years, Newell Brands under Ravi and Chris's leadership has built a great team within a strong mission-driven culture that guides the behavior of 28,000 dedicated professionals who strive each day to bring value to the business and the organization.

Second, dramatic steps have been taken to simplify and streamline the business, which were necessary prerequisites for us to improve our speed, agility and financial performance going forward.

Third, the bold actions recently announced as part of Project Phoenix to reduce overhead costs and create scale across manufacturing, distribution and transportation and customer service are our key business and organizational enablers, which I believe will serve us very well in the years ahead. Finally, and perhaps most importantly, there is broad recognition across the entire company that while these past and current actions are all steps in the right direction, there is much more work that needs to be done.

My interactions have led me to the conclusion that the organization is eager and excited about the future because Newell has a robust portfolio of leading brands with strong market share positions, which when coupled with the right capabilities should allow us to continue on our journey towards becoming a World-class innovation-led consumer-driven company that can consistently grow sales and expand margins year-after-year. And in doing so, generate meaningful levels of total shareholder return.

Personally I'm excited, honored and humbled to be part of that journey. And I'll now turn the call over to Chris.

Christopher Peterson - President

Thank you, Mark, and good morning, everyone. I'd like to echo Ravi's sentiment by welcoming Mark to the team, Mark and I have known each other for a long time, having worked together at P&G. Although Mark has only been here for a short time, I can already see what a great fit he is for the organization, and look forward to partnering with him and the rest of the leadership team to unlock the full potential of the business. I would also like to thank Ravi for his leadership and partnership over the past several years. I've admired his passion, commitment and people-first mindset, which are infectious and have reinvigorated the company's culture.

I'm honored and excited to become the next CEO of Newell Brands. In my new capacity, I look forward to working with our leadership team, the Board and all of Newell's dedicated and talented professionals around the world to drive shareholder value creation through diligent and thoughtful execution of our strategic agenda.

Before jumping into the results, I'd like to take a few minutes to talk about some of the key business and organizational initiatives we have recently taken to strengthen the company's operational foundation. As we've mentioned before, a key component of our aspiration to become a TSR leader in our industry is predicated on creating a scaled World-class supply chain that positions Newell as the retailer partner of choice from a service, reliability and capability standpoint, and leaves the breakthrough value creation in terms of margins, cash and reduce complexity.

Consistent with that, on February 1st, we seamlessly implemented the second go-live wave of Project Ovid across the remaining food categories, as well as the Writing, Outdoor & Rec and commercial businesses. Having reached this major milestone in Newell's supply chain transformation journey, we're now at a point where we can begin to fully leverage the new go-to-market model to operationalize distribution and transportation benefits, improve customer service, better enable omnichannel solutions and drive broad-based operational excellence across the organization.

Project Ovid was an integral step and demonstrating the organization's readiness and willingness to undertake a significant change agenda and commit to a One Newell culture. So we are building on this momentum as part of Project Phoenix to further optimize the company's operations by centralizing manufacturing into a supply chain center of excellence. This will, for the first time, allow us to create and leverage manufacturing scale and turn it into a competitive advantage. While this will not materialize overnight, we do believe that a unified global supply chain organization will drive significant efficiencies, improve our supply chain resiliency, further enhance the company's technical capabilities, strengthen our culture of customer connection and collaboration, and position us to become a best-in-class scaled general merchandise supplier to our retail partners.

Now let's move on to fourth quarter results, which were largely consistent with the outlook we provided in October, and our focus on optimizing cash flow yielded strong results. Net sales for the fourth quarter declined 18.5% year-over-year to $2.3 billion due to a 9.4% decrease in core sales, as well as the impact of the divestiture of the CH&S and business at the end of Q1, unfavorable foreign exchange, and certain category and retail store exits.

Topline trends remain challenged due to inventory reductions at retail as well as softer consumer demand for general merchandise categories. We expect these dynamics to persist in the near-term. Normalized gross margin contracted 360 basis points versus last year to 26.6% as the impact of reduced fixed cost absorption, unfavorable foreign exchange, and inflation more than offset the tailwind from pricing and FUEL productivity savings.

Before moving off of gross margin, I should mention that during the fourth quarter we elected to change Newell's method of accounting for certain inventory in the US from LIFO to FIFO to conform the company's entire inventory to a single method and simplify the company's inventory accounting. Therefore, the financial statements in today's release and the numbers we're referencing reflect the impact of this accounting change to FIFO, both in the current and prior year periods, which have been retroactively adjusted.

For Q4 specifically, there was a $4 million increase to cost of goods sold relative to what it would have been under the prior method. Normalized operating margin declined 510 basis points versus last year to 4.9%, reflecting gross margin pressure and the impact of topline deleveraging on SG&A costs. Net interest expense increased to $64 million from $59 million in the year-ago period. The normalized tax benefit was $5 million as compared to a $38 million expense last year with the difference largely driven by an increase in discrete tax benefits.

For the quarter, normalized diluted earnings per share were $0.16 as compared to $0.42 last year. During the four quarter Newell's cash flow performance improved considerably and it began to reflect the actions we took in 2022 to right-size our supply and demand plans. The business generated operating cash flow of $295 million in Q4 as inventory declined by more than $400 million relative to Q3. Working capital was a source of cash in Q4 despite a meaningful drag from payables, which have been negatively impacted by the timing of our pullback on the supply plan.

Although, the company ended 2022 with an elevated level of working capital and operating cash outflow of $272 million, Q4 cash result, in combination with our proactive pullback in the supply plan give us confidence that operating cash flow will bounce back significantly in 2023. Despite the strong stack - snap back in cash flow, we ended 2022 with a leverage ratio of 4.5 times as we took on short-term debt to navigate through this tough environment. While we expect the leverage ratio to be pressured in the near-term, we remain laser focused on strengthening the company's balance sheet in the years ahead.

Note that effective Q1, we are implementing a new operating model and consolidating our previous five operating segments into three. Therefore, in the interest of time, I'm going to dispense with the usual high level segment sales commentary for two reasons. First, you can easily find these numbers in the tables attached to our press release. And second, I'm sure everyone is interested to hear our comments about fiscal 2023.

Taking a step back, 2022 was clearly a challenging year for Newell, but we acted quickly and decisively to mitigate the impact of the external headwinds and ensure we are strategically investing in core capabilities that position Newell for success over the long-term. In 2023, we've identified five major priorities to stabilize Newell's financial performance while driving foundational improvement, so we can return the company to sustainable and profitable growth as macros improve.

First, strengthen cash flow and balance sheet by continuing to right-size inventories, carefully managing the forecasting process and staying close to the evolving consumer and customer trends so we can remain agile in planning.

Second, drive gross margin improvement by accelerating FUEL productivity savings, further advancing our automation initiatives, operationalizing Project Ovid distribution and transportation benefits, pricing internationally for currency and instilling greater financial discipline surrounding new product innovation.

Third, drive overhead savings through Project Phoenix and pipe spending controls to offset the impact of incentive compensation reset to normal levels and wage inflation.

Fourth, continue SKU count reduction progress and initiate a bottom-up white sheet SKU approach to enable the next phase of reduction.

And fifth, operationalize the new company's structure to enable faster transformation progress.

Despite taking these proactive and decisive actions to strengthening the company's performance, we expect the external landscape to remain challenging in 2023. The high level of uncertainty on the macro front has influenced our modeling assumptions as follows. We are assuming consumers disposable spending power will be under pressure due to inflation in food, housing and energy, with consumers in Europe feeling greater stress than in the US. We also expect consumer demand for general merchandise categories to remain soft due both to macroeconomic environment and normalization of home and outdoor categories from peak pandemic demand levels. Retailers are likely to continue reducing open to buy dollars in general merchandise categories.

Foreign exchange is expected to remain a headwind for the year. We expect the supply chain pressures to continue to ease and for inflationary pressure to moderate to low single digits of COGS, down from high single digits in 2022, as commodity and transportation prices continue to move off their peak levels. Since we expect many of the headwinds the company experienced in the second half of 2002 to persist in 2023, we are maintaining a prudent bias when setting our demand and supply plans to ensure a heightened focus on cash flow generation, working capital improvement and optimization of Newell's cost structure.

Within this context, our 2023 financial outlook contemplates net sales of $8.4 billion to $8.6 billion, with core sales declining 6% to 8%. We're assuming nearly a 3% headwind from foreign exchange, certain category and Yankee Candle store exits and the sale of the CH&S business which closed at the end of Q1 last year. Normalized operating margin is expected to be flat to down 50 basis points versus last year to 9.6% to 10.1%, as stronger gross margins are offset by overheads.

We expect to drive above average productivity savings, which in combination with carryover pricing and new pricing outside the US should more than offset the impact from inflation. We are planning to maintain tight spending controls and are assuming that Project Phoenix unlocks about $140 million to $160 million of pre-tax savings this year. However, we expect these benefits to be fully offset in dollar terms by incentive compensation reset, wage inflation, and select capability investments. We are forecasting normalized earnings per share of $0.95 to $1.08 as we expect a significant year-over-year increase in the interest expense and tax rate.

We are assuming a return to a more normalized tax rate in the high-teens range as compared to 2.5% in 2022. At the midpoint of the range, we are assuming that normalized earnings per share decline low double digits on a constant tax and currency basis. We expect a significant bounce back on cash flow in 2023 from timing of inventory purchases and payables with free cash flow productivity well ahead of 100% at a mid - at the midpoint of our guidance range. We are forecasting operating cash low in the $700 million to $900 million range, including about $95 million to a $120 million in cash expenditures from Project Phoenix.

Our first quarter outlook assumes the following: net sales of $1.79 billion to $1.84 billion, including a core sales decline of 16% to 18% and a 7% headwind from the sale of the CH&S business on March 31, 2022, foreign exchange and certain category and Yankee Candle store exits. We are forecasting normalized operating margin of 3.0% to 3.5%, significantly below 10.6% last year due to fixed cost deleveraging inflation and foreign exchange pressure. We expect normalized loss per share of $0.03 to $0.06. The depressed earnings per share in the company's smallest quarter of the year from a seasonality perspective reflect significant margin pressure, a step up in interest expense and a modest tax benefit.

We clearly expect a much tougher first half of the year relative to the back half, as the business cycle is more challenging topline comparisons with headwinds from currency and inflation carryover being more front half weighted, whereas benefits from Project Phoenix are expected to be more back half loaded. We're also assuming that retailer inventory reductions and constrained spending on discretionary products will persist through the first half of the year.

As such, we expect core sales growth to be stronger in the second half of the year versus the first half. We are taking decisive actions across all areas that are within our control to successfully navigate through this difficult macro backdrop, while building and investing in core capabilities, which we believe will position the company for a return to sustainable and profitable growth.

Operator let's now open up for Q&A.

Question & Answers

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Bill Chappell with Truist. Your line is open.

William Chappell - Truist Securities - Analyst

Thanks, good morning.

Christopher Peterson - President

Good morning, Bill.

Ravi Saligram - Chief Executive Officer

Good morning, Bill.

William Chappell - Truist Securities - Analyst

And congratulations to everyone. First, kind of question on Project Phoenix. Obviously, over the years even before your two tenures, there have been a lot of projects, a lot of consolidation of divisions and from five to three and three to five and what have you, how is this different? I mean, what do you see that in the cost savings that you haven't already gotten from the prior projects that really gets you confident about how this make a big change? Like I said, because it's been done, it seems attempted multiple times before in the past decade.

Ravi Saligram - Chief Executive Officer

So, I think let me kick that off. Look, first its in Australia these ideas germinated when we were looking at the Food business and Appliances business. And the customers and the merchants are the same and we were not approaching it on an integrated basis. The consumers are the same because they reside in the kitchen and so we started thinking about it. And this whole notion of consumer life moments and occasions and really was driven from a consumer and customer standpoint saying, hey, where do these reside and how do you group the businesses.

So as you know, Newell, sort of geared a bit from centralization to decentralization overtime. But for us, we've taken in the last three years a more holistic approach of heading the businesses for front facing and we were unifying in the back to leverage scale. This is just the next evolution of that. And so we said, hey, it really make sense, candles are the home. COVID also taught us that home is the hub. So that made sense then to bring those businesses.

The commercial piece for Australia, it shares the Rubbermaid brand and so we said let's bring that together. The key was this - this has helped us because we had different CFOs and HR for each of the businesses. This has helped us reduce it, create bigger jobs for people, improve the span of control, etc. Second, I think this is very historic by doing International as integrated One Newell as a whole, because it's a lot of fragmentation. So this One Newell market approach - go-to-market approach I think is going to be quite amazing.

I don't think we have ever unified supply chain globally, and I think that - we just feel that will allow for better decisions on nearshoring, hey, do you source, manufacturer taking real leverage of our total footprint globally, which we think long-term will help the gross margins. So when you look at those firms, and then there is a lot of, I think as a company because these were all separate companies in the past. One of the keys is standardizing processes, which we did in Ovid, and we've learnt a lot from that, and then getting to a common measurement systems. So I just think it will create a more efficient company, and - so this was - this was not just a, hey, let's take cost out for the sake of cost out, it was very strategic in how we went about it.

William Chappell - Truist Securities - Analyst

Okay. I'll follow up on that. The second question is just in terms of consumer demand, trying to understand if there are areas where you're seeing meaningful pullback from consumers due to recessionary environment or if you're just expecting that to happen as we move through the year? And if the former, then where are you seeing the biggest pressure points?

Ravi Saligram - Chief Executive Officer

I think, well, two points, one, I'll just reiterate. One, we are about 2019 from the pandemic levels overall. So that's encouraging the stack growth to two years is 9%. But having said that, clearly there are a couple of phenomenon. One is due to the stimulus that occurred as well as the pandemic, on certain businesses and categories have a forward acceleration from a consumer standpoint. For instance, Appliances is probably the prime candidate. Then you had the phenomenon of, like candles, during COVID where people were burning a lot and you brought in, or we bought in lot of low income consumers that now without the stimulus have left the fold. So you are seeing, even before the recession there are couple of impacts which are the retailers destocking, consumer forward acceleration that had occurred in different categories. So, I think when you take a look into that, those are the things that we are seeing those trends persisting in the first half.

William Chappell - Truist Securities - Analyst

Great. Thanks. I'll turn it over.

Operator

Thank you. One moment for our next question. Our next question comes from Olivia Tong with Raymond James. Your line is now open.

Olivia Tong - Raymond James - Analyst

Great, thank you. I wanted to talk about your sales expectations and what's embedded in your core revenue outlook for this fiscal year because we seen that Q2 is going to see some more pressure as Q1. Then it would imply sort of a low single-digit core sales growth in the second half at the midpoint. So can you provide some color on your views on trends as you begin to lap the destocking in the second half of the year and what - what's your full year outlook reflects in terms of your view on shelf space or retailer losses in what you think are underlying line category growth is as you exit this period of destocking?

Christopher Peterson - President

Yeah. Thanks, Olivia. I'll take that. So, I think as I mentioned in the prepared remarks on our revenue outlook, there's really three or four trends that are going on that inform our outlook. One is normalization of categories from peak COVID levels and that's particularly impacting the Home and Outdoor businesses, where we're continuing to see sort of a return to pre-pandemic category levels. Second is consumer pressure on discretionary categories because of inflation in food and housing, which is taking a greater share of consumer wallets. Third is the retailer destocking impact. And then finally, we've seen over the last two years almost 20% input cost inflation and we've largely priced for that as we've talked, but that also is putting pressure on categories from a volume standpoint.

If you look at the trend during the year, we're guiding for core sales growth of minus 16% to 18% in Q1, which we're not going to give quarterly guidance, but I don't think it's a fair assumption to say that we expect that to continue in Q2. I do think that Q1 is uniquely negative because of the comparison. If you look at the two year stacks on Q1, it's almost 27% or 28% that we're comping. So it is the toughest comp. As we mentioned in the remarks, we do expect the back half to be better than the front half, but I don't think it's the right assumption to think that Q2 is going to be down as much as Q1.

Olivia Tong - Raymond James - Analyst

Got it. And then, Chris, congrats first. One, to get your view in terms of potential for a strategic review as you - as you move into the CEO position, whether you think there's another look at the categories you are in, brands you have, how you think about that for the longer term?

Christopher Peterson - President

Sure. Yeah. I think the way I'm thinking about that is, I think that - we put the turnaround place - turnaround plan in place about three or four years ago, and I think as we've talked, we've made significant progress on that, but the macroenvironment is different today than it was then. And because of the progress that we've made, I think that now is an opportune time to relook at the company's strategy going forward. And so, I intend to do that with the leadership team. I don't expect that we're going to have a revolution in the strategy, but I think it's likely that we will evolve the strategy. But I want to take the time to confer with the leadership team and also understand sort of the current environment. I expect that will take us several months to get through, and we'll be ready to share something as soon as we get through that process.

Olivia Tong - Raymond James - Analyst

Understood. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Peter Grom with UBS. Your line is open.

Peter Grom - UBS - Analyst

Hey, good morning, everyone. And Ravi, Chris. Mark, congrats to you all. Maybe just one quick housekeeping item. The topline impact embed any - does the topline outlook embed any potential impact from what's going on at one of your largest retail partners that's been in the news quite a bit recently? And then I guess, just, maybe a bigger picture, taking a step back, the business has changed - been over the past few years, but kind of taking the guidance into consideration, sales are really in a retrenching here.

And Chris you mentioned normalization and kind of consumer pressures, but just kind of bringing it back to the long term core sales target of low single-digit. I mean, is there something you've learned over the past, near 18 months or so that kind of changes your confidence in your ability to deliver on that target kind of longer term as we kind of get through this period of disruption? Thanks.

Ravi Saligram - Chief Executive Officer

I'll just do the first part very quickly. My answer is no. And in terms of any particular retailers issues affecting us, so Chris.

Christopher Peterson - President

Yeah, maybe just to build on Ravi's answer on the first one. I think - I think the retailer you're talking about is the - is likely Bed Bath and Beyond. They represent less than 2% of the company's revenue and we're working very collaboratively with them in terms of kind of a win-win go forward partnership. I'll leave it at there, but it is not a significant part of the company's business. On the long term algorithm, I don't think there's anything that causes us to change the goal in the evergreen model of getting too long - or getting to low single-digit, consistent sustainable core sales growth. And so we are still committed to that as our evergreen topline target. Obviously, we've been impacted by a lot of the trends that we've talked about, which has us off of that for this year, but - but we very much are working hard to get back there as quickly as we possibly can.

Ravi Saligram - Chief Executive Officer

I think the one thing I'd add, just sort of when you look back, look, these last 3.5 years we have had so many thing, right? We've had the pandemic, then supply constraints, inflation, foreign exchange, war in Ukraine, etc. So to me, the holy grail as 2019 as the base here. And the fact that in 2022 we were still up versus '19 in the stack growth was 9%. Should really our brands remains strong, I know Chris and the team are really going to take it to the next level. So I think once the economy turns, I do feel that the evergreen model that Chris and I established is still intact.

Peter Grom - UBS - Analyst

Great. Thank you so much. And then just - this might be a hard question to answer just given the uncertainty on the current environment. But you know, Chris, we've kind of seeing - when new CEOs come in, the initial outlook tends to be somewhat conservative to set the team up for a success. And so I guess, how would you characterize your confidence in this guidance today? Do you feel like you've embedded in a flex should things deteriorate from - further from here, from a consumer demand perspective or inflation or if that's just - and just kind of the confidence this is kind of the worst that can kind of get and things could get better, there could be upside to the earnings as we move through the balance of the year.

Christopher Peterson - President

Yeah. I think I'll just give you sort of a high level conceptual answer to that, which is, we tried to reflect in the guidance everything we knew about the current environment. We tried to be realistic in what we know based on the go forward tailwinds and headwinds for the business this year and we didn't want to take a prudent bias on the core sales because our focus this year is to get cash flow back and - and the best way to get cash flow back is not to overbuild inventory and we wanted to manage our supply and demand plan in a way that ensured that we had an above average cash flow year.

We are, as we mentioned in the prepared remarks, seeing significant headwinds in terms of the tax rate which is going from 2.5% to a high-teens rate, which is our kind of long-term normalized operating rate. We are seeing interest expense, probably is going to be up about $45 million this year versus last year. And we've got the headwinds, as we mentioned of incentive comp reset and foreign exchange, in addition to the core sales deleveraging.

On the flip side, we feel very good about Ovid and the benefits that Ovid is going to generate. We've built our productivity - our gross productivity assumptions are well above 4% of cost for this - cost of goods sold for this year. So it's a step up in gross productivity that's embedded in our guidance because of Ovid, because of the FUEL productivity program and automation. And we've embedded in, as we talked, the Phoenix overhead savings and International pricing along with carryover pricing. And so I feel good about sort of where we are based on what we know today.

Peter Grom - UBS - Analyst

Great. Thanks so much and congrats to all again.

Operator

Thank you. Our next question comes from Kevin Grundy with Jefferies. Your line is now open.

Kevin Grundy - Jefferies - Analyst

Great. Thanks. Good morning, everyone. And just to echo my congratulations as well. And I know its difficult environment like this, I mean I've seen that way, but I think a lot of folks on this call that have followed the company for a while are certainly in a better place post the yard merger, so congrats on that.

Question on Project Phoenix to start, if we could. It seems like another step along with Ovid to drive efficiencies and reduce complexities in the organization, which was inherently more complex in many cases, perhaps to decentralize coming out of Jarden merger. But at the same time, it's a lot of change in what's a very dynamic and challenging environment. Can you just comment on how the organization is handling all this change and why we should not be worried about potential risks to results, at least in the near-term? And then I have a follow up. Thanks.

Ravi Saligram - Chief Executive Officer

Okay. Thank you so much. Look, that's a great question. And I would say we absolutely could not have done this three years ago. And you may recall when Chris and I started here, our engagement scores for about 37 to 45. We went up to 75, world class norms. Much consultants told us that would take us 10 years. We got there in two years and we have maintained that last year when we did it in November. So the organizations culture is a competitive advantage and very strong, but they could absorb it and this whole idea of One Newell is imbued in the employees.

And the way we handle that - there was meticulous planning. We started the Phoenix idea in process. So we started working on it through July and brought in layers of people systematically over time to give them ownership. Our communication has truly been outstanding for make sure people understood why we were doing it. And finally, the people that we had to exit, we treated them with enormous dignity and respect and so much so if you go back to link them and take a look, even though so exited are cheering for Newell and want Newell to succeed.

So I think that culture has been very strong. People understand why we need to do this, and I think it's journey. Look, always with the greatest to see whether we could centralize distribution and that was very successful. That gave us the courage to centralize manufacturing, to put sales all under our Chief Customer Officer. So I think so far the reaction of the organization has been actually very positive. We've been as concerned about the people left behind to make sure they're embracing this. The other part of it has been because of our previous history, we've also made sure there is role clarity, reduce duplication. So I think people are feeling even more empowered. So I'd say the chances of this succeeding are very high.

Kevin Grundy - Jefferies - Analyst

Thanks. Thank you for that, Ravi. Chris, probably for you just on margins. Just to kind of step back and make sure that we're not missing the forest for the trees here. Currently, you're dealing with a lot in terms of volume deleverage, FX, cost, etc., but longer term sort of thinking it more with margins versus your original benchmarks, since then we have Project FUEL, we have Ovid, now you have Project Phoenix. I think the commentary has been that there's no reason this cannot be at 17% to 18% EBITDA margin business longer term as we sort of look past this volume deleverage and so forth as we come out of the cycle. Is that still the view? Is that were investor should sort of - sort of anchor longer term expectations or is it potentially even superior to that now just given some of the programs that even out? Then I'll pass it on. Thank you.

Christopher Peterson - President

Yeah, I think - I think that there's no question that we are shooting for a much higher margin profile in this business and I think we have the opportunity to drive that over time versus where we are today. So, I think that sort of a mid-to-high teens EBITDA - EBIT margin is very much in our in our long-term sight as we've talked. When we did the original benchmarking, we thought that gross margin we ought to be targeting to get the company's gross margin up 37% to 38%, we've taken a series of backward steps for a variety of reasons associated with fixed cost deleveraging inflation, etc.

But I think our guidance this year is for gross margin to turn and start to move positive. And I think that trend, we are very focused on driving that. And then we continue to believe that although we may have some deleveraging effect this year, we believe that getting our overhead down to support that 16% - 15%, 16% level is the right thing as well. So I think that that can yield margins that are - that are much stronger than where we are today and I think a lot of that continues to be in our control, although we are subject as we've seen in the short term to the macro trends, which means it's not going to be a straight line as I've said many times before.

Operator

Thank you. And our next question comes from Andrea Teixeira with J.P. Morgan. Your line is now open.

Andrea Teixeira - J.P. Morgan - Analyst

Thanks, operator. Good morning, everyone, and congrats to all. I think I can speak to most of the ones in this call, then I think you sounded - it did not sound as negative about the path ahead when you announced the 2Q earnings and later with Project Phoenix. Can you help us bridge a little bit of what's gone worse since November and December, perhaps the consumer or the retailers that took a more conservative step on views on the inventory levels?

And also on a clarification on the commentary about the higher management compensation in 2023, I guess with results materially lower in the year, how can compensation normalize the way this year? I think you're adjusting - probably adjusting out some of the external factors within the compensation metrics, so I just want to see if we can bridge that to the commentary that you gave despite those savings in the Project Phoenix, you pretty much set everything with labor inflation and management company, if you can bridge those component, that would be super helpful. Thank you.

Ravi Saligram - Chief Executive Officer

Let me answer your final - last question first very quickly. Essentially, this year, look, our compensation is performance driven and variable to the great part and there is an LGI component as well. So we really - because we didn't make our numbers, obviously the STI component was very low for 2022, and it also affected our LTI. So when we look at '23, we start with the assumption that it will be normalized and you assume the target numbers. So that was a big, big jump, plus the rate inflation, and that is why we said the Phoenix was offsetting that.

Christopher Peterson - President

Okay. Relative to the the change perhaps in what were seeing from November, I don't think we've - I think this is the first time we're giving guidance for this year. And the reason why we give guidance for the first time on this call is because we want to give guidance when we have clear visibility on the macros, and there are - it is a difficult macroenvironment from a forecasting standpoint because there's a lot of uncertainty and a lot of variability in the range.

I think as we've seen the macro trends continuing over the last few months as we saw where Q4 came in as we saw how we started off in January and as we got more visibility to the forecasting, we felt like that helped inform our topline guidance on core sales growth for this year. I think many of the comments that we made are still applicable. We do expect this year to be significantly above average gross productivity year as a result of benefits from the Ovid program, FUEL productivity automation. And as a result, we're expecting gross margin to be up this year. I think the piece that - that's offsetting that from a margin rate standpoint is really the overhead rate, and that's really because of the - the topline deleverage more than anything else. Our overhead cost in total are relatively flat in dollar terms as as we mentioned because of the the wage inflation incentive comp and select capability investments that we're making, which are offsetting the Phoenix savings, so - and then obviously the interest expenses moved with, as the Fed has raised rates and rates on short term borrowing has gone up. And from a tax rate standpoint, we're planning for sort of a full operational tax rate as I mentioned before.

Ravi Saligram - Chief Executive Officer

Can I just add something. Look, we have had the full year of '22 to look at what happened, and really this being a bit repetitive, but the forces of both retailer - destocking consumer followed acceleration, all that and then an impending or imminent recession. When you look at all of that, I think it's really a consumer environment which is softened. So I think we're just being prudent about that. Our brands inherently are - we're continuing to strengthen our brands. So I would just look at that very important, Chris, has really been very clear. So the major focus of 2023 is to get that cash flow back.

Andrea Teixeira - J.P. Morgan - Analyst

Thank you.

Operator

And our last question will come from the line of Lauren Lieberman with Barclays. Your line is now open.

Lauren Lieberman - Barclays - Analyst

Great, thanks. Good morning, everyone. And Mark, hi again, in years. Just wanted to ask one quick question was when you're just looking at the outlook for this year, how you're thinking about still lingering destocking activity versus consumption? If you had talked it earlier in the call, I apologize I missed it, but clarity on that would be great if possible.

Christopher Peterson - President

Yeah, it's good question, Lauren. And I would say that we do expect some lingering retailer destocking. Largely, we expect that to be complete in the first half of the year. And so clearly if you look at the Q1 guidance where we're guiding core sales down 16% to 18%, we are not seeing our underlying POS trends down that much, and part of the - part of the difference there is retailer destocking. I would say that the retailer made significant progress on destocking from our view, and what we're hearing in the back half of last year, but we don't believe that that is fully over yet. We do expect from what we're hearing that the retailer destocking will largely be complete by the first half of the year, although hard to predict entirely, but that's what we're - that's what we're planning for and that's what we're hearing from the major retailers that we interact with today.

Ravi Saligram - Chief Executive Officer

Or which is why we think second half would be slightly better than the first half.

Lauren Lieberman - Barclays - Analyst

Okay, great. Thanks so much.

Operator

Thank you.

Ravi Saligram - Chief Executive Officer

All right.

Operator

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NEWELL BRANDS INC

Q4 2022

Earnings Transcript

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