Good morning, and welcome to the Newell Brands First Quarter 2020 Earnings Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded. A live webcast of this call is available at ir.newellbrands.com. 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. Good morning, everyone. Welcome to Newell Brands First Quarter Earnings Call. On the call with me today are Ravi Saligram, our President and CEO; and Chris Peterson, our CFO and President, Business operations. 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. I refer you to the cautionary language and risk factors available in our press release and our Form 10-Q for a further discussion of factors affecting forward-looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer 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 and reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as on the Newell's Investor Relations website. Thank you. And now I'll turn the call over to Ravi.

Thank you, Nancy. Good morning, everybody, and welcome to the call. We hope you and your families are safe. These are indeed extraordinary times. I want to recognize and thank my Newell colleagues -- excuse me, who stepped up as we battle COVID-19. I'm proud of our frontline workers in our manufacturing and distribution facilities as well as our associates who are working from home. The teams have done a tremendous job of supporting those in need during this trying time and have donated a large variety of products globally, including gloves, masks, wet wipes, baby gear, heat blankets, water bottles, food containers and writing and craft products. In fact, one of our teams designed a face shields used by doctors and nurses. We're in the process of donating 30,000 units to hospitals in the communities in which we work and lead. I'm impressed and humbled by the entire Newell family efforts. On our call today, I'll share how COVID-19 crisis is impacting our business as well as the actions we are taking to adapt to the current environment and to position ourselves for success as the country and world begin to reopen. Chris will discuss our first quarter results, provide a supply chain update and share some observations on our financial strategy. We have developed 3 key priorities to position Newell for success as we manage through these turbulent and uncertain times. The first is, unequivocally, a focus on the safety and well-being of our employees. Our people are being asked to work differently, and they're rising to occasion. We have implemented a mandatory work-from-home policy for professional clinical and administrative employees. All noncritical business travel is prohibited. And we've temporarily closed all our Yankee Candle retail stores. To support our frontline workers, we have implemented a temporary hourly…

Thanks, Ravi, and good morning, everyone. I would like to join Ravi in expressing gratitude to all of our employees, particularly those on the front lines who have demonstrated courage, extreme resilience and dedication in these unprecedented times. Before discussing Q1 results, I want to provide additional color on the company's supply chain. I'm proud of the job our teams have done in keeping facilities open where possible, shoring up additional capacity where needed, putting in place rigorous cleaning and safety protocols to keep our employees safe and ensuring continuity of supply on direct materials and sourced finished goods as well as protective gear for our employees. As it relates to China, following a slower start up in factories after the Chinese New Year's, we are pleased to share that Newell suppliers in the region have rebounded nicely and are now almost back to full capacity. While the company's supply chain is largely operational, we have been experiencing considerable disruption toward the end of Q1 and thus far in Q2. Newell Brands operates 135 manufacturing and distribution facilities around the world, of which 20 were or are temporarily closed due to government guidelines, with another 11 experiencing high levels of disruption. The most significant of these temporary closures include our Home Fragrance plant and distribution center in South Deerfield, Massachusetts, which has been shut down as of late March; and our Mexicali Writing facility, which shut down about 3 weeks ago and is now on a phased reopening schedule. While a diversified global supply chain helps to lessen the risk posed by these disruptions, unfortunately, this does not fully eliminate the impact. To mitigate supply chain risk and better meet the needs of our consumers, we have taken a number of significant actions, including improving employee safety in our facilities…

Okay. Thanks, Chris. [Operator Instructions]. And operator, at this time, we're ready for the questions.

[Operator Instructions]. Your first question comes from Bill Chappell with SunTrust Robinson Humphrey.

Just, I guess, breaking down the near-term weakness and then kind of how you look at it going forward, I mean, can you parse how much was supply disruption versus how much was retail closure? And then on the retail closure, do you see any risk? Are you factoring any risk of some of those smaller tertiary retail outlets maybe going under over the next 6 months? And just kind of any exposure there?

Chris, why don't you take that?

Sure. So I would say what we saw in the month of April and what we're seeing since the pandemic started is, as I mentioned, a little more than half of the impact of the more recent revenue trend is really as a result of the supply chain disruption and the retail store closures. Within that, the retail store closure impact is slightly bigger than the supply chain disruption. I think we view these -- both of these as temporary dynamics in nature because if you look at the underlying consumption trend, it is a much stronger picture than the shipment trend that we're seeing. The other thing I would say is that although we expect these 2 impacts to have a material negative impact on Q2, we do expect to improve sequentially as we get to Q3 and beyond. And so we think that the impact that we're seeing, it's hard to predict the duration, which is why we pulled guidance. But we do believe it's temporary, and we think that we're well positioned to come out of the pandemic in a stronger footing.

And Chris, the retail...

There was a follow-up Bill had on specialty retailers. Do you want me to take it? Or do you want to go ahead?

Yes. On the specialty retail side, the specialty retail channel for us represents about a mid-teens percent of our total revenue. And what we're seeing there is that business at our largest retailers is up as consumers are shopping more in those categories, and we're growing in those categories. The order patterns at the specialty channel are down dramatically as many of them have had closed stores. But we think our brands are strong enough where the consumer has plenty of access to our brands across the multitude of channels in which we operate. We also, as Ravi mentioned, recently hired a Chief Sales Officer. And we think we're underpenetrated and have distribution opportunities in some of the channels like dollar and drug and so forth. We don't believe that we have significant receivable collection risk from the specialty retailers that we're in, and we're monitoring that very closely. But typically, our business is in the specialty retailers that are in the strongest among -- the strongest capitalized within that sector.

[Operator Instructions]. Your next question comes from Steve Powers with Deutsche Bank.

Great. I guess stepping back from the here and now, I would think a lot of what you're doing, things like leaning into online initiatives, simplifying SKU sets, accelerating the focus on cash and cost, all of those things seem very consistent with what your long-term strategies and prioritizations are. So I guess to the extent that we hopefully bounce back from this on the faster side of expectations, is there a scenario where you can actually emerge from this ahead of where you might have otherwise been operationally, if not financially? Again, talking about '21, '22. If so, is there a way you can put any parameters around that?

So let me kick that off. So Steve, absolutely. So look, in fact, first thing is I think we're going to be able to better navigate through this crisis because of all the foundational elements that we've put in place in the turnaround plan. Second, we have created an absolutely terrific leadership team, and every one of them is used to turnarounds. That was part of the criteria for selection, but also people who could build for tomorrow. They're all here to leave a legacy of taking Newell to the next level. So the prices, though, what it does is brings even more sense of urgency to take the decisions that we are taking. It puts -- it gets you very focused, and you have to be very decisive. So at CAGNY, you may recall, Chris applied some parameters and -- on how investors can expect sort of Newell in the long term. And we still remain committed to that. The fundamental tenets that inform that framework remain in place. And we're going about this. So we're addressing every aspect, the P&L, the balance sheet, cash flow, and yes, temporarily, there's some COVID creates issues, which are out of our control. But we are putting a lot more focus on everything that we can control and going after them. And the last thing, Steve, I'd say is if there is one redeeming feature of this crisis, it has brought the Newell employees together. As you may recall, there was some culture issues, engagement issues, so on. We sort of see that as bygone days. Our team, our employees have got unified. We've galvanized them, and there's going to be a great source of strength in order for us to drive innovation, to get costs in order to drive cash flow, et cetera.

Your next question comes from Rupesh Parikh with Oppenheimer.

So Chris, I guess, just going back to your comments just on operating margins, significant impact potentially in Q2. Is there a better way to frame the impact on operating margin if sales are down, let's just say, 25% for the quarter. I guess I'm just trying to get a better sense of fixed versus variable costs, more so in your gross margin line?

Yes. So just maybe to help on that. We view all of our cost as variable in the long term. But obviously, in the short term, they're not variable. And so to sort of help as a generic modeling exercise, about 15% of our cost of goods are fixed in the short term. It varies a little bit from category to category, but 15% is a pretty good rule of thumb to use. And about 2/3 of our SG&A cost is fixed in the short term. And so if you use those as sort of the fixed numbers and flex the balance with the sales line, that will get you pretty close to a margin impact associated with different revenue scenarios. The only other thing I would add that may help in this exercise is since we gave guidance at the beginning of the year, foreign exchange has gotten worse. The dollar has strengthened by about 200 basis points versus the guidance we gave at the beginning of the year. So the difference between core sales growth and all-in sales growth that we had expected at the beginning of the year of about 100 basis points is now about 300 basis points. However, we don't expect that, that will have a material impact on the margin line because although the FX impact has gone negative, it's largely been offset with reduction in inflationary and commodity prices. And so that impact is more of a top line impact than a margin impact.

Your next question comes from Joe Altobello with Raymond James & Associates.

I wanted to go back to the commentary regarding January and February and core sales being up modestly through Feb. I'm trying to understand what businesses were doing well pre-COVID as opposed to post-COVID? And then maybe secondly, Ravi, you mentioned earlier that you are planning for a -- hopefully, a successful back-to-school season. I'm just curious how your retailers are thinking about back to school? Is it their assumption that all schools in the U.S. will be opened this fall?

All right. So let me address the two questions. And -- but the January, February was the continuation of the turnaround plan. We also got significant growth with online, and we started mitigating declines in other areas. So for bigger retailers, we were seeing some traction. So I think really, Jan, Feb was continuation of turnaround, the Food business doing extremely well for us. And it has been a real source of strength. So that recorded strong growth. Baby recorded strong growth in Jan, Feb. So those were one of the factors that really -- and it was even better than what we had expected. So that should give -- in terms of when we come out of this crisis that the turnaround is having a positive impact, that we are beginning to do the right things. And then as we go towards the end of the year, we have innovations planned across many of our businesses. We are prioritizing them. And our teams are continuing to drive whether it's line reviews for top retailers, they're doing it online. So we're pushing forward. So now let me answer your question about back-to-school. We have been in touch with all our major retailers on back-to-school. But there, I think the big issue for everyone is when will schools -- will schools reopen? There seems to be general cautious optimism that key schools will go back. In fact, I think California we just heard somewhat that they may even reopen a little early. So now the universities is slightly different because yesterday, Harvard made some sort of announcement that they were going to start, but they made something about we may do it remotely. So it's -- the university side is unclear. But look, most of our back-to-school, the majority is driven by schools. So the good news for us is the retail orders are in place. And now normally, we would have started shipping out in April because of some of the uncertainty, that may get delayed a bit. And usually, you see -- so what might probably have come in June may now come in July because most of this comes forward after July 4 anyway. So right now, I think retailers and ourselves, everyone is sort of -- the $64,000 question is when will schools reopen, when will university reopen, but people are planning that they will. So we -- that's the best way.

No, absolutely. As a father to two boys, I certainly hope you're right. Appreciate it.

It's not that I want to be right, but I think not only from a business standpoint, you just want normalcy to return.

Your next question comes from Lauren Lieberman with Barclays Capital.

Great. I was hoping we could talk a little bit more about the Appliances & Cookware segment because the comments on POS versus shipments are really interesting. So it's not a business where you talked about supply chain disruption, it's more about the retail closures. But presumably, right, there's as suggests, there's been a lot of inventory at retail. So just thinking through, I guess, your innovation pipeline, that this is a business you've said would take longer to kind of rebuild. How you think you're faring, I guess, in terms of relative -- not business you can measure market share easily, but relative performance versus the category? And any initiatives you may be launching online to support that business as consumer behaviors change. And I think we didn't talk about outdoor at all, but that's another business that in the '08, '09 period, those businesses then owned by Jarden actually performed pretty well because consumers were driving to vacations and sort of more simple outdoor pleasures. So anything that you may be doing to support that business or salary innovation agenda to support it would be great.

Sure, Lauren. So let me separate the two questions. And first question, on Appliances & Cookware. So a couple of factors. It's really sort of a tale of 2 geographies. And the good news is the U.S., which was our most troubled business, historically, has really picked up. And the consumption, the POS that we talked about, the 6 consecutive weeks is in the U.S. And that bodes well longer term because we were challenged. And so it's really good to see and kind of the numbers that we're beginning to say, when I look at sort of week 4 in March and then continue on to week 4 in April, we're really beginning to start getting into the double digits in the U.S. on POS. And that's heartening. So that's being driven in certain categories within the U.S., so smaller appliances. And we have brought value brands like Mr. Coffee that you're familiar with from the days and so on, which has done well in recessionary times. Oster's doing well. Red makers, heating blankets, et cetera. So the small appliances, there is a boost, and we are happy about it. So where we are suffering and why shipments have lagged is really it's -- as I said, the two -- tale of two geographies is international. And international, Latin America, which has always been a great source of strength for us in appliances despite the U.S. having had its issue. Latin America, for instance, I think, over the last 10 years, we've doubled our business, and Oster is a terrific brand. But that is suffering from really country closures, whereas we may think about some shelter at home in particular states, there, Peru, for instance, is totally closed and Brazil, so we're seeing parts of Mexico. So some of…

Your next question comes from Kevin Grundy with Jefferies.

Chris, question for you relating to your debt covenants and to the dividend. And first, I did want to congratulate you and your team on the improvement in your cash conversion cycle. I'm glad you guys are capitalizing on that because I think it's long been an opportunity since the merger. So congrats on that. So we can appreciate you with your own guidance. But can you comment on your level of comfort with your debt covenants? I think there's 2 of no interest coverage ratio, 3.5x and debt to capital, a maximum of 60% again. So without guiding, maybe just comment on your level of comfort here as you think about most likely scenarios. And then you mentioned your commitment to the dividend for the second quarter. Maybe you can put some guardrails around your level of commitment for the balance of the year and how you're thinking about cash flow priorities.

Yes, no problem. So I'll start with debt covenants. So you're right. There are two primary debt covenants, the interest coverage ratio of 3.5x and the debt to total cap of 0.6. The debt to total cap does allow an add-back for goodwill. We ended the first quarter in compliance with both covenants with significant headroom against both covenants. And we've done a significant amount of modeling. We sort of internally refer to it as Alphabet soup because we're looking at the V, the U, the W, the L scenario, et cetera. And looking at all of those scenarios, we're confident that unless something really unforeseen happens that we've got sufficient flexibility to navigate and comply with the debt covenants going forward. So we're not -- we're very confident in the company's liquidity position. The debt covenants, I should mention, only apply to the revolver and the AR facility, which are the short-term liquidity facilities. They don't apply to the unsecured notes. Relative to the dividend, as I mentioned in the prepared remarks, and as -- we plan to maintain the dividend at the current level for the current quarter. As you know, the dividend is a quarterly decision that's made by the Board. As we've done the scenario modeling and all of the scenarios that we've modeled, the free cash flow expectation for the company is more than enough to both fund the dividend and reduce debt on an annual basis going forward, including this year. That being said, given the uncertainty of the severity and the duration of the crisis, we do believe it's prudent to continue to evaluate the company's capital structure and capital allocation strategy, given the range of possible outcomes. And so that's the plan that we've got at the moment going forward.

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

Great. I just wanted to see if you could talk a little bit more about the divergence in growth across your portfolio because businesses where demand in some cases is up. Somewhere -- we probably don't see a ton of impact from what's going on. And then somewhere, obviously, it's quite difficult to drive growth right now or to migrate your businesses online. So if you could just talk about the divergence in terms of that minus 25 from top to bottom. And then just overall, are you seeing any shifts yet in terms of price points? Is there a downshift in terms of what consumers are buying to the extent that they are buying right now across your portfolio of brands, whether it's Rubbermaid, whether people are downshifting Graco as well. And I know it's not the same as 2008, but if there's anything you can give in terms of comparisons to 2008 to help provide some there?

Okay. Let me kick that off, and then Chris, if there's anything you want to add. So you talked about how the divergence in our portfolio, particularly related to April. And so I think I talked about quite a bit of this in the prepared remarks, but I'll just reiterate some of those. So clearly, the outright winner for us has been Food. And so that has throughout really done extremely well, both on POS and on shipments. But actually, POS is ahead of shipments. And the same trends continued in April. If anything, we're beginning to continue to see that growth picking up because originally, we had growth, a lot of growth in Food and ball, and now we're seeing that picking up on Rubbermaid food storage as well. So and then commercial in the first quarter was clearly a big winner. There, I think where the trends, the order book is very full. But there were, especially on things like sanitizer and stuff, there's certain supply constraints on how much we can meet them. So -- but as we are expanding capacity, we think that over time, we'll be able to fulfill that. I think I've already talked about Home Fragrance that where we're in the retailers, we actually are in, it's doing extremely well and I think I mentioned even that in some places, a doubling. So -- but we're also affected by access because our own retail stores are closed, and all the specialty retailers closed. So we're getting volume through where we are. But I think it's not -- the growth is not enough to offset a lot of the closures because you've got a very significant part of access right now closed. But as we come out of this, it should be very positive because consumption, what people are using at home is actually up, which has demonstrated that by the fact that we're doing well. So Baby, more recently, our -- in the beginning of April, we saw a little slowdown, and -- but we've now seen an uptick as these stimulus checks have gone out. We're actually beginning to say a couple of weeks of good positive POS. So I think, hopefully -- and then, of course, Writing, we already -- I spent a lot of time on my prepared remarks. I think the big news now is how do we see us going forward on back-to-school. So there it's about a little bit of supply constraints from Mexicali, but also people really students at home, people are not working in their offices, et cetera, that affects that business.

Ravi, let me just add one thing, which is we did go back and look at and we spent a lot of time in the scenario analysis going back and looking at the 2008 recession. And we looked at, obviously, the Newell business and the Jarden business during that time. And what we saw was that in that time period, both companies were able to gain market share. And it gets to your question on price points because generally, the company is pretty well positioned with opening price point and mid-price point products. So if you believe that the company is headed into a more recessionary time period, we tend to be well represented in the price ladder for where consumers may trend to. We have not yet seen -- I think it's too early to call any kind of a trend with consumers changing relative to price point. But we do believe we're well positioned. And the other thing that we saw from the analysis that was notable about the 2008 recession was that the strongest -- the stronger brands tend to do well in that type of an environment. And as we mentioned at CAGNY, the brands that are in our portfolio, I think 80% of our business were either #1 or 2 in the category. So we're well positioned from both a market-leading brand perspective as well as from a price positioning standpoint to capitalize on the environment going forward.

Thanks, Chris. I think, Olivia, one thing I forgot to mention is in the portfolio, probably the one business, Outdoor & Recreation, I already when Lauren asked the question talked about it, but that business has had a negative impact in not only the quarter, but more in April. And then our Connected Home business, again, because of access because a lot of -- it's a question of how are people looking at it. And then also some of our plants are in Mexico that has been shut down temporarily. Right. So I hope that gives you a good sense.

Your final question comes from Andrea Teixeira with JPMorgan. .

I appreciate the visibility on the April and also the commentary about half of it being supply chain. So if you can kind of like break down a little bit of the consumption and shipping trends that you're seeing if price low teens impact in April and if that could normalize? I'm not saying it's going to go positive, but -- in May and June. So why are you thinking of consumption trends in Food, Baby and small appliance? And should we expect those to remain elevated in the medium to long term as we get out of COVID and feedback from you're having from your panels and customers, the retailers are open. And do you think that, like in the medium term, could offset the Writing supplies that are either going to the offices? And -- or you should be seeing that business remain under pressure? And if we can go just as a clarification to Lauren's question before about the retail inventory and receivables. I understand that Chris had said you're not seeing any major issues. Obviously, again, congrats on your cash conversion. But I wanted to just drill down if Chris can comment on that as well.

Okay. So look, I think we really can't give you specifics on May and June. I think we've given you a sense that we think the overall quarter will be challenged, and that's based on the April trends, which we've been pretty transparent about. Having said that, we're also seeing very -- I think I talked about the positive sequential improvements on POS. So you have to take that into consideration. So the part of the issue is it's -- we just don't know some of these things in terms of -- I think we already dealt with the back-to-school. Hey, when will schools open? When will offices open? So even our own, we've now -- we thought we'll be opening the offices on Monday. We moved that to May 26. Could we move it again? It all depends on this is [indiscernible]. So it's more the uncertainty because of the pandemic that -- but I think the thing that one has to take from this is there is no fundamental structural issues. We're just dealing with situational stuff in the quarter, which deal with either supply chain constraints, retail closures or some consumer shifts in behavior because of stay at home, some of it, which is benefiting us positively, some negatively. So I think we've covered the gamut of that. So I think really, what we're looking at is how we come out of this and emerge stronger, not only in the second half. And we do have some confidence that sequentially, we will improve in the second half of the year. And then going forward into 2021, I think we'll -- a lot of the steps we're taking and the team we're building and the actions we're taking and what we're doing with the brands and innovation should make us a strong player coming out of all of us. So yes, the quarter is challenged, but really we're focused on how do we get through the rest of the year in a positive way. Chris, maybe you can answer the question on the cash conversion.

Yes. So I think the question was on the receivables. So we're obviously looking at our receivables much closer. I've actually have a meeting twice a week on this topic. What we're seeing so far specifically is that we're collecting receivables actually better than our forecast. Part of that is the process improvements that we've made. And you can see that, that came through in the first quarter and was a big enabler for us delivering the 27-day reduction in the cash conversion cycle. That trend is continuing in April. So we continue to collect receivables at or ahead of forecast. We're also monitoring credit risk in a much tighter fashion. But again, as I mentioned I think in one of the earlier questions, the majority of the company's business is with well-capitalized retailers. We do have some business with specialty and department retailers, about a mid-teens percentage. We're monitoring those closely, but we have not seen a -- any type of a slowdown in our receivables as an aggregate company. So we're -- but we're monitoring it closely as the situation evolves.

And Chris just from the inventory at the specialty retailers that are closed, can you comment on that?

Yes. So our largest specialty retail -- our largest specialty retail customers would be people like Staples, Office Depot and Bed Bath & Beyond would be the top 3. And we -- most of those retailers are open for their online business and continue to sell. We are monitoring both inventory at the retailer and credit that we've extended to those retailers. And we're managing that to ensure that there's continuity of appropriate supply to consumers without overinvesting in inventory at those retail customers. And I think we're managing that relatively well.

Okay. So first and foremost, I just want to thank all the analysts and investors who are on this call. We appreciate your support of Newell and in these difficult times to listen to us. And we truly pray that you and your families stay safe. Thank you very much for being on the call. We look forward to chatting with you next quarter. Onwards and upwards. Thank you.

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