Newell Brands Inc

NASDAQ:NWL

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to Newell Brands' Fourth Quarter and Full Year 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 Sofya Tsinis, VP of Investor Relations. Ms. Tsinis, you may begin.

[Sofya Tsinis, executive]

Thank you. Good morning, everyone. Welcome to Newell Brands' fourth 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 earnings release and our Forms 10-K and 10-Q available on our Investor Relations website for a further discussion of the factors affecting forward-looking statements. We assume no obligation to update any 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 available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as in other materials annual Investor Relations website.

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

[Ravichandra Saligram, executive]

Thank you, Sofya. Good morning, everyone. Happy New Year and happy Lunar New Year, and welcome to our call. I sincerely hope that you and your loved ones are staying healthy and safe. While there's no doubt that 2020 was a very challenging year, I am immensely proud of the results our team delivered as we quickly adapted to the evolving environment. At the same time, we remain focused on ensuring the safety and well-being of our employees carefully operating our plants and distribution facilities while ratcheting our capacity and maintaining financial viability and business continuity.

We closed this to start the year on an exceptional manner with fourth quarter and full year results ahead of our expectations across the board. This is a testament to the incredible resilience, fortitude and commitment of our employees who execute with excellence. In fact, in first quarter, we pivoted to accelerate the turnaround plan and drove significantly stronger underlying performance in the business in the second half of the year across all key value drivers, top line margins, earnings per share and cash growth.

We also achieved meaningful progress against our strategic priorities in 2020. First, we strengthened and diversified our team as we broadly have world-class leaders from the outside and top lines, commercial food and outdoor and recreation businesses as well as the driver functions. They hit the ground running.

As COVID certainly hit off, did not allow for any down time. They complement our strong existing leaders across the remaining 4 businesses.

The leadership team and I are focused on building a winning one new culture focused on trust, transparency and teamwork. A diversity inclusion belonging efforts are our top priority as we continue to galvanize our employees and unify everyone behind the common purpose of delighting consumers with our innovative brands that create moment of guide, build confidence and provide peace of mind.

Second, throughout the year, we improved customer relationships through enhanced collaboration, joint business planning efforts as well as increased emphasis on delivering excellent service for our customers. We are leveraging our omnichannel capabilities to advance joint business planning and believe there's an area of strength for you. We're also seizing opportunities to close our distribution gaps, particularly in the food, drug and other channels. We're already making progress on that front across a number of businesses, such as Food, driving and Home Fragrance.

Third, we drove a 30 basis point improvement in normalized operating margin in 2020 and incredible fee, given the cost and business mix headwinds, we had to overcome during the year. This was made possible by establishing a culture of productivity as well as aggressively attacking overhead costs and organizational complexity.

In fact, normalized operating margin expanded 120 basis points year-over-year in the second half, reversing the losses in the second quarter that were mostly driven by fixed cost deleveraging. And for the full year, EPS of $1.79, wow, up nearly 12% from continuing operations for tight working capital management resulted in stellar operating cash flow of more than $1.4 billion. Yes, folks, $1.4 billion. Our business unit CFOs, led by our own billion-dollar man, Chris Peterson, did a phenomenal job.

Lastly, one of the key objectives of turnaround has been to return the company to sustainable core sales growth. While core sales for the year declined 1.1%, I'm delighted to say that in the second half of 2020, we turned the corner. Core sales grew 6% and increase across 7 out of 8 business units with every geographic region growing.

During 2020, we experienced healthy domestic consumption that's broad-based. The strength and resilience of our portfolio showed through as growth in Food, Commercial and Appliances, Cookware business units offset Writing softness. The team successfully navigated demand surges, product and container availability issues and tempering factor and distribution center closures.

Highly focused on relevant generation, grounded in consumer insights as well as omnichannel execution are making a difference. During 2020, we grew, improved domestic market share across a number of businesses. including baby gear, food storage, vacuum scene, fresh preserving, tents, quarters and tents, to name a few. Many of our top brands delivered incredible results in 2020, as Rubbermaid, FoodSaver, Oster, Mapa/Spontex, Bob, First Alert and WoodWick, all grew at a double-digit rate.

Omnichannel is the way forward and a critical priority for us. Our e-commerce business has continued to be a substantial growth engine for the company. In 2020, e-commerce revenue growth accelerated to the high 30s, and penetration online improved to about 22% of net sales on a local basis, close to double the rate versus 2 years ago. While Baby remains, by far, the most highly penetrated business across the digital platforms, we'll see meaningful shift towards online consumption across the portfolio.

In fact, in 2020, 4 business units commanded digital penetration as a percent of net sales of more than 20%, including Baby, Home Fragrance, Outdoor & Recreation and Appliances and Cookware, and Food is chasing that number.

All of our leaders took quick and decisive actions to swiftly adapt to the COVID-19 environment and emerging trends. These trends include preparing more food at home as regular people turn into home chefs, heightened interest in outdoor hobbies and personal wellbeing and increased investment in sanitation. We anticipate that trends will continue to evolve throughout 2021.

We also believe that many of the habits that have been formed during the pandemic are here to stay with our portfolio well-positioned to capitalize on them.

Let me briefly touch upon how each of our businesses performed in 2020 as I'm truly thrilled with the progress we have made. Let's start with Appliances & Cookware, where we delivered mid-single-digit core sales growth, driven by the strength in the international markets.

In the U.S., consumption increased during the fourth quarter and for the full year as more people have been cooking, baking and spending time at home. In Latin America, despite COVID-related challenges, the team delivered outstanding results as they quickly pivoted towards the digital platform.

Although I'm extremely proud of these results, I also realized that a lot more work needs to be done to reposition the Appliance business for sustainable growth. During 2020, the Appliances category accelerated significantly. And in some instances, we did not keep up, especially in the U.S. This resulted in share losses, albeit lower in magnitude than in prior years. Although we are seeing good traction with recent innovations such as Mr. Coffee iced coffee maker, Oster Texture Select Blenders and Oster Diamond for heating cooking products, we need to extend the learnings and leverage consumer insights across the entire brand portfolio.

Back where it began in 2020 and is continuing in earnest throughout 2021, as we implement the necessary strategic changes to successfully position appliances. We have a strong international Appliance franchise with strong brand equity for Oster, Crockpot and Sunbeam in LatAm and Australia and New Zealand, followed by Breville in Europe.

Our challenge is to address [ payer ] category businesses in the U.S. with low gross margins that drag down the portfolio. Chris Robins, our CEO for that business, will undertake actions in 2021 to prune the portfolio.

Within the Commercial Solutions segment, our commercial business had a phenomenal 2020 as core sales growth during each quarter culminated in high single-digit growth for the year. We saw particularly strong sales growth in washroom, glove and scouring product as well as outdoor and garage organization businesses we've benefited from heightened consumer engagement across the home improvement categories.

In response to strong demand for sanitization as well as our strategic investments to expand production capacity, we placed about 3.3 million soap and dispenser, sanitizer dispensers globally and sold enough soap and sanitizers to clean over 30 billion pairs of hands. That's a lot of hands. We're not stopping there.

We're introducing innovative stands and brackets that enable facility operators to put hand sanitizers virtually anywhere in the building, including on the wall, on a table top or any general open space. The breadth of the commercial business portfolio, which includes both consumer and commercial offerings as well as the diverse coverage of verticals and enhanced partnership with retail partners, position the business for long-term success.

Let's move to Connected Home & Security business. While core sales were down in 2020 due to supply constraints caused by pandemic-related plant shutdowns, the business performed well in the back half of the year, with top line accelerating in the fourth quarter.

Within the Home Solutions segment, our Food business has certainly lived up to its rocket-ship status that have grown very founder. It actually returned to growth prior to the pandemic and built momentum to mid-20% core sales growth in 2020, propelled by strong consumption throughout the year as well as market share gains. In the U.S., our leading brands, Rubbermaid, FoodSaver and Ball, took share across food storage, food preservation and canning verticals, benefiting from improved commercialization of product, stronger consumer social engagement and programming as well as recent innovations, such as the latest vacuum sealing device, FoodSaver and VS3000 multiuse preservation system and Rubbermaid Brilliance Glass.

The launch of Brilliance Glass is off to a rolling start. And the overall sub-brand of Rubbermaid Brilliance sales have almost doubled in 2020. 2020 was a stellar year for FoodSaver, which is the fastest-growing brand across all of Newell brands, and it broke through as a top 10 brand for us. Strong appliance sales in 2020 should translate into increased consumer purchases in 2021.

In Food, we continue to chase strong demand for January, and we are working hard to address supply constraints in certain product lines.

Turning to Home Fragrance, we experienced strong consumption growth at our Home Fragrance business during 2020, driven by surge in demand in the back half of the year. As a result, core sales increased in both North America and EMEA in the second half of the year and in the seasonally critical fourth quarter period.

Full year top line sales performance was partially hindered by the temporary closure of Yankee Candle retail stores and other specialty chains for several months early in the year and the supply chain disruption experienced in the second quarter.

I'm extremely proud of the team's resilience and creativity in addressing supply shortages as they work around the clock and even engaged the corporate teams in the manufacturing and packing operations. They went all out on production in an attempt to keep up with consumer demand, which remained robust in January.

The scented category -- candle category [ so far ] in 2020, no pun intended, as demand for products that help bring tranquility to consumer homes remained robust. We held share despite supply constraints. As we look out to 2021, there are a number of exciting innovations in the hopper, including the Yankee Candle Signature Collection, the largest update to the Yankee line in years, and it's launching this month. It will provide our best burning experience to date.

We continue to reposition the Home Fragrance business for the long time. During 2020, we exited the fundraising business and 77 retail stores with additional store closures anticipated in 2021. At the same time, we are building great momentum on our direct-to-consumer business, which grew strong double digits in 2020, offsetting sharp falls in retail, expanding distribution into the grocery and truck channels and diversifying the product portfolio into auto diffusers, et cetera.

In the Learning & Development segment, cross-sell for our Baby business grew modestly during 2020. The rebound from Q3 persisted into Q4, driven by healthy consumption recovering from the depressed levels in March and April, where lockdowns were in full effect. For the year, domestic demand improved across baby gear and in print care businesses, particularly [indiscernible] car seats, high chair, swings and bottles. We have seen a continuation of strong domestic consumption trends in January.

As mobility improved post lockdowns, the rebound in demand for toddler cases has been nothing short of remarkable. What's even more craft fine is that we solidified our leading position in this important category in 2020, getting over 250 basis points of share. We're thrilled by the strong performance of our Graco brand, which picked up 130 basis points of share in 2020 in a year past this innovation. More exciting launches are planned for 2021, including Graco slim fit 3-in-1 car seat, our slimmest designed that fits 3 car seats across savings space in the backseat. Without compromising on safety in the future -- feature's need.

Now as anticipated, 2020 was a tough year for our Writing business as a category in total, particularly in the commercial channel. Core sales pressure continued into the fourth quarter, albeit at lower levels relative to the part of prior 2 quarters as demand in the U.S. normalized a bit.

During the fourth quarter, we did see continued consumption growth in the U.S., which started in September as the back-to-school season was extended. For the full year, there were also a few bright spots, including pens, living and fine art businesses, all of which grew POS despite the disruption.

Although category headwinds were significant, both in the U.S. and internationally, we've made progress on the market share front. In our core Writing category, which position us to come out with pandemic on a stronger footing.

2020 was the year of the pen for the Writing business, with innovation delivering outstanding market share gains of about 750 basis points in gel pens and 260 basis points across the total pen category. We're optimistic about our momentum in the pens category and have launched expansion to our Sharpie S-Gel platform with Sharpie S-Gel fashion designs and color expansion and Sharpie S-Gel Metal Barrel. We'll be launching this platform around the globe.

We also received -- achieved strong share performance in our [indiscernible] business as [ Dynamo ] reached record share, both in the U.S. and EMEA. While category challenges persist, consumption has remained positive thus far in 2021. We exited 2020 with the lowest retailer inventory position across the office superstores in several years.

This should better position us in the retailers for a rebound, post-pandemic, as schools and offices return to more normal cadence.

While there's a great degree of uncertainty around the timing of return to a sense of normalcy in schools and offices, we're assuming a more normal back-to-school season in 2021, but the offices may remain in a hybrid environment for the balance of the year impacting our commercial channel.

Lastly, core sales and consumption in our Outdoor & Recreation business, while under pressure during 2020, break down by the softness in our technical apparel and beverages businesses as a result of further reduced on-the-go activities.

We delivered fair performance in the Outdoor business in the back half of the year, particularly in the Outdoor Equipment category, such as coolers, tents and stoves. We also saw a number of favorable developments in the market share front in several core categories such as coolers and tents, where we gained about 90 and 190 basis points of share, respectively.

I'm especially excited to share that Coleman, which is one of the Newell's largest brands, returned to growth during 2020. What a way to celebrate the brand's 120th anniversary. Coleman had a number of successful launches in 2020, including The Coleman, Skydome, and we refreshed many coolers. We are following up in the 2021 season with additional consumer-centric and purposeful innovations.

To highlight just a few. We're expanding the assortment on the 2020 Coleman's Skydome Tent to larger dome tent in a variety of styles and colors. We're also introducing a Coleman Reunion collection of coolers, which will include new Matte powder-coated finish and 3 beautiful trend-focused colors that elevate and rejuvenate the Coleman's steel-belted cooler.

Although I'm certainly encouraged by the progress we have made in outdoor equipment business, we have more work to do on technical apparel, which is especially led by Marmot brand and beverage with Contigo. We have brought in capable leaders to do just that and expect a stronger 2021.

Newell is now 2 years into the turnaround with notable progress across the organization. As we look into -- look out to 2021 and beyond, we intend to build on the improving momentum. We will continue to position new brands for sustainable and profitable growth with our strategic priorities focused on the following 5 areas.

First, galvanize our employees behind our purpose to create consumer-obsessed customer-focused organization that's digitally savvy and willing to experiment and learn while adhering to uphold values.

Second, sustained top line growth by focusing on the end-to-end consumer journey, strengthening omnichannel capabilities while accelerating online penetration and focusing on scaling and modernizing our top brands.

We also want to strengthen efforts to improve supply availability to improve customer service levels with a strong focus on forecast accuracy.

Third, become an innovation engine by sharpening our focus on consumer insights and trends implementing an enterprise-wide innovation, operating model, building cross-business unit platforms and better leveraging our R&D resources.

Fourth, accelerate international growth and improve profitability by addressing fragmentation, high overheads, prioritizing dry countries, evolving autonomous geographic units to One Newell approach to build scale and move to a distributor model in nonpriority countries.

And fifth, continue to make progress on the financial agenda, expanding margins through productivity type management of overhead cost and complexity reduction as well as strengthening Newell brand's cash conversion cycle and balance sheet.

Although 2020 was undeniably one of the most trying and volatile periods in recent history, I'm extremely clarified, poised and resilient persistence, ability to adapt, pivot and execute with speed in the journey. This has enabled us to gain significant traction on our turnaround strategy and strengthen the underlying fundamentals, positioning the company to come out even stronger post the pandemic. I am excited about Newell's prospects and feel our better days are ahead of us. Onwards and upwards.

And now I turn the call over to billion-dollar man, Chris Peterson.

[Christopher Peterson, executive]

Thanks, Ravi, and good morning, everyone. The team delivered an outstanding finish to the year with Q4 results ahead of our expectations across every key metric, including top line operating margin, EPS and operating cash flow. In fact, our 2020 results exceeded or were in line with the initial guidance we laid out a year ago despite the significant disruption from the pandemic.

We are now 2 years into the turnaround and have come a long way in strengthening the financial performance and operational effectiveness of the company. Last year, we drove excellent progress on each area of the turnaround plan and gained significant momentum in the second half of 2020.

Before getting into the financial results and outlook, I want to spend a few minutes on operational highlights. We made significant progress simplifying the organization. For example, on SKU count, we exceeded our target a year early and exited 2020 with 47,000 SKUs as compared to our goal of 50,000 by the end of '21. We have eliminated 54% of our SKUs over the past 2 years with a 37% reduction in 2020 alone. Effectively, we have doubled our revenue per SKU over the past 2 years. We've also meaningfully strengthened the quality of our inventory, cutting our excess and hostile inventory by more than half since 2018. We are not stopping here, and we'll continue to simplify the SKU portfolio across each of our businesses.

Over the past 2 years, we've also significantly simplified our IT architecture as we rationalize nearly 90% of IT applications, ending 2020 with less than 800 apps; successfully implemented 8 ERP migrations, including the October 1 move of Coleman North America to SAP, which went smoothly. We expect to get 95% of our business on 2 ERP systems over the next 2 years.

We also fully redesigned our digital technology platform, rationalizing the number of sites in North America from about 290 to 40. We have already migrated 35 of these 40 sites to the new platform, with another 3 conversions expected to be completed by the end of February. This is a remarkable achievement within an 18-month period.

The new platform delivers a much higher quality, more engaging and impactful consumer experience and allows us to introduce exciting omnichannel features along the way. We expect to complete the conversion of the remaining U.S. sites by the summer and later this year, plan to extend this initiative to our international markets.

As I mentioned on our prior call, during 2020, we also implemented a new technology to consolidate and better control the company's indirect overhead spending, which we expect to drive significant savings going forward. These are just a few examples of where we are eliminating complexity from the organization, but the efforts go well beyond the ones I mentioned, impacting areas, including the supply chain, legal entity structure, cost centers, profit centers, financial systems and real estate, amongst others.

We are driving overhead efficiencies through complexity reduction, along with benefits from restructuring savings, which we started to realize in the back half of the year. We lowered our overhead as a percent of sales by another 100 basis points in 2020.

Importantly, as we look forward, we see ample opportunity to continue to simplify our operations and optimize our supply chain. Beyond efficiency, simplification allows us to become a more preferred partner with our retail customers. As we continue to optimize normal cost structure, we are increasingly leaning into our productivity initiative called FUEL, a significant enabler of our margin ambition.

In 2020, we drove a stellar outcome on FUEL, reducing our cost-of-goods sold base by about 4% year-over-year as gross savings increased about 35%. This was not only the best annual result Newell Brands has delivered since we started tracking this measure, but also amongst best-in-class in the industry. We are systematizing these productivity efforts across the organization and have a strong pipeline of projects for 2021 and the coming years, which should help drive gross margin improvement going forward.

Now let's turn to quarterly results. During the fourth quarter, Newell's net sales increased 2.5% year-over-year to $2.7 billion as core sales growth of 4.9% was partially offset by headwinds from foreign exchange as well as business and retail store exits. For the second consecutive quarter, we saw broad-based top line momentum, with core sales growth across all 4 geographic regions and 6 business units.

Normalized operating margin improved 10 basis points year-over-year to 11.4%, which was ahead of our expectations. Overhead cost reduction and productivity savings helped to offset higher advertising and marketing expenses as well as pressure from business unit mix, COVID-related cost and inflation.

We reduced our net interest expense by $1 million year-over-year to $69 million due to debt repayment during the year. We recorded a normalized tax benefit of $6 million as compared to a normalized tax expense of $51 million in the year-ago period, reflecting discrete tax benefits in the current quarter.

We grew Q4 normalized diluted earnings per share 33% year-over-year to $0.56 a share. Stronger-than-anticipated top line results in combination with disciplined expense management and strong productivity enabled us to outperform versus our expectations.

Moving on to our segments. Core sales for Appliance & Cookware increased 4.2% driven by international markets. Consumption trends continued to reflect increased frequency of at-home cooking. I would like to point out that effective January 1, 2021, the CEO of the Food business has taken over the responsibilities for the Calphalon Cookware business. As a result of this change, the Appliance & Cookware segment will be renamed Home Appliances in 2021.

Core sales growth for the Commercial Solutions segment accelerated sequentially to 13.8%, with increases across both the Commercial and the Connected Home & Security businesses. Consumption trends also improved sequentially across both businesses. Within Commercial, we saw strong demand for many consumer-facing businesses as well as in washroom and hand protection.

Core sales for the Home Solutions segment increased 12.4%, propelled by growth across both Food and Home Fragrance business units. Food was once again the strongest performer within the portfolio, continuing on its double-digit growth streak as consumption remains strong.

In a seasonally important quarter, core sales increased in the Home Fragrance business, reflecting strength in e-commerce, EMEA and the wholesale channel. As anticipated, core sales in the Outdoor & Rec segment were under pressure, declining 7.4%. Fourth quarter results were negatively impacted by the timing shift of sales in Coleman North America into Q3, ahead of the October 1 conversion to SAP.

Looking past the timing shift and focusing on the second half of 2020. Core sales per outgoing rent grew year-over-year as improved consumption of outdoor equipment categories offset softness in beverage and technical apparel.

Core sales for the Learning & Development segment contracted 2.2%, which was a meaningful improvement from the prior 3 quarters. While core sales for Writing were challenged due to the impact of COVID-19 on school and office closures, we were encouraged to see continuation of positive consumption trends in the U.S. Top line momentum for Baby accelerated in the fourth quarter, reflecting strong consumer demand.

Our efforts to tighten working capital delivered outstanding results, making cash flow one of the major highlights in 2020. We generated over $1.4 billion of operating cash flow during the year, which represents a $388 million improvement from 2019. Last year at CAGNY, we set an ambitious target of delivering free cash flow productivity in excess of 100%, and this was our second consecutive year of meeting that goal.

In fact, in 2020, Newell's free cash flow productivity was 154%, a remarkable achievement by all accounts. We shortened the cash conversion cycle by about 26 days to 72 days, which is very close to our benchmark target of 70 days. Accounts payable was the most significant driver of the improvement in the cash conversion cycle as we saw a flow-through of more favorable payment terms that we have renegotiated with our suppliers. We also ramped up our supply chain to build inventory in order to support demand, creating a timing benefit in payables that we expect to partially reverse in 2021.

We are in a much stronger balance sheet position today than we have been in a very long time. We ended the year with a net debt-to-normalized EBITDA leverage ratio of 3.5x versus 4.0x at the end of 2019, and we are closing in on our target of 3.0x.

During the fourth quarter, we completed a $300 million debt tender. And for the year, we reduced our net debt by $748 million to $4.6 billion. We exited 2020 in a very strong short-term liquidity position, which exceeded $2.5 billion, including nearly $1 billion of cash on the balance sheet.

Turning to 2021. I want to start by providing some context for our plan. We are encouraged by the momentum we have seen in our business in the second half of 2020. The first quarter of 2021 is off to a very strong start from both a consumption and shipment perspective. At the same time, we are balancing this optimism against the macro environment, which remains quite dynamic as a result of the ongoing pandemic.

We are taking a prudent planning approach to 2021, capitalizing on growth opportunities while continuing to drive cost and cash discipline. While we expect many of the recent consumer habits to persist, we are assuming a normalization of category trends over the course of the year. Since the comparisons are much tougher in the back half of 2021, we expect a stronger first half relative to the second half.

Additionally, we are seeing inflation trends pick up, primarily due to resins, transportation costs, wage rates and sourced finished good pricing. We plan to grow gross margins despite this cost pressure with both pricing and productivity actions.

Specifically, in 2021, we expect to deliver on our evergreen financial targets for core sales growth, operating margin expansion and free cash flow productivity. For the full year of 2021, we are guiding for net sales of $9.5 billion to $9.7 billion, with core sales growing at a low single-digit rate and favorable foreign exchange more than offsetting the headwind from continued rationalization of the Yankee Candle retail store footprint and other minor business exits.

We are planning for normalized operating margin improvement of 30 to 60 basis points year-over-year to 11.4% to 11.7%. We expect productivity and overhead savings will more than offset the impact of inflation as well as incremental investment behind higher advertising and marketing spend.

We are assuming normalized effective tax rate in the high teens, significantly above the 2020 level, due to a lower benefit from discrete tax items. This outlook does not contemplate any potential changes in the U.S. corporate tax rate under the new administration.

We expect this to net out a normalized earnings per share of $1.55 to $1.65, with a modest uptick in the number of shares relative to 2020 levels. The year-over-year step-up in the tax rate represents a more than $0.30 headwind to earnings per share in 2021. On a tax rate equivalent basis, we are projecting strong growth in earnings per share in 2021.

For 2021, we expect to generate operating cash flow of approximately $1 billion. Our outlook implies that we will continue to make progress on reducing our cash conversion cycle, despite a lower year-over-year benefit from working capital.

For Q1, we are guiding for net sales of $2.04 billion to $2.08 billion or 8% to 10% year-over-year growth, with core sales increasing in the high single-digit range versus Q1 2020. Favorable currency is expected to more than offset the impact from Yankee Candle store closures and minor business exits.

Our first quarter guidance assumes normalized operating margin improves of 90 to 130 basis points year-over-year to 6.9% to 7.3%, reflecting benefits from productivity efforts and overhead savings that are partially masked by higher advertising and marketing investments as well as heightened commodity and transportation costs.

We are projecting a normalized effective tax rate in the mid-20s for the first quarter, reflecting a discrete tax headwind in the quarter. We expect normalized earnings per share in the $0.12 to $0.14 range, which represents strong double-digit growth as compared to $0.09 in the year-ago period.

Over the past 2 years, we have made tremendous progress on our turnaround. We are coming out of 2020 in a much stronger position than we were coming in despite the ongoing disruption from the pandemic. We continue to see significant opportunity for value creation, and will remain vigilant in executing on our goal of driving consistent and sustainable core sales growth, operating margin expansion and improved cash conversion cycle.

Operator, let's now open up the Q&A session.

[Operator]

Thank you. [Operator Instructions] We will now take our first question from Bill Chappell from Truist Securities.

[William Chappell, analyst]

I just trying to -- I understand forecasting this year is more of an art than a science. But can you kind of walk us through -- on the -- I guess, the comparison, just understanding, I guess, 3 things. One, being a year ahead of expectations, what the SKU count reduction does to expected revenue to the Yankee store closures? I mean I know it won't have as much impact on first quarter, but certainly on the back half. So just trying to understand what that does. And then third, I can't remember or I don't remember exactly what it was in terms of -- last year, you had a fair amount of plant closure around COVID that created shortages and out of stocks. Any idea of kind of what you can make back as we look at the first, second quarter of this year. Sorry, that's a lot.

[Christopher Peterson, executive]

Yes. No problem. Let me try to address those. So we are very excited on the SKU count progress that we've made. As I said in the prepared remarks where we've gotten to our goal a year early.

One of the things that we've done is we've put in place a systemic process that we call a Magic Quadrant analysis that looks at revenue per SKU and gross margin per SKU. And as we've gotten into that and systematized the process, we think we've got opportunity to go further on SKU count reduction going forward. We don't believe that this is going to be a revenue headwind. We actually think that this is going to be a revenue health for the company and a cost help because it allows us to improve our customer service levels.

We're in the process of setting new targets, and we'll share more probably at CAGNY next week with regard to the out-front targets, but very encouraged by the results so far, and we see it as an enabler for both revenue growth and continued productivity.

On Yankee stores. We ended 2020 by closing, I think, 77 stores in 2020. Our store count was 398 stores. I think our plan for '21 is to close somewhere about another 80 to 100. Most of those will happen, and in fact, most of those happened in January. So it's very part-of-the-year loaded. That does not have a significant impact on the company's revenue because we're growing very fast in that business on the e-commerce side, with the wholesale business and in the international markets. And so we believe that we're going to see a profitability benefit as we make that transition from retail to more online and wholesale in that business.

And then on the plant closures. You're right, in the second quarter last year, of our about 135 manufacturing facilities and distribution centers, we had 20 that were closed via government mandate. As we sit here today, all of our facilities are open, largely operating at full capacity, and we have largely caught off across the majority of our product categories. That being said, we do have some product categories where we're still supply-constrained. And those tend to be the product categories where we've seen outsized consumer demand increases. But we are working hard to catch up and add capacity in those situations.

[William Chappell, analyst]

Well, that's great. And one just follow-up on Writing, and you're talking about kind of tougher comparisons for the overall business in the second half. I've got to think Writing is set up for a gangbusters. You had third and fourth quarter, assuming schools are back open, offices are back open. Are you preparing for that? Or how should we be looking or thinking about that as we move to the third quarter, fourth quarter?

[Ravichandra Saligram, executive]

Yes. Bill, let me tackle that. But the first piece of good news in terms of the resilience of the portfolio when you look at 2020 with all the headwinds we had on Writing that we were able to do as well in the second half and actually contain the decline for the full year to a negative one is testimony to how we're beginning to get resilience with other brands. So that to me is comforting when you look from a long term.

Writing is a very well-managed business for us. It's just the macro has been what it has been. When we look at '21, I think what we're assuming is that schools will go back to reopening are these the [indiscernible] in the second half of the year. And we've taken that into consideration. We're preparing for it. We think it will be a more normal back-to-school season. And I think some of the universities as well.

The big unknown at this stage is the commercial business. Because when you look at offices, the prediction I had thought that most of the offices would head back in by July, but everything we're reading and hearing is that until you get hurt in early, I think companies are low to sort of take that step. We have learned from Silicon Valley companies that they may actually remain closed not only into the fall, but the entire year.

So that does get affected in terms of our commercial business, which is softer part of the business. So we'll have to see on that. Overall, do we expect the Writing business to grow in 2021 versus 2020? Absolutely. How much? I think second half will be the question mark.

And look, the other thing I should say, which I've said in my prepared remarks, the share gains we've had in Writing are truly spectacular. And Sharpie's brand strength that it can go beyond markers and how it is doing in the pen side and all the innovations we are coming up.

And lastly, we're really comparing for a different future with this business. We're now -- our team is very focused on innovations, which is there's more stay-at-home stuff that we have prepared to do that in the longer term. So it's still very -- feel good about this business and -- but the other businesses are picking up as well.

[Operator]

We can now take our next question from Olivia Tong from Bank of America.

[Olivia Tong, analyst]

I was hoping to talk a little bit more about the margins, particularly gross margin. You mentioned the commodity pressure, of course, and some pricing. So perhaps could you give a little bit more detail in terms of where you think you could potentially price.

And then just sort of marrying all the different things, the puts and takes from margin. You recognized pressure, potentially some offset from pricing, maybe a little bit less leverage but hopefully, an improved sales mix relative to last year. So just think me through all these different pieces. And if you could just give us a little bit more color on that in terms of the puts and takes there.

[Ravichandra Saligram, executive]

Chris, why don't you take that?

[Christopher Peterson, executive]

Yes. Sure. So if we think about the margin guidance, the operating margin guidance in particular, gross margin impact for next year, for 2021, basically, there are 2 primary headwinds. The first is inflation, which, as I mentioned in the prepared remarks, is due to resin wage rates; the sourced finished goods, primarily due to the strengthening of the Chinese currency and transportation costs.

We expect that inflation pressure based on what we're seeing today to be almost a 200 basis point headwind for the company for next year, which is a significant ramp up from prior years. We also are planning to increase our advertising and marketing cost as a percent of sales in 2021, given that our innovation pipeline has strengthened in 2021 as we've brought new leadership on and they've begun to develop stronger innovation plans. So those are the 2 headwinds.

We're guiding to operating margin growth because we have benefits that more than offset that. And the benefits that we're seeing are -- the biggest one is productivity with the fuel savings program. And so we're using that productivity drive to basically offset -- largely offset the inflation pressure.

We also have -- we are going to take selective pricing. We're not taking pricing to fully offset inflation, but we are taking selective pricing in those categories that have seen the biggest inflationary pressure. We also expect business unit mix benefit.

As Ravi mentioned, we are expecting the Writing business to come back and be a meaningful growth driver for the company in 2021. Actually, we're expecting the Writing business to grow starting in the first quarter from what we've seen.

And then the last thing I would mention is continued focus on overhead cost reduction through our simplification initiatives. So those are sort of a walk through the puts and takes. I think when you net it all together, we're expecting to drive gross margin improvement in 2021 despite the inflation environment because of the productivity efforts the pricing and the mix from the business unit forecast.

[Olivia Tong, analyst]

Can I ask you one about how you're thinking about channel exposure, probably for the business going forward? Obviously e-commerce has been growing pretty substantially. So as you expand online, can you talk about the margin implications of that? And then where are you focusing on distribution expansion more acutely? Like which segments do you think you have more opportunity in terms of distribution expansion?

[Ravichandra Saligram, executive]

Yes. Let me quickly get back to this. So we -- I think e-commerce is here to stay. It's going to continue to grow, and we're going to be advantaged because we have got strengths. As I mentioned, 22% global net sales penetration; and e-commerce growth, high 30s. And for us, that business, our e-com growth business is quite profitable. And it's not something that is -- it's a very good margin business. So I don't think that's a concern, and we'll continue to grow there.

Second, in terms of channels. As I mentioned, where the big thrust for us is the grocery business, the dollar stores, the drug stores. And we're making already good progress, especially our Food business really had a good year on the grocery side. We're putting together now a very focused sales team on this channel. We think that there's a lot of opportunity. One, we continue to do well with our strong mass merchants or our biggest customers, so continued focus on that.

[Operator]

And our next question comes from Kevin Grundy from Jefferies.

[Kevin Grundy, analyst]

Congratulations here on the recent momentum. It's great to see. First question, perhaps for Chris on the margin opportunity, and I have one for Ravi on the geographic opportunity.

So first, on the margin opportunity. Chris, as you're well aware, the 600 to 800 basis point opportunity with respect to combined gross margin and overheads, understanding those figures are gross and ex, any sort of reinvestment concerns? But frankly, it's pretty unique and rather substantial within the consumer space.

So the long-term guidance calls for 50 basis points of improvement each year. You guide this year is 30 to 60 basis points. The question is, what's the organization's ability to lean in and accelerate the pace of that margin enhancement and unlocking that value for shareholders while balancing versus the investment needs and cost inflation that you'll encounter in any given year? So your comments there would be helpful. Then I have a quick follow-up on opportunities outside the U.S.

[Christopher Peterson, executive]

Yes. So let me start on the margin question, Kevin. So if you look at the underlying trends of what we're driving this year, the organization is driving sustainable margin improvement progress on both gross margin through the fuel program and on overhead reduction through the complexity reduction that dramatically exceeds our guidance of 30 to 60 basis points in operating margin improvement.

The reason why we're guiding to 30 to 60 basis points is because we have an inflationary environment, which I mentioned is about a 200 basis point headwind. And we're planning to increase advertising and marketing costs as a percent of sales significantly in 2021. And so if those 2 things were not there, you would see our ability to fundamentally be driving operating margin improvement be higher than the net guidance.

I think the evergreen model that we've put out of 50 basis points improvement each year, our guidance is very much in line with this year. So we're excited that our guidance this year has us fully on all metrics in line with the -- with our evergreen model. And we think that the company has really turned the corner in regard to delivering against that evergreen model.

So in any given year, we'll guide as appropriate when we get there. But I feel very good about the underlying capabilities of the company to continue to drive margin improvement, primarily in the gross margin and overhead area.

[Kevin Grundy, analyst]

Got it.

[Ravichandra Saligram, executive]

And do you have a follow-up?

[Kevin Grundy, analyst]

Yes. I got a follow up. I'm sorry?

[Ravichandra Saligram, executive]

Yes. The follow-up, go ahead.

[Kevin Grundy, analyst]

I do. Yes. Ravi, just very quickly on the opportunity outside the U.S. for the business. I think it's probably been a little bit lost in the company's efforts to stabilize and put processes in place, which you've had success doing. But now it's about roughly 30% of the company's mix.

Could you spend a moment on the international strategy? How big of a priority it is to grow the business outside the U.S.? Where you see the greatest opportunities? And as we think about the algorithm for the overall portfolio, how should we think about the core sales growth rate for your businesses outside the U.S.? And then I'll pass it on.

[Ravichandra Saligram, executive]

Yes. So thank you, Kevin. As you may know from my background, I've been President of International, twice in my career. So obviously this is something that is near and dear to my heart. But our first priority was to really get U.S. focus, which we are now beginning to get traction. So we're telling more of our attention on that for '21 and beyond.

I think there is a lot of opportunity. The key is depth, not breadth. We are not into branding drags, which has been the issue in the past as where I think in a lot of places, that the overhead in the international business are higher than U.S. So we've got to get -- it's very fragmented.

So if you take the U.K., we have many businesses that are in different offices, there's not the synergies. So we've got to get focused. So what we're doing is focusing on sort of top 10 countries and saying how do you get after them and how do we create longer-term a country management system, more of a one-year approach rather than everyone doing their own thing.

Having said that, the teams have been still doing pretty well. And when you look at the fact that overall, international actually grew pretty well and slightly better than the U.S. in 2020. And when you think about appliances where Latin America is the strongest, it was double-digit growth -- strong double-digit growth in Latin America.

So it's all positive. I just think there's a lot of opportunity, and we're going to get after it with a very well-articulated strategy. COVID's also made it difficult to get to these countries. But this year, this is one of my big priorities as we go forward.

[Operator]

And our next question comes from Wendy Nicholson from Citi.

[Wendy Nicholson, analyst]

Two questions, please. First is just in the very short term, we've read some reports about the port of Los Angeles having backlog issues. And Chris, I was just wondering if you had any issues given that you import some of your goods from China or your materials in China. Do you have any issues or bottlenecks there?

And then second, question. Actually, that's on the margins, but looking at it from a different perspective. My take is that the biggest hindrance to your overall margin is how low your margins have been in appliances and cookware specifically? And I know there's been a lot of lumpiness quarter-to-quarter. But with new management there, how long do you think it will be until that specific segment can firmly be in double digits from an EBIT margin perspective?

[Christopher Peterson, executive]

Very good. Thanks, Wendy. So on the port of Los Angeles, I'll just give a few comments. We do import a significant amount of containers through the port of Los Angeles from Asia and primarily China. That has been a backlog and a source of supply disruption for us.

So earlier in the pandemic, as I mentioned, in the second quarter of last year, it was about our manufacturing facilities and our distribution facilities. Now the disruption is more related to that port. We are getting products through there. We're also shipping through other ports on the East Coast and other places in the West Coast.

The prices for containers have gone up dramatically. We are a large-scale importer from a volume standpoint. That gives us some advantage in the marketplace because we have contractual commitments for volume and pricing that I think advantages us versus many of our smaller competitors. So we don't see it as a major headwind for the quarter or for the year, but it is something we're sort of battling every day as we go along here.

[Wendy Nicholson, analyst]

Great.

[Ravichandra Saligram, executive]

And then let me address Appliances there. So look, yes, we recognize that the Appliance business, we need to work on the margin structure here. There's no question. So the big issue is gross margins. And part of the issue for us is we deal with sort of the OPP and FPP segments. And so we've got to get more innovations out, which then can be at high gross margins.

The good news is when you look at our brands, which are more premium outside of the United States, like Breville in Europe or Oster in Latin America. The gross margins outside of the U.S. are actually quite good. So what the charge -- Chris often say, we've got to get that gross margin up over the next several years.

And also, as we get out of these scale businesses, some of these we are finding were gross margin-negative so we really need to get out, if you are giving out sort of dollar bills with some things. It's no good. So we're being very hard headed about looking at these categories. And while in the sharp down, that might have a little revenue shortfall. It's okay. We need to get the margins up. So very, very focused on gross margins on this business.

[Operator]

Next question comes from Joe Altobello from Raymond James.

[Joseph Altobello, analyst]

Just a question on the guidance. Given the momentum that you guys saw in the second half, and I know you assumed some of those consumer trends that we saw last year, have started to normalize and there's a lot of uncertainty. But why would sales in 2021 be below 2019? I mean other than Writing on the commercial side, what businesses might be lagging from 2 years ago?

[Ravichandra Saligram, executive]

Sorry, did you say 2021 versus -- can you repeat the -- we couldn't hear you very well. Sorry about that, Joe.

[Joseph Altobello, analyst]

Yes. I'm just curious. Outside of Writing on the commercial side, what businesses might be lagging from 2019?

[Christopher Peterson, executive]

Yes. So I think -- I don't think we're -- our guidance is implying widely. Let me try to just address the top line guidance and give some color to it.

So I think, as you all know, the company turned positive on core sales growth in Q3 of last year. We had a very strong Q3. We're reporting today a strong Q4. We're guiding to high single-digit core sales growth in the first quarter and some low single digit for the year. And I think when you look at that and you look at the -- like if you were to look at our 2-year stack growth rates, returned positive on a 2-year stack basis in Q3. We were positive on Q4, we're guiding positive on Q1, and we're guiding positive for all of 2021.

If you look specifically at the categories, I think the categories -- the category that has been most negatively impacted, as we've talked, has been Writing because of the schools and office closures. But as Ravi mentioned in the prepared remarks and as we alluded to on the Q&A, we are exiting 2020 in a very good position from a retail inventory perspective. And we expect the Writing business to be back to growth in 2021 starting in the first quarter. So I don't think we're seeing categories that we're expecting to have declines heading into 2021.

[Ravichandra Saligram, executive]

So let me just add one thing to that, which is the first half, look, we have better visibility because no one knows what's going to happen. And the first half, we are pretty bullish. I mean, we have given you a pretty good sense of first quarter. We had a great second half.

We also take into consideration a Food business that grows 25% last year on core sales. It's got to lap and that was big in the second half especially. So you've got to lap that. So when you look at stacked growth, I think we're doing pretty well. So we actually feel pretty strong. But even coming out of COVID, this business is beginning to turn around and get growth momentum.

[Joseph Altobello, analyst]

That's helpful. I appreciate that. Just one quick follow-up for Chris. You mentioned that there's more opportunity on SKU count. You're at 47,000 now. How low do you think that number could ultimately get?

[Christopher Peterson, executive]

Yes. So we're -- as I mentioned, we're excited about getting to our goal of 50,000 a year early. We're going through that analysis as we speak. And I think we're doing it in a database fashion. Just as a little bit of background. 2 years ago at CAGNY when I first presented as the CFO of Newell Brands, we were over 100,000 SKUs. And so we've been able to go from over 100,000 down to 47,000.

And we set our 50,000 goal based on just sort of a thumb in the air. What we've got now is a much more databased way of tracking and measuring it. We're finalizing our objectives, and we'll share a revised out-front target next week at CAGNY as we get there. But there's no question that we have further opportunity for SKU reduction. And that further opportunity, I think, is going to enable us to both accelerate revenue growth and drive strong gross productivity and cost of goods savings and margin -- gross margin improvement. But we'll share more next week.

[Operator]

Next question comes from Lauren Lieberman from Barclays.

[Lauren Lieberman, analyst]

I was hoping we could talk a little bit about Baby. You called out very strong performance in the fourth quarter. And I was just thinking forward some of the headline risks or realities about the birth rate. I know that over time, innovation for Trump's birth rate dynamics, but I was just curious what you were seeing in terms of how you're projecting the category, how you're thinking about innovation in the pipeline and what may be developing from a competitive landscape standpoint?

[Ravichandra Saligram, executive]

Yes. Lauren, so one of the -- U.S. birth rate itself is of high, but you also have continued immigration. And so growth rates, depending on within the U.S. population, may be higher in certain groups and stuff. So -- but also, really, it's a global business for us, and there's opportunities elsewhere in the globe. And we have both the gear business and our care business. And we think, in the care business in the U.S., we have a lot of share opportunities with our NUK brand, and we're driving innovation to put out that temperature-controlled bottle, which has really done well, both in the U.S. and Germany.

And in gear, we continue -- there are still certain segments. While we have Graco's, the overall leader and had a tremendous share improvement this year, there's still more to go. So we think that there's just -- this business is a good, steady business. It's got good operating margins, good cash flow. Overall, a solid business, and we're quite confident that this will we -- continue to be a good part of the portfolio.

[Christopher Peterson, executive]

And the only thing I would add on that, as Ravi alluded to, we've done actually a fairly deep dive into the category growth rates. And the U.S. birth rate is not indicative of the category growth rate because of the immigration point that Ravi mentioned. What we're seeing is that integration is as big a driver in the category growth rate as the U.S. birth rate.

And what we're seeing is the immigration trend is more than offsetting the U.S. birth rate dynamic so that the category is actually growing even on volume basis, because of the net of those 2 dynamics, which may be a little bit counterintuitive to those that are just thinking about the U.S. birth rate, not that you are, Lauren, but for other people haven't asked us that question.

[Lauren Lieberman, analyst]

No, that's great. It's really helpful. And just anything on innovation? Sorry, that was a kind of a category growth piece. I know we're late in the call, but I was just curious about innovation and competition.

[Ravichandra Saligram, executive]

Yes. I think, look, we're -- I talked about the slim car seat. I think that is great on the whole sensory side where -- that we launched last year, which we're continuing to look at innovating, which in terms of cradles, bassinets, all of that is very positive for us, I think that technology.

So I think when you look at those, the new cradle thing that really is a Japanese-sold innovation and that came in, I think. So we're continuing to innovate. I mean this group -- and then we launched the Century brand and which has been really a great more -- it's really minimalistic, appeals to millennials is more value-based. And we think that will have a lot of traction going forward. And then we're working on a lot of innovations on Baby Jogger. So that should come out in '21 and '22.

[Operator]

We only have time for one more question, and that's from Steve Powers from Deutsche Bank.

[Stephen Robert Powers, analyst]

Appreciate it. Actually, if I could squeeze in 2, that would be great, but I think they're both relatively straightforward. First one is just as you think about '21, balancing expected store closures that you called out versus some channels maybe reopening and your own efforts to expand points of distribution online in food, driving elsewhere.

Can you just plan how you're expecting actual end-market consumption to trend across the portfolio versus the low single-digit core sales guidance that you issued today? I just want to square that circle, if I could.

[Ravichandra Saligram, executive]

Yes. I'll do a quick one on that, Steve, which is the -- look, as we look at our various categories, we do think, at least in the first half, which we have more visibility, there's continued growth. And I think some of these trends that came out in the pandemic, there's been a real interest. What started as home cooking as a security measure, not to go so much to restaurants, they have done them to -- from a hobby to really a home check.

So I think you'll continue to see these, which means many of the categories we compete in, are going to handle growth. And -- but importantly, we're also taking share. I mean this is the first year in '20, where we got shared in a number of categories.

And Writing, we feel very good that we're pushing the share side. And second half, we'll just have to see. So I think overall -- and then I think one of the comments for some store closures which is really more of a -- it really affects 2 things, right? Yankee Candles where ourselves closing and the D2C business for us has been very strong, so it's absorbing that.

And on the specialty side, clearly, that affects our Writing business. And so the commercial business is affected there a little bit. But overall, I think we're hoping that the strength that we have both in terms of our brands will -- if this category growth will grow ahead of it or if that is flat, we will go after share so.

[Stephen Robert Powers, analyst]

Okay. But I guess if I summarize, it sounds like you're assuming that overall consumption kind of trends more or less in line with core sales. Is that fair?

[Ravichandra Saligram, executive]

Yes. Yes. I would say that's a fair comment.

[Stephen Robert Powers, analyst]

Okay. Cool. And then, Chris, this is maybe something that you'll talk more about next week. But just the working capital drivers that you outlined on Slide 15, you gave us some color on your '21 expectations. But I guess just stepping back, I'm curious how you view the longer-term opportunity on those metrics and just the pacing by which you think you might be able to make ongoing improvement there. So maybe any color.

[Christopher Peterson, executive]

Yes, sure. So -- and you're right, I'll cover a little bit more on this next week at CAGNY. But just as background, I think 2 years ago, when I -- as I mentioned when I first showed up at CAGNY, with 2 months at the company, and I reported that we were -- our cash conversion cycle was 115 days, which had us as the worst company in the industry.

And we set a goal of 70 days where we wanted to get to. And the 70 days was really based on looking at the categories that we compete in and trying to say if we could get to the median level based on our peer group, what would that look like, and that was 70. We ended this year at 72. So we've gotten there very quickly. I think the move from 115 days down to 72 has been phenomenal.

I'm not satisfied with being at median. I think that we aspire to be best-in-class, not just median. And so we're working through similar to the SKU count, now that we've achieved the initial target that we've set, I think we're likely to set a more aspirational target that's more aggressive because we continue to see opportunity ahead of us for cash -- working capital takeout and cash conversion cycle improvement.

Similar to SKU count, I'll share more detail on what that looks like next week when we get into the strategy discussion.

[Ravichandra Saligram, executive]

Steve, one quick follow up. Also, I forgot to mention in January, consumption, it was really looking strong and across most of our categories. And RPRS is really doing well so that bodes well.

[Operator]

This concludes our questions-and-answer session. I will now turn the call back to Mr. Saligram for closing remarks.

[Ravichandra Saligram, executive]

Thank you very much. We feel very good as we go into 2021. I apologize to those who couldn't get their questions. We ran out a little bit. But thank you for that and onwards and upwards.

[Operator]

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