Chris Peterson
President & Chief Executive Officer at Newell Brands
Thank you, Sofya. Good morning, everyone, and welcome to our third quarter call.
We had mixed results in the third quarter. We made significant progress delivering against the five major priorities we established at the start of the year as well as deploying and actioning the new integrated corporate strategy. At the same time, we were disappointed, core sales declined 9.2% during the quarter. Let me take these each in turn, starting with the five priorities we laid out at the start of the year.
First, year-to-date, we delivered excellent results on operating cash flow, which improved more than $1.2 billion versus last year, largely due to significant progress on inventory reduction. The stronger-than-anticipated performance thus far has given us confidence to raise our outlook on cash flow for the full year.
Second, during the third quarter, gross margin reached an inflection point, expanding 170 basis points year-over-year with the fuel productivity program along with pricing serving as the driving force. We continue to expect record productivity savings in 2023 with year-over-year gross margin improvement continuing into the fourth quarter.
Third, we've completed the Project Phoenix organization design changes with all markets moving to the One Newell approach. We are on track to realize $140 million to $160 million of pre-tax savings this year and $220 million to $250 million on an annualized basis.
Fourth, we are moving at pace with the simplification and SKU count reduction work across the organization and are on track to end the year with less than 25,000 SKUs, down from about 28,000 last year and over 100,000 at the end of 2018.
Finally, the new operating model with three segments, a centralized manufacturing and supply chain and a One Newell approach with our top four customers and across the geographies, is now fully in place and starting to pay dividends. The most concrete example of how we are already creating and leveraging scale under our One Newell approach is the difficult but necessary actions taken during the third quarter to rightsize the manufacturing labor force across selected sites. Those actions which would have not been possible previously due to the way Newell was organized are expected to yield about $50 million in annualized cost savings.
The challenging macroeconomic backdrop continued to weigh on Newell's topline during the third quarter, reflecting soft demand for discretionary and durable products amidst persistent inflation on everyday goods, normalization and category trends post-COVID, tight inventory management by retailers, as well as the unfavorable impact from the bankruptcy of Bed Bath & Beyond. We estimate that about 80% of the sales decline was driven by category declines and retailer inventory actions.
However, there was a meaningful portion of our sales compression that traces back to gaps in our front-end consumer-facing capabilities or was the direct result of the July 1st pricing actions we took to proactively address situations where our structural economics were untenable. That is why since my appointment in May, we have placed so much emphasis on developing a robust set of corporate, business unit, functional and brand-specific strategies, all of which were fully informed by our brutally honest capability assessment to guide our approach in the years ahead.
At its core, our new strategy focuses on improving the company's consumer-facing capabilities while distorting investment to our top 25 brands in top 10 markets and building on the strengthened operational and organizational foundation we have built over the past several years.
Following the deployment of our new strategy in June, we've taken decisive actions to bring the new strategy to life in several ways. First, to put consumer understanding and insights at the center of everything we do, we've reinvented the consumer insight function and overhauled Newell's innovation process around the biannual review process. This new process has been established to identify strong consumer-driven propositions on our top 25 brands with a focus on creating fewer, bigger, and longer-lasting innovations that are gross margin accretive as part of a comprehensive tiered product launch system designed to get consumer-relevant innovation into market faster.
Consistent with this and to ensure we are being choiceful in driving the strategy into execution, we are taking swift action relative to the exit of smaller non-core brands. We are moving at pace and expect to finish the year with a tighter, more focused brand portfolio comprised of about 60 master brands versus 80 at the start of this year.
Second, to dramatically improve brand building and brand communication and as we strive to build brand management into a foundational capability, we replaced close to half of Newell's brand managers over the past several months and put exceptional performance standards in place, which set clear KPI-driven expectations for all brand managers going forward. In addition, we recently implemented important changes to the process and structure of our marketing and digital organizations to unlock quicker decision-making, drive accountability, and improve our ability to drive stronger purchase intent across our top 25 brands.
Third, key members of Newell's sales team have been tasked with leading new business development, where they will leverage Newell's scale and extensive portfolio of leading brands to identify and pursue incremental distribution opportunities within new accounts, while the bulk of our selling resources will continue to maintain their focus on strengthening our partnerships and increasing distribution with existing customers.
Finally, to properly cascade Newell's integrated set of corporate where to play and how to win choices, along with the new segment function and top 25 brand strategies, key members of the leadership team and I have now visited eight of Newell's top 10 countries across North America, Europe, and Latin America. Based in part on those interactions, we have decided to bring in new, strong talent to fill crucial roles across several of Newell's businesses and geographies. For example, we recently hired new leaders for the Home Fragrance and Kitchen businesses as well as new heads of Europe and France.
Before turning the call over to Mark, I'd like to provide a little perspective on the back-to-school season since that's always an area of interest. While predictions for the back-to-school season varied widely across the industry, in aggregate, the categories where Newell competes declined modestly with stronger market performance from retailers that put their support behind leading brands versus those that focused on private label offerings.
Against this backdrop, several of our major brands such as Sharpie and EXPO grew market share, which we were excited to see. That said, gaining share in a down market is not a prescription for long-term success. That's why we are already incorporating the learnings from this season, the most important of which is the role our leading brands can play in driving category growth into next year's back-to-school plans with leading retailers.
While there are parts of Newell's portfolio where we are gaining share, that's not the case broadly. This highlights why we needed to make a major pivot in the company's front-end strategy. While we are dissatisfied with our current sales performance, we did say at the Deutsche Bank Conference in June that we expected our topline performance to be below our evergreen target of low-single digits for the next four quarters to six quarters. Beyond that and as the bulk of our new capabilities ramp up, we remain fully committed to returning the company to topline growth.
Back in June and during our last earnings call, we also reiterated that our top financial priorities for 2023 were strengthening cash flow and improving gross margin, and very good progress is being made on both of those fronts. So while there are certainly much more work to do ahead of us, the strategy is starting to take shape. That's why we are confident that this year, free cash flow productivity will exceed our evergreen target of about 90% and the business will continue to improve sequentially next year as measured by gross margin expansion and the number of top 25 brands growing market share.
As we operationalize and execute our new strategy to significantly improve our financial performance, we have been laser-focused on implementing the organizational, operational, and cultural changes required to strengthen the company's front-end consumer-facing capabilities while harnessing the scale and power of One Newell. While the path forward will not be a straight line, we remain confident Newell's financial performance will improve and significant value will be created over time for our stakeholders.
I would like to thank our leaders and employees for their hard work, perseverance, and dedication amidst significant organization changes and for their unwavering commitment to our purpose of delighting consumers by lighting up everyday moments.
I'll now hand the call over to Mark.
