Mark Erceg
Chief Financial Officer at Newell Brands
Thanks, Chris. Good morning, everyone. While core and net sales were better than expected at down 9%. We believe the most important financial story of the fourth quarter is the dramatic improvement achieved in the underlying structural economics of the business as evidenced by a 570 basis point improvement in normalized gross margin versus a year ago. Simply put, the targeted interventions we have made to improve the underlying structural economics of the business, such as the July 2023 high single to low double-digit pricing action on roughly 30% of our US business, primarily in the Home & Commercial segment, as well as the reduction in the manufacturing labor force across selected sites, are clearly showing up in the financials.
The company's fourth quarter normalized gross margin of 32.3% represented a 100 basis point improvement sequentially and the second consecutive quarter of year-over-year expansion despite sustained pressures on volumes. Remember, as Chris mentioned earlier, approximately 80% of our reduction in core sales this year was due to retailer inventory actions and category contraction. The resulting lower volumes when combined with nearly $700 million of inventory reduction, which we unilaterally removed from the system throughout the course of the year had a significant impact on capacity utilization and makes the over 500 basis points of productivity delivered in the fourth quarter by our exceptionally talented supply chain organization even more impressive.
On the SG&A front, meaningful savings were also realized with Project Phoenix providing $53 million of benefit in the fourth quarter, which helped partially offset higher incentive compensation and the deleveraging impact on SG&A from a weaker top line. Fourth quarter normalized operating margin increased 280 basis points to 7.7%. Encouragingly, this is the first time normalized operating margin has expanded since the second quarter of 2022, which we believe is another proof point that the right strategy is now in place.
During the fourth quarter, net interest expense increased $6 million versus last year to $70 million due to higher interest rates and discrete tax benefits yielded a normalized tax benefit of $10 million, all of which brought normalized diluted earnings per share in at $0.22. Importantly, this was considerably better than the $0.15 to $0.20 outlook we previously provided.
Turning to operating cash flow. $251 million was generated in the fourth quarter, bringing full year operating cash flow to $930 million, an increase of $1.2 billion versus 2022. You will recall that at the start of 2023, improving cash flow was our Number 1 financial priority. So we are very pleased that the team over-delivered on this critical metric despite greater than originally anticipated macro headwinds. Strong cash flow allowed us to reduce gross debt by about $500 million during the year with over $200 million of that reduction occurring between the third and the fourth quarter. which helped lower our leverage ratio from 6.1x at the end of Q3 to 5.6x at the end of Q4.
Turning to 2024. Expectations have not changed since our last earnings call. We said fiscal 2024 core sales were expected to be down year-over-year and below our evergreen target of up low single digits, with operating margin expansion ahead of the evergreen target of 50 basis points. Consistent with this, we expect the following for 2024.
Core sales and net sales are expected to decline 3% to 6% and 5% to 8%, respectively, for two primary reasons. First, we expect our categories on average to contract low single digits in 2024. While we wish this wasn't the case, we nonetheless view this as a source of optimism since this is considerably better than the high single-digit contraction experienced in 2023. Second, we expect distribution losses and product line exits to exceed distribution gains by about 2 points due to our business decision to exit some structurally unprofitable businesses.
Finally, please note that the 2-point difference in expected core versus net sales is driven primarily by unfavorable foreign exchange and to a lesser extent, category exits. We expect normalized operating margin between 7.8% and 8.2%, which at the midpoint represents a 100 basis point improvement, which is 2x our evergreen target, which calls for a 50 basis point improvement each year. The increase in normalized operating margin should be driven by strong gross margin improvement as another year of world-class productivity gains and the annualization of the July 1, 2023 pricing action more than offset an expected low single-digit headwind from inflation.
Having just touched on pricing, it bears mentioning that given the degradation in the company's gross margin level in prior years, we are fully committed to restoring Newell's gross margins to provide the necessary fuel for reinvestment behind the business going forward. However, our guidance does not reflect any significant incremental positive pricing actions during 2024.
Within SG&A, we expect overhead costs will be down meaningfully in absolute dollar terms, which should stay close to flat as a percentage of sales. The combined savings from Project Phoenix and our more recent organizational realignment should more than offset professional wage and benefit inflation and a series of incremental investments being made to enhance several critical core capabilities required to support our new corporate segment, regional brand and functional strategies. Despite robust cost control, the anticipated contraction in top line sales we expect to incur in 2024 will keep overhead costs as a percentage of sales elevated in the short term.
Outside of overhead expense, advertising and promotion represents the balance of SG&A. We are planning to spend more in both absolute dollar terms and as a percentage of sales as we are beginning to see improvement in our innovation funnel and brand building activity and therefore, have more investable opportunities at our disposal.
For 2024, we are assuming that interest expense steps up by $15 million to $20 million and that our tax rate is in the mid-teens. Importantly, this compares to a tax benefit of $68 million in 2023. All in, we expect normalized diluted earnings per share in the range of $0.52 to $0.62. Now we'll be the first to admit that at first glance, this does not compare favorably to the $0.79 per share just recorded. However, once a $0.26 year-over-year tax differential is accounted for, the midpoint of this range represents high single-digit growth versus last year, which we believe represents good progress in our corporate turnaround.
For the year, we expect to generate operating cash flow of $400 million to $500 million. This range assumes another meaningful improvement in our cash conversion cycle, just not at the record level achieved during 2023 when nearly $700 million of excess inventory was removed and Newell's cash conversion cycle dropped by 24 days. Our operating cash flow range also includes about $150 million to $200 million in cash restructuring and related charges.
Frankly, we briefly considered slowing down some restructuring efforts, but the rates of return associated with Project Phoenix, the network optimization project, the organizational realignment and other initiatives are all so compelling, the decision was taken to aggressively but thoughtfully move forward with a multifront transformation of Newell Brands.
During fiscal 2024, we plan to invest about $300 million in capital expenditures, most of which will be spent on high-return cost-saving projects to further improve the structural economics of the business and accelerate the turnaround. While fully funding numerous high-return internal projects, we also plan to reduce our leverage ratio and strengthen our balance sheet with an expected return to a more typical seasonal cash flow pattern, characterized by a use of cash in the first half of the year, followed by meaningful cash generation in the second half. Newell's leverage ratio will likely increase as we move towards the midpoint of the year before dropping to about 5x by the end of Q4.
Long term, we remain committed to achieving investment-grade status and continue to target a leverage ratio of about 2.5x. But in the meantime, we wanted to create additional financial flexibility. So we proactively amended the terms of Newell's revolver, even though we were fully compliant with all covenants at the end of the fourth quarter. As a result of the amendment, which was finalized earlier this week, the revolving facility was converted to a $1 billion secured facility, which we believe provides us with ample liquidity going forward.
Free cash flow productivity is expected to significantly exceed our 90% evergreen target during 2024. As it relates to the first quarter of 2024, we expect a core sales decline of 6% to 8%, with net sales down 8% to 10% versus last year. Please note that the 2 to 3 point difference between our full year and first quarter core sales assumptions can be largely attributed to a greater impact from net distribution losses due to our decision to exit some structurally unattractive businesses, as well as weaker market share performance at the start of the year as the benefits from the capability build-out should improve sequentially going forward.
As with the full year, the 2-point difference in expected core versus net sales is driven primarily by unfavorable foreign exchange and to a lesser extent, category exits. For the first quarter of 2024, we expect normalized operating margin of 2.4% to 3.2%, which at the midpoint would represent a 40 basis point improvement versus 2023. We expect gross margin to continue to expand versus last year, although not nearly as much as in the fourth quarter, largely due to FX impacts and less favorable capitalized variance adjustments.
Total SG&A dollars should be down versus a year ago despite spending more on A&P, but because of the anticipated sales decline, SG&A as a percentage of sales should be up by less than the amount gross margin should expand. After incorporating slightly higher interest expense and a modest tax help, we were looking for a normalized diluted loss per share in the range of $0.05 to $0.09.
That said, Q1 is typically Newell's smallest quarter of the year due to seasonality. As a result, it is not indicative of full year margin trends. In closing, we believe a great deal was accomplished during 2023, which has laid the groundwork frame much stronger 2024 as part of our multiyear journey to put the organization and the business with the right set of core capabilities, inclusive of sound business processes and cultural attributes required to fully operationalize Newell's new corporate strategy and in doing so, dramatically strengthened the company's financial performance going forward.
Operator, if you could, please open the call for questions.
