Christopher Peterson
President at Newell Brands
Thank you, Mark, and good morning, everyone. I'd like to echo Ravi's sentiment by welcoming Mark to the team, Mark and I have known each other for a long time, having worked together at P&G. Although Mark has only been here for a short time, I can already see what a great fit he is for the organization, and look forward to partnering with him and the rest of the leadership team to unlock the full potential of the business. I would also like to thank Ravi for his leadership and partnership over the past several years. I've admired his passion, commitment and people-first mindset, which are infectious and have reinvigorated the company's culture.
I'm honored and excited to become the next CEO of Newell Brands. In my new capacity, I look forward to working with our leadership team, the Board and all of Newell's dedicated and talented professionals around the world to drive shareholder value creation through diligent and thoughtful execution of our strategic agenda.
Before jumping into the results, I'd like to take a few minutes to talk about some of the key business and organizational initiatives we have recently taken to strengthen the company's operational foundation. As we've mentioned before, a key component of our aspiration to become a TSR leader in our industry is predicated on creating a scaled World-class supply chain that positions Newell as the retailer partner of choice from a service, reliability and capability standpoint, and leaves the breakthrough value creation in terms of margins, cash and reduce complexity.
Consistent with that, on February 1st, we seamlessly implemented the second go-live wave of Project Ovid across the remaining food categories, as well as the Writing, Outdoor & Rec and commercial businesses. Having reached this major milestone in Newell's supply chain transformation journey, we're now at a point where we can begin to fully leverage the new go-to-market model to operationalize distribution and transportation benefits, improve customer service, better enable omnichannel solutions and drive broad-based operational excellence across the organization.
Project Ovid was an integral step and demonstrating the organization's readiness and willingness to undertake a significant change agenda and commit to a One Newell culture. So we are building on this momentum as part of Project Phoenix to further optimize the company's operations by centralizing manufacturing into a supply chain center of excellence. This will, for the first time, allow us to create and leverage manufacturing scale and turn it into a competitive advantage. While this will not materialize overnight, we do believe that a unified global supply chain organization will drive significant efficiencies, improve our supply chain resiliency, further enhance the company's technical capabilities, strengthen our culture of customer connection and collaboration, and position us to become a best-in-class scaled general merchandise supplier to our retail partners.
Now let's move on to fourth quarter results, which were largely consistent with the outlook we provided in October, and our focus on optimizing cash flow yielded strong results. Net sales for the fourth quarter declined 18.5% year-over-year to $2.3 billion due to a 9.4% decrease in core sales, as well as the impact of the divestiture of the CH&S and business at the end of Q1, unfavorable foreign exchange, and certain category and retail store exits.
Topline trends remain challenged due to inventory reductions at retail as well as softer consumer demand for general merchandise categories. We expect these dynamics to persist in the near-term. Normalized gross margin contracted 360 basis points versus last year to 26.6% as the impact of reduced fixed cost absorption, unfavorable foreign exchange, and inflation more than offset the tailwind from pricing and FUEL productivity savings.
Before moving off of gross margin, I should mention that during the fourth quarter we elected to change Newell's method of accounting for certain inventory in the US from LIFO to FIFO to conform the company's entire inventory to a single method and simplify the company's inventory accounting. Therefore, the financial statements in today's release and the numbers we're referencing reflect the impact of this accounting change to FIFO, both in the current and prior year periods, which have been retroactively adjusted.
For Q4 specifically, there was a $4 million increase to cost of goods sold relative to what it would have been under the prior method. Normalized operating margin declined 510 basis points versus last year to 4.9%, reflecting gross margin pressure and the impact of topline deleveraging on SG&A costs. Net interest expense increased to $64 million from $59 million in the year-ago period. The normalized tax benefit was $5 million as compared to a $38 million expense last year with the difference largely driven by an increase in discrete tax benefits.
For the quarter, normalized diluted earnings per share were $0.16 as compared to $0.42 last year. During the four quarter Newell's cash flow performance improved considerably and it began to reflect the actions we took in 2022 to right-size our supply and demand plans. The business generated operating cash flow of $295 million in Q4 as inventory declined by more than $400 million relative to Q3. Working capital was a source of cash in Q4 despite a meaningful drag from payables, which have been negatively impacted by the timing of our pullback on the supply plan.
Although, the company ended 2022 with an elevated level of working capital and operating cash outflow of $272 million, Q4 cash result, in combination with our proactive pullback in the supply plan give us confidence that operating cash flow will bounce back significantly in 2023. Despite the strong stack -- snap back in cash flow, we ended 2022 with a leverage ratio of 4.5 times as we took on short-term debt to navigate through this tough environment. While we expect the leverage ratio to be pressured in the near-term, we remain laser focused on strengthening the company's balance sheet in the years ahead.
Note that effective Q1, we are implementing a new operating model and consolidating our previous five operating segments into three. Therefore, in the interest of time, I'm going to dispense with the usual high level segment sales commentary for two reasons. First, you can easily find these numbers in the tables attached to our press release. And second, I'm sure everyone is interested to hear our comments about fiscal 2023.
Taking a step back, 2022 was clearly a challenging year for Newell, but we acted quickly and decisively to mitigate the impact of the external headwinds and ensure we are strategically investing in core capabilities that position Newell for success over the long-term. In 2023, we've identified five major priorities to stabilize Newell's financial performance while driving foundational improvement, so we can return the company to sustainable and profitable growth as macros improve.
First, strengthen cash flow and balance sheet by continuing to right-size inventories, carefully managing the forecasting process and staying close to the evolving consumer and customer trends so we can remain agile in planning.
Second, drive gross margin improvement by accelerating FUEL productivity savings, further advancing our automation initiatives, operationalizing Project Ovid distribution and transportation benefits, pricing internationally for currency and instilling greater financial discipline surrounding new product innovation.
Third, drive overhead savings through Project Phoenix and pipe spending controls to offset the impact of incentive compensation reset to normal levels and wage inflation.
Fourth, continue SKU count reduction progress and initiate a bottom-up white sheet SKU approach to enable the next phase of reduction.
And fifth, operationalize the new company's structure to enable faster transformation progress.
Despite taking these proactive and decisive actions to strengthening the company's performance, we expect the external landscape to remain challenging in 2023. The high level of uncertainty on the macro front has influenced our modeling assumptions as follows. We are assuming consumers disposable spending power will be under pressure due to inflation in food, housing and energy, with consumers in Europe feeling greater stress than in the US. We also expect consumer demand for general merchandise categories to remain soft due both to macroeconomic environment and normalization of home and outdoor categories from peak pandemic demand levels. Retailers are likely to continue reducing open to buy dollars in general merchandise categories.
Foreign exchange is expected to remain a headwind for the year. We expect the supply chain pressures to continue to ease and for inflationary pressure to moderate to low single digits of COGS, down from high single digits in 2022, as commodity and transportation prices continue to move off their peak levels. Since we expect many of the headwinds the company experienced in the second half of 2002 to persist in 2023, we are maintaining a prudent bias when setting our demand and supply plans to ensure a heightened focus on cash flow generation, working capital improvement and optimization of Newell's cost structure.
Within this context, our 2023 financial outlook contemplates net sales of $8.4 billion to $8.6 billion, with core sales declining 6% to 8%. We're assuming nearly a 3% headwind from foreign exchange, certain category and Yankee Candle store exits and the sale of the CH&S business which closed at the end of Q1 last year. Normalized operating margin is expected to be flat to down 50 basis points versus last year to 9.6% to 10.1%, as stronger gross margins are offset by overheads.
We expect to drive above average productivity savings, which in combination with carryover pricing and new pricing outside the US should more than offset the impact from inflation. We are planning to maintain tight spending controls and are assuming that Project Phoenix unlocks about $140 million to $160 million of pre-tax savings this year. However, we expect these benefits to be fully offset in dollar terms by incentive compensation reset, wage inflation, and select capability investments. We are forecasting normalized earnings per share of $0.95 to $1.08 as we expect a significant year-over-year increase in the interest expense and tax rate.
We are assuming a return to a more normalized tax rate in the high-teens range as compared to 2.5% in 2022. At the midpoint of the range, we are assuming that normalized earnings per share decline low double digits on a constant tax and currency basis. We expect a significant bounce back on cash flow in 2023 from timing of inventory purchases and payables with free cash flow productivity well ahead of 100% at a mid -- at the midpoint of our guidance range. We are forecasting operating cash low in the $700 million to $900 million range, including about $95 million to a $120 million in cash expenditures from Project Phoenix.
Our first quarter outlook assumes the following: net sales of $1.79 billion to $1.84 billion, including a core sales decline of 16% to 18% and a 7% headwind from the sale of the CH&S business on March 31, 2022, foreign exchange and certain category and Yankee Candle store exits. We are forecasting normalized operating margin of 3.0% to 3.5%, significantly below 10.6% last year due to fixed cost deleveraging inflation and foreign exchange pressure. We expect normalized loss per share of $0.03 to $0.06. The depressed earnings per share in the company's smallest quarter of the year from a seasonality perspective reflect significant margin pressure, a step up in interest expense and a modest tax benefit.
We clearly expect a much tougher first half of the year relative to the back half, as the business cycle is more challenging topline comparisons with headwinds from currency and inflation carryover being more front half weighted, whereas benefits from Project Phoenix are expected to be more back half loaded. We're also assuming that retailer inventory reductions and constrained spending on discretionary products will persist through the first half of the year.
As such, we expect core sales growth to be stronger in the second half of the year versus the first half. We are taking decisive actions across all areas that are within our control to successfully navigate through this difficult macro backdrop, while building and investing in core capabilities, which we believe will position the company for a return to sustainable and profitable growth.
Operator let's now open up for Q&A.
