Fitch Downgrades Newell Brands Inc.'s IDR to 'B+'; Outlook Stable

Fitch Ratings has downgraded Newell Brands Inc.'s Long-Term Issuer Default Rating (IDR) to 'B+' from 'BB' and unsecured credit facility and notes to 'BB-'/'RR3' from 'BB'/'RR4'.

The Rating Outlook is Stable.

The downgrades reflect ongoing challenges that indicate significantly reduced medium-term earnings power and cash flow. Beyond the overall slowdown in discretionary consumer spending since mid-2022 and a weakening macro environment, execution risk remains a concern, as Newell continues to realign and restructure its business segments and supply chain network and reposition its brand portfolio, which could further disrupt operations. Fitch therefore expects EBITDA to remain below $1 billion, with EBITDA leverage (gross debt/EBITDA) increasing to over 6x in 2023 from 4.9x in 2022 and remaining elevated in the high 5x-6x over the next 24 months.

Key Rating Drivers

Accelerated Declines: Newell's operations beginning 2H22 have been challenged by changing consumer behavior with a shift towards services after strong pandemic-induced demand, a slowdown in consumer spending given moderating consumer fundamentals, and declining customer orders as retailers reduce inventory levels across general merchandise categories. This has been compounded by the company's brand execution challenges. The company has also seen significant margin headwinds from cost inflation, an increase in advertising and promotion expense as a percentage of sales and an unfavorable impact from foreign exchange, partially offset by pricing, productivity savings and lower overhead costs.

Core sales (a Newell metric which eliminates the impact of M&A and other non-comparable factors) declines have accelerated into 2023. Fitch projects core sales to decline 13% and Fitch-adjusted EBITDA margin of 10.4% with EBITDA trending towards $830 million from about $1.2 billion in 2022. With the company still expecting core sales declines for another few quarters, Fitch now expects 2024 core sales to decline and for EBITDA to remain below $1 billion versus prior expectations of returning to the $1.2 billion range. EBITDA margin is expected to improve towards 12% in 2025 but remain well below the 14% range pre-2022.

Elevated Leverage: Gross leverage increased to 4.9x in 2022 versus 3.7x in 2021, given the decline in EBITDA in 2H22 and the addition of approximately $600 million in short-term debt, due to a FCF outflow of almost $1 billion. Fitch expects gross leverage to increase to 6.4x in 2023, given the significant EBITDA decline offset by the paydown of a significant portion of the short-term debt with FCF. Fitch expects FCF to turn positive at $380 million in 2023, on working capital improvement. FCF is expected to be modest going forward, given projected EBITDA levels in the mid-$800 million to $900 million range and neutral working capital.

Liquidity is adequate near term and the company has $200 million in debt maturities in 2024, which it could refinance or pay down with revolver borrowings. Newell will need to refinance $550 million due 2025 and close to $2 billion of unsecured notes due 2026, potentially with secured debt.

Focus on Major Brands: Newell previously shared that it expects to sustain low single digit organic sales growth over the medium term by strengthening brands through increased innovation, focusing on omnichannel initiatives (with ecommerce at 22% of sales), and accelerating international growth (one-third of sales). Newell has realigned its business segments several times over the last few years in an effort to drive growth and improve profitability. This combined with material shifts in consumer spending patterns during and post the pandemic make it challenging to assess underlying business trends.

In early 2023, the company realigned its businesses into three operating segments: Home and Commercial Solutions (55% of 2022 revenue), Learning and Development (31%), and Outdoor and Recreation (14%).

In May 2023, Chris Peterson, prior CFO, became the new President and CEO after the retirement of Ravi Saligram. He recently shared his plan to focus on front-end or brand capability build out. The company will shift its focus towards the larger and more profitable brands, prioritizing the business in the U.S., and disproportionately investing in segments that have greater potential. The company noted that its top 25 brands comprise 90% of its revenue and profits and it plans to reduce its current brand portfolio from 80 to 60 by end of 2023.

The company aims to invest further in innovation, brand building capabilities, and make additional supply chain improvements to support this strategy with the overall goal of long-term topline acceleration and margin expansion.

Return to 14% EBITDA Margin Challenging: Newell has a long-term target of driving operating margin improvement of 50bp annually. Actions include reduction in overhead costs and working capital management. In September 2021, Newell discussed a new multi-year supply chain initiative (Project OVID) to transform its go-to market strategy, particularly in the U.S., moving from 23 business specific supply chains to a single integrated supply chain.

In January 2023, Newell announced another restructuring and savings initiative, Project Phoenix, that aims to strengthen the company and further reduce complexity, streamline its operating model and drive operational efficiencies, with annualized pre-tax savings in the range of $220 million to $250 million beginning 2024.

Given Newell's ongoing top line deterioration, gross margin challenges in a number of categories, investments required to support its brands and potential execution risk, Fitch expects it could be challenging to return to the 14% EBITDA range seen in 2019-2021.

Derivation Summary

Newell's 'B+'/Stable rating reflects ongoing challenges that indicate significantly reduced medium-term earnings power and cash flow. Beyond the overall slowdown in discretionary consumer spending since mid-2022 and a weakening macro environment, execution risk remains a concern, as Newell continues to realign and restructure its business segments and supply chain network and prune its brand portfolio, which could further disrupt operations. Fitch therefore expects EBITDA to remain below $1 billion, with gross leverage (gross debt/EBITDA) increasing to over 6x in 2023 from 4.9x in 2022 and remaining elevated in the high 5x-6x over the next 24 months.

Other consumer product companies within Fitch's rated portfolio include ACCO Brands Corporation, Mattel, Inc., Hasbro, Inc. and Knowlton Development Corporation, Inc (KDC).

ACCO's 'BB'/Stable ratings reflect the company's historically consistent FCF and reasonable gross leverage, which trended at approximately 3.0x prior to pandemic-related operating challenges in 2020. The rating and Outlook are constrained by secular challenges in the office products industry and channel shifts within the company's customer mix. Fitch expects margin recovery combined with debt paydown to drive leverage back toward 4.0x in 2023, but a prolonged downturn could be a rating concern.

Mattel's 'BB+'/Positive ratings reflects its strong portfolio of owned brands such as Barbie, Hot Wheels and Fisher Price, which the company has worked to revitalize and re-energize in recent years. The Positive Outlook reflects Fitch's view that Mattel's improved competitive positioning and debt reduction over the past few years could support its ability to navigate near-term macroeconomic volatility and eventually support an investment-grade rating.

Hasbro's 'BBB-'/Stable ratings reflect its position as one of the world's largest toy companies, its good liquidity and cash flow profile and expectations that gross leverage will be in the low 3x range in 2024, recognizing that it could be elevated in the mid-3x range in 2023. The company could also use asset sales or FCF to support deleveraging.

KDC's 'B-'/Stable ratings reflects its position as a global leader in custom formulation, packaging and manufacturing solutions for beauty, personal care and home care brands, supported by a diverse product portfolio and long-term customer relationships. While Fitch expects EBITDA leverage could improve in fiscal years 2024 and 2025 on margin recovery supported by cost initiatives, Fitch would require increased confidence in continued organic EBITDA growth, a commitment to sustaining leverage below 7x, and generating positive FCF to consider a positive rating action.

Key Assumptions

Fitch's Key Assumptions Within The Rating Case for the Issuer:

Revenue declines of around 15% to $8 billion in 2023 from $9.5 billion in 2022, reflecting core sales declines of 13% driven by a significant pullback in retail orders and an overall slowdown in discretionary consumer spending. Top line is also expected to be impacted from a combination of currency headwinds and the divested businesses (the company divested its Connected Home & Security on March 31, 2022, which had net sales of $395 million in 2021). Revenue is expected to decline by 5% in 2024 reflecting low single digit core sales decline and approximately 2%-3% of currency headwinds and brand exits, before growing modestly in the low single digits in 2025 and thereafter;

Operating EBITDA is expected to be approximately $830 million in 2023, versus $1.2 billion in 2022, and is expected to grow towards the $900 million range by 2025. EBITDA margin is expected to be approximately 10.4% in 2023 (versus 12.6% in 2022), 11.3% in 2024 and increase 50 bps in in 2025, with the improvement reflecting a combination of easing inflationary pressures and some benefit from cost reduction initiatives;

Capex of around $300 million and dividends at close to $180 million in 2023, compared to dividends of $385 million in 2022. In May 2023, Newell reduced its quarterly dividend to $0.07 per share compared to the prior pay-out of $0.23 per share. Dividends are expected to be close to $120 million in 2024 and thereafter;

FCF (after dividends) is expected to be around $380 million in 2023 after a significant FCF outflow of almost $1 billion in 2022, on working capital improvement after a material increase in working capital in 2022. FCF is expected to be modest going forward given projected EBITDA levels in the mid-$800 million to $900 million range and neutral working capital;

Fitch expects leverage to increase to the mid-6x range in 2023 (from 4.9x in 2022 and 3.7x in 2021) before trending below 6x by 2025, assuming some top line stabilization and EBITDA margin recovery. The projected net EBITDA leverage of 6.2x in 2023 and 6.0x in 2024 (5.7x and 5.5x, respectively excluding off-balance sheet factored receivables) is significantly higher than Newell's long-term net leverage (net debt/EBITDA) target of 2.5x.

Recovery Analysis

Fitch's recovery assumes Newell's value is maximized as a going concern in a post default scenario, given a going-concern valuation of approximately $4.5 billion compared with around $2.5 billion in value from a liquidation of assets.

Fitch's going concern value is derived from a projected EBITDA of around $750 million. The scenario assumes a lower revenue base of around $6 billion, around 25% below 2023 projected revenue of $8 billion, assuming market share losses or discontinuation of some of its existing brand portfolio. EBITDA margins could trend around 12%-13% in a recovery scenario, below the 14% margins achieved in 2019-2021. A going concern multiple of 6x was selected, within the 4x-8x range observed for North American corporates, reflecting Fitch's assessment of Newell's industry dynamics and company-specific factors.

After deducting 10% administrative claims from the $4.5 billion going concern valuation and adjusting for senior ranking receivables claims, the unsecured claims have good recovery prospects (51%-70%). Therefore, the unsecured credit facility, which is assumed to be fully drawn at $1.5 billion, and approximately $4.8 billion in unsecured notes are rated at 'BB-'/'RR3'.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

A positive rating action could result from increased confidence in the company's ability to grow core sales in the low single digits, improve EBITDA to over $1 billion and deploy FCF towards debt reduction, such EBITDA leverage is sustained under 5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A negative rating action could result from worse than expected operating performance leading to reduced confidence in Newell's ability to stabilize its business and/or lower than expected debt reduction such that EBITDA leverage is sustained above 6x.

Liquidity and Debt Structure

Adequate Liquidity: As of Sept. 30, 2023, Newell had $396 million in cash on hand and approximately $1.1 billion available under its $1.5 billion unsecured revolving credit facility due to mature in August 2027, after netting out $376 million in short-term borrowings and $21 million of letters of credit. In October 2023, Newell terminated its $375 million A/R facility and entered into a new accounts receivable securitization facility due October 2026, providing liquidity of up to $225 million between February and April of each year, and up to $275 million at all other times.

Newell's total outstanding debt was approximately $5.5 billion at Sept. 30, 2023, versus $5.8 billion at the end of 2022 and $5.4 billion at the end of 2021 including off-balance sheet factored receivables in the $300 million to $400 million range as part of Fitch-adjusted debt. Fitch expects Newell to end 2023 with debt of around $5.3 billion as the company deploys its FCF toward paydown a significant portion of the $600 million in short term debt it took on in 2022 due to working capital increases.

The next debt maturity is $200 million of debt due in December 2024, which the company could choose to refinance or pay down with cash on hand or revolver borrowings. Newell will need to refinance $550 million due 2025 and close to $2 billion of unsecured notes due 2026, potentially with secured debt.

Issuer Profile

Newell is a global marketer of consumer and commercial products, marketed under Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer's, Coleman, Marmot, Oster, Sunbeam, FoodSaver, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert, Mapa, Spontex, Quickie and Yankee Candle.

Summary of Financial Adjustments

Historical EBITDA has been adjusted for stock-based compensation, restructuring and restructuring related costs, acquisition amortization & impairment, transaction and related costs, other items.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Newell has an Environmental, Social and Governance (ESG) Relevance Score of '4' for Financial Transparency. Operating comparability over the last few years has been challenging given a number of reclassifications of continuing versus discontinued operations as well as business segments in 2018-2022. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with the other factors.

The items above are in the context of Newell having previously seen material weaknesses in internal controls over financial reporting related to the company's tax accounting in 2019 and 2020, which have since been remedied and an SEC subpoena in January 2020 related to the impairment of goodwill and other intangibles in 2018, which got resolved with a settlement in September 2023. In June 2021, the company received a subpoena related to disclosures around the potential impact of revised U.S. Treasury regulations.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.