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Newell committed to transformation

admin | November 9, 2018

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Newell continues execution of its accelerated transformation plan, which includes selling assets and using the majority of proceeds to reduce debt. The majority of proceeds from their latest announced sales are expected to be realized in early 2019, which could lead to a waterfall tender offer for existing coupon step bonds.

Earnings recap

Newell Brands reported fiscal 3Q results late last week, which reflected sequential improvement in the core sales decline and operating margin improvement. Core sales were down 4.0% yoy, which was an improvement from the decline of 6.2% in 2Q, and all segments and regions posted better core sales trends on a sequential basis. Core sales were negatively impacted by the Toys R Us bankruptcy. Adjusted operating margin was 13.0% in the quarter, up 10 bp yoy. The company posted a strong improvement to operating cash flow due to its working capital initiatives. Operating cash flow was $572 million in the quarter, up from $183 million in the year ago period. Management reaffirmed its full year guidance of net sales in the $8.7 billion-$9.0 billion range and operating cash flow of $900 million -$1.2 billion. Full year EPS guidance was increased by $0.10 to the $2.55-$2.75 range due to tax benefits.

Debt reduction continues

In accordance with Newell’s accelerated transformation plan, the company utilized proceeds from the Waddington and Rawlings asset sales, both of which closed at the end of 2Q, to continue to reduce debt by $890 million to $9.6 billion. The $890 million third quarter reduction comprised repayment of a $300 million term loan and roughly $590 million of commercial paper and front end debt. Subsequent to quarter end, Newell tendered for $899 million of bonds, including $249 million of the 2.875% 12/1/19 and $650 million of the 3.15% 4/1/21. A make whole call for the $101 million remaining the 2.875% 12/1/19 bonds has been executed and becomes effective on 11/9/18. The aforementioned actions will further reduce total debt to $8.6 billion.

More asset sales announced

On 11/7/18, management announced that it has signed definitive agreements to sell its Pure Fishing unit to Sycamore Partners and its Jostens unit Platinum Equity. After tax proceeds from the asset sales are expected to total $2.5 billion and the transactions are expected to close in the fourth quarter. This would put total after tax proceeds from asset sales at just over $5.0 billion, halfway to management’s $10 billion target. While the majority of asset sale proceeds will go to debt reduction, management may use some of the proceeds for shareholder rewards. Roughly 75% of the Waddington/Rawlings proceeds were used for debt reduction, combined with $500 million of share repurchases in the quarter which returned roughly $620 million via dividends and repurchases to shareholders.

Asset sale proceeds from the most recent divestitures are likely to be deployed in a similar fashion. Management plans to accelerate the debt reduction component of their transformation plan as they remain committed to their investment grade ratings and look to hit their leverage target of 3.0x-3.5x. Estimated leverage is currently 4.5x, pro forma the tender and the make whole call that happened after quarter end, and assuming LTM EBITDA of $1.9 billion. Based on management’s forecast of $1.7 billion – $1.8 billion of normalized EBITDA, the company will need to repay between $2.3 billion to $2.65 billion of additional debt to hit the high end (3.5x) of its leverage target.

Opportunities in coupon step bonds

Management will likely look to target front end debt over the remainder of 2018 given that they could execute make-wholes close to breakeven. As we enter 2019, the potential exists for a broader tender offer, since the majority of remaining proceeds are expected to be realized early in the year. Moody’s removed NWL’s rating from review for a downgrade based on the debt reduction, and has put the outlook on negative. While the imminent risk of a downgrade is now muted, the following coupon step bonds could be targeted as part of a waterfall tender as part of ongoing debt reduction efforts.

Exhibit 1: Coupon step bonds that could be targeted as part of debt reduction

Source: Bloomberg

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