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.
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.
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
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.