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Incs stock and therefore stand to realize gains in the event that the price of the stock declines. Please refer to our full disclaimer located on
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Newell Brands: A Valeant Effort by a Slimy Company

Newell Brands Inc (NWL or the Company) uses accounting tricks in order to mask a terrible
acquisition while creating a windfall payout for management. We believe that NWL is misleading
investors in order to hide declining organic sales growth, net income and cashflows, which will
eventually result in a declining share price as the company struggles with its punitive debt load. We
initiate coverage of NWL with a price target of $19.16 or downside of 55%

NWL completed the acquisition of Jarden Corporation (JAH) on April 15, 2016. This acquisition
saddled the company with substantial amounts of debt, and accounting tricks associated with the
acquisition have been used routinely to overstate quality of performance while benefitting insiders.
We believe that the acquisition of JAH was a disastrous decision, and in this report, we will

Company: Newell Brands

NWL used the timing of the JAH acquisition to Ticker: NWL

artificially boost operating cash flow (OCF), and is Industry: Consumer
likely to show big problems in the second half of Discretionary
2017, reminiscent of infamous roll up collapse Stock Price as of
Valeant Pharmaceuticals (ticker: VRX). 10/10/2017: $42.69

Market Cap:$20.92bn
NWL manipulates sales disclosures to overstate Daily Volume: 4,026,369
core sales growth for the benefit of insiders and (3 month avg.)
misstates the effects of the slime fad Price Target: $19.16

The fastest growing categories in private labeling go

head to head with both NWLs legacy businesses and
JAH. Likely to result in significant problems for the

Jarden makes anything that you would find left behind after a burglary
-John Oliver, Last Week Tonight, 11/22/2015
NWL purchased Jarden on April 15, 2016. Jarden was itself a roll up of various branded consumer
goods backed by notable roll up promoter Bill Ackman. It sells branded consumer products like Yankee
Candle, Crock Pot, Ball jars, Diamond matches, Sunbeam kitchen appliances, and many other brands
that you would probably be familiar with if you were born before 1975 and remember hanging out in
your friends kitchen. The most common reaction when discussing Jarden in our office was They still
make that stuff?!

Cash Flow Tricks Not So New and Not Done Well

For the full year of 2016, NWL reported OCF of $1.82Bn, a 200% increase over 2015. This was not due to
any brilliant new product line by management or significant increase in revenues, it was simply an old
school accounting trick. As you can see from the box above, this is because JAHs product portfolio was
made up of lots of items that tend to be given as gifts during the holidays. Although for shareholders of
NWL, this looks a lot less like a gift and a lot more like a burglary. NWL will struggle to service their debt.

When one company buys another, acquisition accounting conveniently allows the buyer to stuff all
acquisition costs into investing cash flows. When a company like JAH spends the first half of the year
buying and creating inventory in preparation for sales in the second half, this results in significantly
negative OCF. The company is building inventories and shipping to large retailers ahead of the holiday
season, but they have not sold much of it, and have also not been paid for the bulk of what has been

By timing the acquisition in 2Q16, NWL got to exclude all of this from their OCF statement. The
inventory build and cash outflows associated with JAH all get conveniently allocated to the Cash Flows
from Investing activities. Then in 3Q and 4Q as that inventory gets sold, the very cash that was spent
buying JAHs inventory magically reappears as operating cash flows! Inventory adjustments were
responsible for $785mm of NWLs $1.8Bn in OCF in 2016!

This is an old trick and has been used by many acquirers to mask a poor acquisition. This trick was
pushed to its maximum threshold by the famous roll up Valeant Pharmaceuticals (ticker VRX). When the
music stopped on VRX, it dropped over 90%, which we believe is certainly a possibility for NWL.

While VRX was able to continue the charade for several years, the wheels already appear to be coming
off for NWL. In the first half of 2017, OCF fell apart, declining from $336mm in 1H16 to -$241mm in
1H2017, a nearly 200% decline and almost entirely due to inventory.

Management is already changing its tune. Lets look at what the CFO had to say about OCF on the 4Q16
conference call:

This implies that this was normal cash flow generation with opportunity for improvement (we will get to
managements games in the next section), but going into the second half of 2017, they are admitting
that was essentially false guidance.

In 1Q17, management continued to mislead the street saying:

Management can no longer keep up this false narrative heading into the second half of 2017. Lets see
what he had to say on the last call:

How do you go from feel good and seeing opportunity there over time to saying this is unusually
high? This is a classic example of bait and switch by management.

Taking apart the guidance for the rest of 2017, we can see that the situation is only getting worse. The
CFO said they are now only expecting $1Bn for the full year:

Why is $1bn so bad? Well, its really showing a decline when observed versus the apples to apples of a
2016 combined cash flow statement of JAH and NWL. With -$241mm of OCF in 1H17, a full year of only
$1bn would imply 2H17 OCF of $1.241Bn. When compared to the 2H16 cash flow of $1.493Bn, this
shows that management is actually lowering cash flow forecasts by $252mm or a whopping 27%! With
cashflow declines of 27%, just like VRX, NWL will likely face problems with their over $10Bn in debt.
Given the retail landscape (to be discussed further later in this report), and historical lies, we do not
believe that managements forecasts are at all reliable and holders of this stock should be very worried.

Cash interest expense is over $300mm a year. With shrinking cash flows despite slight revenue growth,
NWL finds itself in a tough predicament. Credit markets have already begun to take notice as the NWL 5
year CDS is climbing:

Many companies that start off borrowing too much money do so when it is affordable. As NWLs
borrowing costs increase it may find itself being unable to refinance at the same low rates. We believe
that an inability to refinance at tight spreads could lead to huge destruction of equity value.

Rotten to the Core, Very Slimy
NWL regularly discusses its Core Sales growth in earnings releases, in fact it is featured prominently as
the first bullet in earnings releases (which as a non-GAAP figure, is potentially a violation of SEC rules,
but thats a different discussion). This is meant to illustrate to investors what sales are doing after
adjusting for various one time items, and according to the company provides a more complete
understanding. The term core sales appears 46 times in NWLs last earnings release, but exactly zero
times in the same periods 10-Q.

In the most recent earnings release, the company defines Core Sales as:
Core sales exclude the impact of foreign currency, acquisitions (other than the Jarden acquisition)
until their first anniversary, and planned and completed divestitures.

In fact, Core Sales Growth is a target which has a 50% weight in Mnagement performance goals
according to the most recent Proxy statement:
Performance Goals Weight Rationale for the Measure
Core Sales Growth 50% Incent overall growth
Normalized EBITDA 50% Incent profitable growth

However, for the purposes of getting bonuses, management uses a separate definition of Core
Sales. From the same document:

Core Sales growth for purposes of the Bonus Plan is calculated on a different basis than
reported Company financial performance. As noted above, reported Core Sales growth
for the Company was 3.7%. However, the performance measure used under the Bonus
Plan differed in several respects, recognizing differences between legacy Jarden and
legacy Newell Rubbermaid methods of evaluating sales growth. The Bonus Plan metric,
unlike reported sales, included the impact of acquisitions below 1% of Jardens 2015
sales, and excluded the impact of product line exits. The Bonus Plan calculation also
included Jarden results for the full year, and adjusted targets to reflect any deviation
from budgeted results during the period prior due to the completion of the Jarden
acquisition. For additional information regarding reported Core Sales, see Appendix A
Non-GAAP Reconciliation.
This likely created a windfall for management. While using the definition presented to investors, core
sales growth would have barely passed the target level of 3.6%, using the changed definition
substantially increased compensation:

2016 Bonus Plan Performance Targets

Minimum Performance
Target for Threshold for for Maximum Actual
Performance Goals Payout at 100% Payout Payout (200%) Performance
Core Sales Growth2 3.6% 2.8% 4.4% 4.2%
Normalized EBITDA $2.631 billion $2.537 billion $2.725 billion $2.644 billion

2016 Actual Target as % of Actual % of Base
Name Bonus Payment Base Salary Salary Earned in 2016
Michael B. Polk $ 2,827,125 150% 215%
Ralph Nicoletti 709,161 100% 144%
Mark S. Tarchetti 1,283,945 85%/100% 139%
Fiona C. Liard 589,857 100% 144%
William A. Burke 1,101,490 85%/100% 138%

This is in addition to huge increases management received, which are apparently a reward for merely
paying a high multiple and loading the company with debt:
2016 Summary Compensation Table
Change in
Value and
Non-Equity Non qualified
Incentive Deferred
Stock Plan Compensation All Other
Name and Principal Salary Bonus Awards Compensation Earnings Compensation Total
Position Year ($) ($)(1)(4) ($)(2) ($)(5) ($)(3) ($)(5) ($)
Michael B. Polk, 2016 $1,312,500 $ $16,552,730 $ 2,827,125 $ $ 992,187 $21,684,542
Chief Executive 2015 1,200,000 9,449,984 2,962,150(4) 775,079 14,387,213
Officer 2014 1,200,000 8,559,614 1,839,240(4) 752,705 12,351,559
Ralph Nicoletti, 2016 493,845 1,900,000 7,762,629 709,161 52,375 10,918,010
Executive Vice
President, Chief
Financial Officer
John K. Stipancich, 2016 433,250 4,139,416(5) 11,193 2,221,306(5) 6,805,165
Former 2015 592,958 1,668,556 820,411 1,998 315,755 3,399,678
Executive Vice 2014 535,000 88,000 1,091,601 439,289 1,378 297,906 2,453,174
President and
Chief Financial
Mark S. Tarchetti, 2016 922,212 15,993,744 1,283,945 164,877 18,364,778
President 2015 616,000 4,394,813 863,940 226,256 6,101,009
2014 616,000 115,000 573,250 136,359 1,440,609
Fiona C. Laird, 2016 410,764 750,000 6,195,064 589,857 58,567 8,004,252
Executive Vice
President, Chief
Resources and
William A. Burke, 2016 796,053 4,720,757 1,101,490 361,259 490,887 7,470,446
Executive Vice 2015 660,000 1,529,513 925,650 303,906 405,332 3,824,401
President, Chief 2014 660,000 1,574,009 552,776 697,311 359,240 3,843,336
Operating Officer

These are huge increases for the team members who were at NWL prior to the acquisition
Comp in
2015 2016 Percent change

Polk 14,387 21,684 51%

Stipancich 3,399 6,805 100%

Tarchetti 6,101 18,364 201%

Burke 3,824 7,470 95%

Whats more, the Core Growth seen in 2Q17 appears to be driven by absolutely no special effort by
management while they reap the benefits. While we said earlier that its likely you arent familiar with
JAH products if you were born after 1975, you probably arent familiar with the slime craze if you were
born before 2005. Making slime a slimy concoction of various household items has become a huge
trend driven primarily by social media. The standard slime recipe calls for a PVA based glue, and Elmers
(a NWL brand) has been a huge beneficiary.

In June the New York Times ran an article about the trend:

Also early in 2Q, many consumers noted shortages:

However, we now see evidence that the slime trend appears to have hit its zenith in 3Q.

Google search traffic for both slime and Elmers is showing substantial declines since August:

Additionally, Elmers has competition. On office Depots website, we can see that while Elmers glue
sells for $1.99, Office Depot is selling its own brand for only 50 cents! Both are equally good for slime
making, and now consumers have a better value proposition.

(This is also evidence of the private label threat that NWL faces on many products, but that is to be
discussed in our next section)

Management did not create the slime trend, but that hasnt stopped them from touting core sales
growth. In 2Q16, management disclosed Elmers revenues of $80mm. On the 2Q17 earnings call,
management the CEO said:

If the overall glue market grew 40%, and Elmers took an additional 14% share, that means that total
Elmers 2Q17 revenue could have been as high as $175mm, a very impressive nearly 100% growth,
which also ties to the huge increase in search activity. This is also troubling because Core Sales
Growth in 2Q17 was only $93.8mm according to the companys press release:

This means that Elmers alone could have been responsible for the entire Core Sales Growth in 2Q17,
and management forecasts of growth are essentially tied to what is a declining social media trend. As
the slime trend fades, we believe NWL will find it nearly impossible to hit sales growth forecasts.

As we have seen poor governance and misleading guidance already, we believe that NWL is poised to
disappoint investors in the second half.

It is not new news to anyone that many retailers are suffering. In fact, the term Retail Apocalypse now
even has its own Wikipedia entry: https://en.wikipedia.org/wiki/Retail_apocalypse. The products sold by
NWL and JAH are heavily dependent on brick and mortar retailers. According to the most recent 10-K:
The Companys top-ten customers in 2016 included ( in alphabetical order ): amazon, Bed, Bath & Beyond,
Costco, Lowes, Office Depot, Staples, Target, The Home Depot, Toys R Us and Wal-Mart.

In addition to the effects of Toys R US bankruptcy, NWL should be impacted by these large customers
moving more towards private label in effort to increase margins, and therefore presenting competition
to NWLs brands. According to Nielsen, consumers are very open to private labeling:

Lets now take a look at the threat to NWL. In core product lines like home Dcor and Writing, sales
have begun to erode at retailers like Bed, Bath and Beyond and Office Depot:

Bed, Bath and Beyond:

Office Depot:

Meanwhile, sales are growing at retailers offering heavy discounts and investing into private labeling like
Costco, Target and Walmart. NWLs products are ripe for displacement by private label or discounting:

As we can see from the above, commodity products like markers, kitchen supplies, garbage cans, and
candles are all easily disruptable as they require no technological advantage in order to produce them.
Even for the iconic Rubbermaid brand, bins are the fastest growing category in private label:


We believe that eroding cash flows and a slowdown in the slime trends, and increasing competition will
not only cause NWL to disappoint analysts earnings expectations, but also divre a significant equity
price correction due to the huge debt load form a terrible Jarden acquisition. Free to manipulate results
for compensation purposes, we think management has shown they will look after themselves and not

We use EV/EBITDA as a valuation metric in order to account for the significant debt load. We believe
that this year is more likely to compare to last year in terms of EBITDA generation but could turn out to
be worse. We use an 8x EBITDA multiple to account for the shenanigans and earnings manipulation
used by management as well as macro headwinds and the end of slime.

Valuation $s in MMs

2017 EBITDA 2,500

multiple 8

EV 20,000

add cash 780

subtract debt 11,393

Equity value 9,387

Shares out 490

Target price per share 19.16

Current share price 43

Downside -55%

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