Newell Brands' Christopher Peterson, Hellman & Friedman's Patrick Healy at Semafor World Economy

0:01 Thanks everyone. Patrick Healy, welcome. Patrick Healy and Chris, welcome. It's been a long day. >> >> Thanks very much for the time. Patrick, I want to start with you. and we're going to talk about tariffs, trade, a bunch of stuff. And we're going to try and get through as much of it as we can. walk me through from an investor point of view the combination of the Iran war, higher for longer rates, and this kind of continued like a year on from liberation day. What what is what's it like being an investor in this world?

0:33 You know, we're getting quite used to uncertainty and it's sort of been that way since, you know, really 2021 when we went into 2022, we had sort of the three Rs of rates cuz remember, you know, we had to raise interest rates and the threat of a recession and of course the Russia and Ukraine issue and then it's, you know, it's been sort of every year it's been something. What's been really interesting is the capital markets have adopted and sort of gotten used to that uncertainty. The private markets have you know, sort of choked up and seized a little bit. So, you know, managing in the face of uncertainty, what the market looks for now, public and private, and let's throw in AI, is things that are durable, things that are, you know, sort of must-haves. and those are things that are easily financed. And we did about a hundred billion dollars of refinancing in our own portfolio last year creating about three hundred million dollars of interest savings. We were able to get that done, you know, across a portfolio that's pretty much, you know, must-have recurring revenue, predictable type businesses. I think things that have a with of AI, things that are exposed to tariffs and trade imbalances, that's a much less certain ground to stand on. And then when it comes to sort of geopolitical risk in terms of your portfolio, I mean how how do you think about it? Like you know, do you sort of stay away from certain geographies? Do you sort of price it differently? Like how how how does it play out? Yeah, we we we have a specific business model. We we we manage about a hundred twenty billion, twenty-seven companies, two hundred and fifty thousand employees across them.

1:55 So, it's a very, you know, best ideas, big portfolio. So, we get to choose where we want to play. We basically don't want to play in places where there are not rules of law, in places that we don't understand. So, we're largely, you know, Western Europe, North America based. And then today we're sort of just trying to stay out of the traffic of things that are standing directly in the face of AI. Interesting. Chris, so the same question. You also have a portfolio, but your portfolio is one of brands. And so I'm curious, you know, again, Iran war, tariffs and trade, higher for like how is this playing out? Yeah, it's interesting. So, Newell Brands is got fifty brands, consumer brands like Sharpie, Rubbermaid, to name a few.

2:33 and we're on the ground in forty-two countries around the world. we've been focused on things that we can control. understanding the consumer, innovating against the consumer, telling great go-to-market stories to retail partners. and importantly, we've been focused for a couple of years on resiliency and agility in our supply chain. And that has proven to be very powerful. We've reduced our exposure to China from a manufacturing standpoint. Five years ago we were at thirty-five percent, we're down to ten percent. we've brought manufacturing back to the US in a significant way. Interestingly this year there's crosscurrents going on I would say in the economy at the moment.

3:15 tariffs for us this year are significant help versus last year because the tariff rate has gone down. at the same time commodity cost inflation has gone up with transportation cost, whether it be trucking or ocean freight, resin cost, et cetera. Those two are roughly equal to each other right now, interestingly. So, in a in a strange way we don't know where it's headed, but we think we're we're driving operational excellence and trying to establish resiliency and agility in the supply chain so we can react as the as the world has become faster.

3:49 So, you know, it's such a great point. Like as the world has become faster, it's such a more volatile place. Yeah, how are you you have this sort of sprawling kind of company? How are you managing that volatility when you have the same finite number of hours in the day? How are you sort of parsing decisions? How are you sort of making investment cases? Yeah, we're we're looking at a number of things. Number one, we've got a very clear strategy that's foundational for our business, which is understanding consumer unmet wants and needs, developing innovative products that represent a great consumer value, and then bringing them to market through leading retailers. And if we do those steps well, we believe we'll gain market share or win in the marketplace.

4:31 Now, the way that we do that has changed dramatically. We've gotten very focused on automating our supply chain, driving effectiveness and efficiency. we've broadly deployed AI across the enterprise both in terms of machine learning and things like planning, but also in generative AI and things like marketing, and increasingly in agentic in terms of workflow management across the enterprise. I mean, you were saying backstage that you have an expectation now of your senior management that this is now mandatory. This is not a nice to have. Yeah, we've changed our our our hiring practice. We we rolled out chat GPT 365 Copilot to our top 2000 leaders. And we've recently changed our hiring so that we won't hire somebody that isn't AI proficient or AI fluent into the company anymore because we think it's that important in order for us to to to drive great value for consumers through our through our branded products.

5:28 And Patrick, you were talking about, you know, staying on the AI subject, you're talking about you try to stay out of anything any businesses that are in the sort of path of AI. Like what are what are the kind of contours of those industries that you think are most exposed? >> yeah, I mean and that's the context is we haven't made a new tech investment in in four years. About thirty percent of our hundred twenty billion dollars is actually software. So, we've been living through this transformation. Two of the our largest investments in the two largest customer service businesses, something called Genesys and Zendesk.

5:59 We're co-shareholders in both. So, we own about half of both. So, those are like right in the crosshairs of AI. So, we have been on this. We actually closed on Zendesk like eight days before chat actually got launched in November '22. So, this has been front of mind. And sort of the the thesis that we've had, and it's working so far, is if you actually are, you know, you've got the right to win and you're a market share leader, you just you you can't wait. You know, it is wartime as it relates to just, you know, being on top of it. So, in the case of sort of Zendesk, we now have transitioned about half of our R&D people into, you know, pure AI. Eighty percent of our revenues are actually agentic and and and co-agents. So, we're really shifting the revenue very quickly to resolution base and just trying to get ahead of it. But in the in in evaluating a new investment, you know, software has been a little bit trickier to and I think we're maybe getting into a valuation range where you can sort of price the risk a bit better because I think software was probably overvalued for quite a long time and it's probably depends on what it is. Of course, the market's painting with a broad brushstroke is probably undervalued. So, there's probably some really interesting opportunities where you're getting paid to take the risk and to go back into things like software. Huh. I mean, would that be the case with Zendesk if you were making that deal today?

7:10 So, I think the case for Zendesk today, yeah, you would you would you would look at it today or Genesys and think like at the current valuation where it is positioned, what what its opportunity set is pretty interesting. It's not that it's going to get less competitive cuz I think the one thing that is true with AI, it lowers, you know, the barriers and it accelerates the speed. And so, I think the traditional notion of what's a barrier to entry, what's a moat, it's going to change. And I think the moat in the world of AI is, you know, how quickly can you move to continue to, you know, own the right to serve a customer.

7:40 Want to go on from AI We talked about trade briefly, but I really want to this kind of enduring interest of mine. We're a year on from liberation day, but then we're also, you know, six years on from COVID. We're sort of four years on from the Ukraine war. I'm really curious, you know, in this time you know, you from Procter & Gamble to Ralph Lauren to Newell, what what what do you think has been the lesson of the past six years of all these disruptions for a business like yours? Yeah, I think I think agility and and supply chain and it really started with us and with me at Newell during COVID because during COVID we had to to take dramatic steps to make our supply chain resilient. we and then we had a port strike in the on the West Coast, which we were overly dependent on the West Coast. And so, we've now balanced our supply chain so we are half on the West Coast, half on the East Coast. and and we continued that after COVID. And thank God we did in the current environment because you know, we've invested now two billion dollars in US manufacturing since 2017.

8:47 And we've now developed automated manufacturing plants in the US that can compete with any plant in the world from a cost standpoint and in a in a productivity standpoint. So, for example, if you buy a Sharpie pen, almost every Sharpie pen in the world is made in Tennessee. Hm. And that Sharpie plant in Tennessee, if I went back and looked five or six years ago, we had a manufacturing line that was operating at a hundred fifty units a minute that took, you know, six or seven people on the line. Today that line is operating at five hundred units a minute with one person.

9:19 and so, it's much different job today. in the past it was more manual, today we have more automation engineers. and that speed and effectiveness and automation has basically neutralized the labor advantage and it's made having the manufacturing closer to where the consumer is actually make sense from an ROI standpoint. And so, we've then had to invest in our workforce to change our workforce from manual laborers to much more automation engineers and people that can manage the lines, which are higher-paying jobs. So, it's been a good thing. So, our our employment level at that manufacturing plant is the same today as what it was 5 or 6 years ago despite the automation, but that plant is producing two to three X what it was with the same number of people. So, it's it's been a good journey. You know, my colleague yesterday wrote a column for our China briefing about how Hormuz is a wake-up call and you know, the Malacca Strait and the Taiwan Strait are the real disaster scenarios.

10:26 I don't You know, to the extent you want to address that, but I'm curious you know, do you find that sort of public listed companies, the companies you invest in, they're not incentivized to plan for a crisis that not yet has not yet happened? That Hormuz is sure, it is a crisis and you have to adapt to it. COVID is a crisis you have to adapt. But actually the crisis that hasn't come yet, I mean, what is the incentive? You you don't have a fiduciary duty to plan for that, do you?

10:45 >> Well, you you do. So, often times what you find is that management teams have a longer time horizon. If you have a good management team, then typically the investment community which is much more quarter to quarter. And as a result, if you're a management team, you do want to plan for crisis and we do an exercise every year that we call an enterprise risk management process where we look at what are the top 10 things that could go bad. We do it as a as a leadership team. We then rank those and say, "Okay, if those were to happen, what would we do? And what can we do now to to mitigate those risks?" And in some cases, there's things that you can do to mitigate that are either good projects and on their own or they're neutral projects. Where it gets more challenging is if you have something that's a negative project where it's going to cost you money if the bad event doesn't happen. Those are probably not the ones to prioritize first. And so, but we found a lot that you can do to make your supply chain more resilient and they're good projects from a from an ROI standpoint at the same time. And Patrick, you know, we talked to a couple of investors yesterday and at the World Economic Forum who said that actually among the investor community, there is a little bit more tolerance for investing in redundancy even if it does not deliver immediate returns.

12:05 Is that true of I mean, would you say that's correct or do you actually know that that that has not changed like the sort of mindset is about the same as it was 5 or 6 years ago? Oh, look, I think I think I think for sure you want to invest in redundancy. You want to you want to practice things. I mean, people are highly invested in cyber and we're going to have to just you know, further increase our investment in cyber. We run drills all the time, you know, around cyber stuff. I think this is like table stakes. And so, you you need to be redundant. I think really it gets back to like as an investor, you want to put the right people in the seat that have the judgment like what you know, what your your practice of having a top 10 scenario. Like that's what an investor is trying to do. Like we can't know everything. We can't direct everything.

12:45 We can't run a company, that's for sure. We can't be Boeing engineers. But what you can do is you can exercise judgment and and and back the right people to do those things. And so, would you tolerate, you know, lower returns than you did 5 or 6 years ago as a result of paying for that redundancy? We we absolutely have. I mean, I think we learned a lot coming out of COVID as the unwind and we got you know, stuck stuck up with supply chains etc. You know, we're the probably the second largest investor in Medline which is the largest hospital supply distribution business and and product business. It's a large business just went public.

13:15 You know, that business post COVID, you know, redesigned all of its supply chains, but it still has a lot, you know, outside the US and so sort of in the early days of liberation day, you know, we were looking at a multi multi multi multi million 100 million dollar headwind in terms of tariffs and that management team, it's extraordinary what they were able to do in terms of you know, redesigning over the course of 2025 its its supply chains. Even having done that already after 2020 from 101. So, it's it's it we we do it.

13:43 And Chris, you mentioned about the sort of de-Chinizing your supply chain. I'm curious if you could you know, what is the end goal of this? Is it to be 0% China? Is it to and also just you know, Can you if you could walk through We talked about it backstage before the benefit of the audience. How did it impact your profitability? How did you manage that? Yeah. So, so we we operate 40 manufacturing plants around the world. 15 are in the US. Two are in Mexico on the border of the US that are USMCA compliant. And largely what we're trying to do is in categories where you need scale to have one manufacturing plant for the world. We want to try to put that in our biggest market that's closest to the consumer if it can be automated like the Sharpie example. But there are other manufacturing plants where the cost of transportation across oceans doesn't make sense. And so, we have manufacturing plants in Europe and we have manufacturing plants in Asia and in Latin America as well. And and that whole system is designed to be resilient. What we're trying to do is is automate all of these manufacturing plants because we know that our competitors are going to do that.

14:52 And we've got to stay in the lead from an automation standpoint. Also, we think it's a way to to create better careers for the employees because you know, it's it's difficult to to hire and retain employees who are doing manual work. The turnover rate is pretty high. But if you can bring an employee in as a blue collar employee and teach them a skill of how they can become an automation engineer and move up and then lead a team of automation engineers, that's a pretty attractive career for people and we can afford to pay more money for those jobs. And so, that's the sort of transition we're trying to make in total. And we're trying to locate our facilities both manufacturing plants and distribution centers in a way that that we're more resilient. We've we found because there's so much ROI in this automation that the investment in automation often times pays for the resiliency if you do it in concert with each other. And that's sort of the approach we've taken.

15:52 And then just going back to what is the end goal of de-Chinizing? I think we're pretty close. I think we've said 10% is is probably the right place. 35 was too high. I became convinced back in 2000 in 20. The Trump administration and Trump 1.0 put tariffs on China. The Biden administration kept those tariffs on China. And so, and it seemed from my view that both the Republicans and the Democrats wanted tariffs on China and therefore I didn't want to be overly dependent on China particularly for manufacturing that was headed for consumption in the US. And so, that's what got us started on it. And we figured out a way to do it where we can bring significant amount of stuff back into the US manufacturing footprint that we had. We've also moved manufacturing into Southeast Asia and into other markets.

16:44 And I think we're now in a in a very resilient place. I don't think our answer is zero because we actually sell consumer products in China, too. We've got a decent size business in China that that we sell to consumers there. So, I feel like we're in reasonably good shape today. Okay. And then, you know, just staying on that topic for I mean, do you see a world in which you can you will gradually go back from 10% to a little bit more? And then just you were saying like you see Republican and Democrat kind of coalescence on tariffs against China. Is that tariffs specifically only against China or you think actually like we will see continual tariffs with future Democratic president around the world? China is the biggest economic rival to the US. And that if you listen to the administration, the current administration, they will say that the tariff rate on China should be higher than the rest of the world because China subsidizes a lot of their industry.

17:41 The US does not subsidize our industry and so, there is a little bit of an unfair playing field. Just depends on which industry you're in on how big that disadvantage is. The rest of the world tariff situation, I think there's different points of view depending on who you talk to on which side of the aisle. So, you're not going to craft a sort of sort of supply chain policy around that for now at least. >> No, we're not you know, we make when we make manufacturing investments, they're they tend to be 10, 20 year, 30 year type of investments. So, you can't do that and change it every 4 years based on the election cycle. What what we're trying to do is is as I said generally move manufacturing closer to the consumer and have a resilient supply chain that is well diversified that in any environment we can maneuver and be agile regardless of the current policy. And then we're trying to drive automation in a way that that we're driving operational excellence in a way that that keeps our prices to consumers for our products to be the best value products that consumers can buy in the categories and brands in which we compete.

18:49 And Patrick, you know, from your perspective as an investor, when you talk to your portfolio companies, do you advise, cajole, you know, work with them to de-Chinize as well? Do you see that as a sort of systemic risk in the supply chain? Yeah, we've largely done that. We have really only probably two companies right now that have real supply chains with China either supply chains or selling into China in a significant way. So, it's really two out of 27. So, it's you know, we really quite small. And it's been a campaign to sort of get that number lower and lower.

19:18 >> since 2021. Yes. That's interesting. And you know, with the last couple minutes we have, I really want to talk about sort of all of these things coming together for you know, you to have I think unique perspective on a granular level about the consumer. Much more you know, we get a lot of macro data, you know, sort of the wholesale price index was pretty bleak last week and there's a lot of data that looks not great. I'm curious, you know, Patrick if you start like what what are you seeing in terms of the resilience of the American consumer and then more broadly as well, the consumer as you can Yeah, so we're we're largely B2B, but we have some snapshots into some some consumer activity and I would say sort of discretionary purchases are maybe softer than you might expect. We're we're trading down on value or deferring. So, we own Safeguard, which is you wouldn't know it, but it's an OEM affiliated auto warranty business. And so, we would see a slowing in their sales cuz new cars are being pushed out. We own Caliber Collision, which is the largest collision repair business in America.

20:17 And what we've seen in the consumer there is they're trading down on their insurance. So, they're taking higher deductible insurance. And conversely, we we are the largest second largest owner of an Action, which is about a $35 billion privately held retailer, deep discount in Europe. That thing's flying. So, people are trading down there. So, we're sort of seeing that. And then on the must-have or, you know, non-discretionary things, we own a business called Verisure, the largest alarm monitoring business in Europe. No one's cutting that.

20:44 So, sort of a interesting dynamic in terms of what we're seeing. You probably see quite a lot, Chris. >> Yeah. Yeah. You know, it's interesting. So, we our brands tend to be durable and discretionary categories. We're seeing consumer spending in the US hold up pretty well, but it's very different by cohort. So, we look at income quintiles. And if you look at the the bottom quintile, those consumers are under significant economic pressure from the cumulative impact of inflation. And so, we're seeing the bottom quintile pull back on durable and discretionary purchases. But the mid and upper income consumer continues to spend. And if you come with a innovative product, that solves a unique consumer need, we've seen no no resistance to to driving growth through that. And so, if anything, the categories are trading up because the low-income consumer is dropping out and the mid and upper are looking for something that's more mid price and upper price.

21:45 We're also seeing a little different by age cohort. The 18 to 24-year-old is buying less general merchandise, and I think it's because the unemployment rate for 18 to 24-year-olds is much higher than the national unemployment rate. And and so, they're choosing to spend more money on essentials, etc. Interestingly, both of those trends in the US, we're not seeing that same divergence around the world. Okay. So, it seems to be a US phenomenon about the low-income consumer and the 18 to 24-year-old. The Europeans is much more consistent across Across the across cohorts, across the income and age cohorts. But in that inflation is affecting them and making them price down.

22:26 >> Yes. Yes. Trade down. Correct. You see, you know, there there consumers are are are considering their choices more carefully today. And I think that's a consistent theme. Well, listen, this has been so insightful. Thank you both for the time. I really appreciate it. Thank you.