Q2 2022 Newell Brands Inc Earnings Call
Yeah.
Good morning, and welcome to Newell brands second quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After a brief discussion by management, we will open up the call for questions.
In order to stay within the time scheduled for the call. Please limit yourself to one question during the Q&A session. As a reminder, today's conference is being recorded.
A live webcast of this call is available at our newer brands Dot com.
I'll now turn the call over to Sofia, Denis VP of Investor Relations Ms. <unk> you may begin.
Thank you good morning, everyone welcome to Newell brands second quarter earnings call on the call with me today are Ravi <unk>, our CEO and Chris Peterson, our president and CFO .
Before we begin I would like to inform you that during the course of today's call, we will be making forward looking statements, which involve risks and uncertainties actual results and outcomes may differ materially and we undertake no obligation to update forward looking statements I refer you to the cautionary language and risk factors available in our earnings release, our Form 10-K Form 10-Q.
Other SEC filings available on our Investor Relations website for a further discussion of the factors affecting forward looking statements. Please also recognize that today's remarks will refer to certain non-GAAP financial measures, including those we refer to as normalized measures. We believe these non-GAAP measures are useful to investors, although they should not be considered soups.
Here to the measures presented in accordance with GAAP explanations of these non-GAAP measures.
Reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as in other materials Aneel Investor Relations website. Thank you and now I'll turn the call over to Ravi.
Thank you Sophie and good morning, everyone and welcome to our second quarter call. We are pleased with our second quarter results, which demonstrate the power of our diverse all weather portfolio and another quarter of terrific execution by us.
We delivered balanced performance across core sales and normalized operating margin in a difficult environment as we remain laser focused on driving sustainable and profitable growth and operational excellence for the quarter.
<unk>.
Core sales increased one 7%, while normalized operating margin improved 100 basis points versus last year for the first half. This puts us at 4% core sales growth and 70 basis points expansion with normalized operating margin, which is excellent.
Farmers.
Q2 was the eighth consecutive quarter of core sales growth for newer brands.
A significant achievement, particularly given the difficult comparison of 25, 4% from the prior year period, which reflected double digit growth across nearly each business unit. We saw a shift of some customer orders from Q3 into Q2 all of this.
Is less meaningful than we initially anticipated given retailers increased focus on right sizing their inventory levels.
Core sales increased year over year across Florida, seven business units as growth in commercial writing baby and outdoor recreation more than offset declines in home fragrance home appliance and the food businesses, we were not surprised to see a divergence in performance across <unk>.
<unk> as some such as rising in commercial are benefiting from the reopening activities, while others, such as home fragrance home appliance and food and.
In challenging parts of the cycle due to elevated levels of demand during the pandemic and power, yes stimulus benefits in the U S. These dynamics are expected to continue to impact consumption, which contracted year over year in the U S. While still remaining well ahead of pre pandemic levels.
During the quarter six of our top 10 brands grew including Sharpie paper mate Expo Rubbermaid ball in Rubbermaid commercial products and 11 of our top 20, which included <unk> staffing gas contango Mr. Coffee the strength of our brands has enabled us to take pricing.
Hi, Chris actions.
Across our businesses to help mitigate the impact of inflation.
Looking at the geographic results core sales increased across each of numerous major regions International markets grew two 9% with Latin America, registering nearly 10% growth.
EMEA and APAC regions were up modestly in EMEA demand continues to be hampered.
By low consumer confidence due to mounting prices and concerns about the war in your credit.
While it's early days in our journey to Turbocharge International we are actively analyzing ways to best leverage existing infrastructure across key markets.
To drive synergies and unlock additional opportunities for growth.
Let me share some highlights of our business unit results, starting with writing which is getting out for the back to school season.
The topline momentum remained strong and rising registered its sixth consecutive quarter of core sales growth notwithstanding a very challenging double digit comp in the prior period.
Growth was broad based across every region and most categories, reflecting increased orders for the back to school season.
Continued recovery in the commercial channels as more employees return to their offices, we did see a shift in retail our back to school orders into the first half as some customers decided to set their shelves earlier.
Though we remain enthusiastic about the back to school season, we believe the shifted orders to the first half will unfavorably affect the third quarter. We are focused on ensuring we had the best possible position from a supply perspective to serve our retail partners and consumers.
In baby core sales grew modestly against its toughest double digit comp driven by baby cat a slight shift in shipments from Q3 to Q2 ahead of project implementation helped this quarter.
As anticipated the categories softening modestly against unprecedented growth in 2021, given the essential nature of this category burdensome caregivers continue to show the willingness to invest in gearing up for babies and keeping their children driving safely they're also willing to pay for premium.
Innovations with added benefits for example, the recently launched premium turning car seat platforms, including Graco Test for me and Baby Jogger City 10 are off to a very strong start.
Commercial Whatsapp top performing business unit in Q2.
This is the third consecutive quarter of core sales growth, which accelerated to 10, 7%.
Driven by North America, Latin America, and to a smaller degree EMEA.
We saw broad based strength across all major categories with the exception of disposable gloves, which continue to moderate relative to elevated <unk>.
Levels.
Strong price realization, along with improved product availability and attached to offices and improve mobility. All contributed to the excellent Q2 performance. Despite the disruption to some fixed budget goes through the throughout the pandemic the commercial business posted a strong track record.
Consistent top line delivery.
<unk> grew during nine of the past 10 quarters.
Team has been quick to adapt to evolving trends and has leveraged the diversity of the portfolio, which serves both <unk> and consumers.
And third core sales were below last year's elevated level.
Sustained strength in our fresh preserving business was more than offset by softness in other categories, particularly cookware, which along with others continue to normalize relative to the pandemic.
In the process of re staging south of our Cao from products with exciting new offerings, providing superior Nonstick cookware.
Tough comparisons due to pandemic related surge in demand are impacting quarterly results.
<unk> business remains on solid footing with a very strong innovation funnel.
The business is also substantially larger than it was in 2019, there are several category trends that should be beneficial to the food business, particularly in a more challenging and highly inflationary macro environment, including greater at home cooking at patients relative to pre pandemic levels.
With hybrid work only accentuating this behavior increased investment in gardening heightened.
Heightened propensity to buy food in bulk and find ways to avoid food waste.
Leading brands are well positioned to capitalize on these trends, while ensuring that our communication with consumers reinforces the value messaging.
After nearly doubling in the year ago period as demand surge core sales for the home fragrance business declined in the second quarter with softness in both North America, and EMEA consumption continued to moderate off peak level incentives further constrained by broad based inflationary pressure on low end.
Consumers, although the business was down in Q2 core sales grew relative to the pre pandemic level. We expect the home fragrance category remained challenged in the near term due to both difficult comps, albeit below first half levels as well as softening macros, we're focusing on.
Our efforts on optimizing the product assortment to stimulate demand across price tiers.
Q2 was a tough quarter for home appliances as core sales contracted 4% with softness in North America and EMEA.
More than offsetting increases in Latin America, and Asia Pacific.
<unk> sales grew on a three year stack basis, the appliance categories expected to continue to normalize relative to the elevated levels from prior years, given long purchase cycles for these products as well as increased mobility for consumers, while the U S market is challenging there are pockets of strength for example launches.
Mr Coffee ice plus hot and proper Chinas, three and one half propelled the brand to the number two share position in single serve coffee category Latin America decelerated sequentially, but remained a bright spot for the business leveraging <unk> leadership position across many markets.
The outdoor recreation business lost 25% core sales growth a year ago.
<unk> delivered a 242, 5% increase this quarter.
Both in outdoor equipment across the international markets was complemented by continued post pandemic recovery of the beverage business.
Accounting for the shift of some retail orders into the first quarter and assuming that inflationary conditions impact.
Such as decisions, we expect the business momentum for outdoor recreation to decelerate in the back half.
As consumer and shopper behavior evolves, we expect our categories and leading purpose driven brands to continue to play an integral role in the lives.
And remain a good value. We also believe the diversity of our portfolio is an advantage that we leverage in this environment. For example, while we are seeing.
Softening in home fragrance and home appliances, the commercial underwriting businesses are on a very solid footing and we're leaning in we're particularly encouraged that our swift and decisive actions to alleviate the significant significant impact of inflation.
<unk>, such as pricing and fuel productivity have enabled us to maintain gross margin in the second quarter. This was no small feat as we absorbed about 9% inflation on the cost of goods sold.
Of course, the ultimate goal is to drive gross margins higher and we remain committed to getting closer to benchmark levels over time.
As we look forward inflation remains at elevated levels and we expect a tougher second half relative to the first half that has greater macro uncertainty and consumer demand headwinds with some retailers, taking a tougher stance on their inventory positions.
Higher cost of living due to inflation, especially in sharp us wallets weighing on sentiment and consumer demand, particularly at the lower income levels. While this is something we had already started to plan for in some categories, particularly home fragrance. The book back in consumer demand has been more.
Acute than initially anticipated and we're pivoting our plan of action Accordingly.
Strengthening of the dollar has been another key development in the past few months presenting a significant challenge.
On top and bottom lines relative to our initial forecast we are doubling down on our efforts to mitigate the unfavorable impact of both currency and inflation as we accelerate our productivity actions further hone in on overheads and discretionary spend management and evaluate pricing opportunities.
In the international markets.
We've previously declared 2022 and yet our modules and that is the outcome. We have been driving towards in fact during the first half yields normalized operating margin expanded 70 basis points, which was ahead of our expectations, mostly due to stronger overhead cost management.
With the recent depreciation of the dollar we expect an unfavorable transactional impact and as a result.
Our adjusting our margin outlook for the year Accordingly.
In partnership.
That is no change in our full year 2022.
Sales and earnings outlook.
On a constant currency basis, although there are some moving parts.
As we look to the balance of the year, our actions had equally focused on navigating the difficult macro backdrop and simultaneously executing executing on our strategic priorities surrounding.
Driving the topline innovations and mastering the 360 degree consumer shopping journey driver.
Driving margin improvement in spite of significant inflation rate.
Currency headwinds turbocharging international enhancing customer service levels, and transforming our supply chain through project to help with the automation and strengthening the one <unk> culture.
Building on our employee engagement and momentum.
Over the past several years, we've become a more agile consumer and customer centric organization.
And are confident we have the right strategies in place to navigate the softening macro drop backdrop, while building competitive advantage and driving operational excellence, we remain committed to unlocking and realizing cost savings opportunities across the organization while <unk>.
<unk> top line I would like to express my gratitude to our employees, whose resilience hard work passion and commitment pave the way to a bright future.
Continue to believe that our best days are ahead of us onwards, and upwards and now I'll turn over to Chris. Thank you Ravi and good morning, everyone.
We delivered solid results in the second quarter with core sales growing on top of a difficult year ago comparison and better than anticipated performance on margins. Despite ongoing inflationary pressures. This quarter is another testament to the actions we have taken over the past several years to put the business on a much firmer footing to effectively manage external challenge.
Yes.
Before discussing the details of Newell's quarterly performance I want to provide an update on the current operating environment and project often.
While we continue to face elevated levels of inflation the outlook on costs for the balance of the year has not changed materially relative to the first quarter, we still expect inflation to account for about 9% of cost of goods sold in 2022 similar to last year, we continue to anticipate that the most significant.
Drivers of inflation this year will be ocean freight sourced finished goods and wages and we have good visibility into each of these buckets.
At this stage, we have implemented nearly all major domestic price increases planned to date and in many instances competitors have followed.
We are staying very close to consumer trends, which remain volatile lower income consumers are being forced to allocate a greater portion of their wallets everyday essentials, such as gasoline food and housing.
Category growth rates are being affected significantly by increased mobility and base period comparisons to manage through this we are adjusting our demand forecast and supply plans on a more frequent basis to ensure we are meeting consumer demand and businesses such as commercial in writing where we are experiencing strong.
Growth.
And we are remaining maintaining appropriate inventory levels and businesses, such as home fragrance and home appliances, where consumer demand is below year ago levels.
While still prevalent external supply chain issues impacting the industry have shown signs of easing.
Lead times for Ocean freight are coming down we are also seeing greater availability of ocean containers freight carriers as well as raw materials and component parts notwithstanding shortages in select areas our fill rates for most businesses have gone up and the number of products. We have an alligator allocation has come down.
While the supply chain environment is more favorable now we also continue to make headway in building supply chain agility through initiatives, such as automation and project often.
We are very pleased to share that we reached a significant milestone in <unk> transformation journey on July one we successfully implemented the first wave of project off.
The baby home appliance and select food categories are currently doing business with retail customers in the U S under a single legal entity.
Strong planning and coordination across groups, along with a rigorous testing process paid off enabling our successful implementation of the cutover.
Project off it is instrumental and empowering the company to improve customer service and optimize transportation cost mitigate the external pressures of port congestion and supply bottlenecks better enable omnichannel solutions and drive broad based operational excellence across the organization.
We still have a significant amount of work left on the project and are currently preparing for our second go live wave, which is expected to take place in early 2023.
Now, let's turn to second quarter performance.
Net sales decreased six 5% year over year to $2 $5 billion as core sales growth was offset by the impact of the sale of the CHS business at the end of the first quarter unfavorable foreign exchange and category and retail store exits.
Core sales grew one 7% on top of a difficult 25, 4% comparison last year as pricing more than offset lower volume.
Though below initial expectations there was a modest shift in customer orders from Q3 to the first half for back to school as well as the first wave of <unk> implementation.
Core sales increased in four of seven business units as every business faced challenging year ago comparisons.
On both a two and three year stacked basis core sales increased in each business unit.
Normalized gross margin was 32, 7% flat versus year ago pricing.
Pricing and fuel productivity savings offset of nearly 700 basis point headwind from inflation and foreign exchange the sequential.
Improvement in <unk> gross margin performance was driven by a combination of stronger pricing and fuel productivity savings.
Disciplined overhead cost management led to a 100 basis point expansion in normalized operating margin to 13, 6%.
Mitigating the impact of higher A&P spending as a percent of sales and a headwind from currency.
Net interest expense declined $10 million year over year to $55 million, while the normalized tax rate was 15, 1% similar to last year's level.
This translated to normalized diluted earnings per share of <unk> 57 versus <unk> 56, a year ago.
Turning to segment results core sales for the commercial solutions segment grew 10, 7% driven by pricing actions and customer demand.
Core sales for the home appliance business declined 4% on top of a 15, 3% comp in the base period.
Core sales for the home solutions segment declined eight 5% as the business lapped 33, 7% growth a year ago.
Both the food and the home fragrance business has posted lower core sales against challenging comps.
Core sales for the learning and development segment increased five 7% on top of a 31, 6% comp with growth in both the baby and writing businesses notwithstanding tough compares.
Core sales for the outdoor <unk> recreation business grew two 5% on top of 25%, it's toughest comparison of the year.
Moving onto cash flow and balance sheet year.
Year to date through Q2 operating cash flow was a use of $450 million as compared to cash flow of $76 million last year with the cash conversion cycle increasing year over year.
These results can be largely attributable to a seasonal inventory build to support sales and the first wave of <unk> implementation.
We believe that the company's inventory position peaked in the second quarter.
While longer lead times and other supply chain challenges of warrants had higher than normal inventory levels. In recent quarters. We are planning for significant reduction going forward and have adjusted our back half supply plan and safety stock levels Accordingly.
We expect this to drive strong cash generation in the back half of the year and enabled the company to Delever from the three four leverage ratio at the end of Q2.
Before sharing our outlook for Q3 and the full year 2022, let me provide some context for the updated forecast.
As we look to the back half of the year, we are continuing to manage the business assuming the macro environment will get tougher due to increased pressure on low income shoppers as high inflation on essentials, such as food and housing constraints.
Discretionary spending.
And we expect more dynamic customer order patterns, even though most of <unk> businesses are retailer inventory target levels.
With our domestic pricing actions largely in the market now we are carefully monitoring both elasticities and competitive reaction, which vary by category.
For the full year, we are still assuming a high single digit benefit from pricing, partially offset by a mid single digit decline in volume, we expect purchasing behavior to continue to evolve across categories as consumers, particularly the low and adjust to the current realities.
We expect greater normalization across businesses the disproportionately benefited during the pandemic, particularly home fragrance in home appliances. We also anticipate stronger performance across the commercial and writing businesses that are recovering with improved for mobility.
We are taking decisive actions to address the macro changes, including accelerating efforts to drive fuel productivity savings.
Managing discretionary expenses, while continuing to invest in important capabilities.
Optimizing promotional spending.
Reducing supply plans in categories that are declining.
And shifting our messaging to be more value focused while ensuring we have innovation across price tiers to meet all shoppers needs.
Despite the changes in the macro backdrop on a constant currency basis in aggregate, we are maintaining our top and bottom line outlook, demonstrating the strength of the portfolio and the agility of the organization.
We are however, updating our full year 2022 outlook on net sales normalized operating margin and normalized EPS for the significant appreciation of the U S dollar, which is resulting in both translation and transaction headwinds the major culprits of this adjustment or the euro Japanese yen.
<unk> and the British pound all of which are among newell's largest currency exposures. Although over time, we do expect to mitigate the transactional foreign exchange impact through pricing actions.
Based on current rates and the expected currency headwind for 2022.
It is about 10 cents worse than it was three months ago.
Let's go to the specifics of the outlook for full year 2022.
We currently forecast net sales of $9 76 billion to $9 98 billion, which.
Which incorporates flat to 2% core sales growth and a nearly 8% headwind from the divestiture of the CHS business Foreign exchange category exits and closure of some Yankee candle retail stores. This guidance contemplates normalized operating margin improvement of about 20 to 40 basis points versus last year to 11.
2% to 11, 4%.
Recent strength in the dollar is pressuring net sales and normalized operating margin by more than $150 and about 30 to 40 basis points, respectively relative to the prior outlook the updated.
Forecast implies mid to high single digit growth in normalized operating income on a constant currency basis, excluding the contribution from CHF us in both years.
Yes.
We are updating the normalized earnings per share outlook to $1 79 to $1 86 versus $1 82 in 2021, including a tax rate in the low double digit percent range and approximately 2% decline in diluted shares outstanding.
We are also revising the operating cash flow forecast to a range of 7% to $800 million.
With the change relative to the prior outlook, reflecting the impact of the stronger dollar as well as the potential for incremental inventory build at year end ahead of implementation of the second wave of project of it early next year.
For Q3, we are forecasting net sales of $2, three 9% to $2 $5 billion, including core sales decline of 1% to 5% and an approximately 9% headwind from the sale of the <unk> business Foreign exchange category exits as well as closure of some Yankee candle retail stores.
We estimate that the timing shift in customer orders from Q3 to the first half is unfavorable impacting core sales this quarter by a couple of points.
We expect normalized operating margin to contract 40 to 70 basis points year over year to 10, 7% to 11%, reflecting a year over year increase in A&P to sales ratio as well as deleveraging impact on overheads and sequentially stronger gross margin PERC.
<unk>.
We are forecasting a normalized effective tax rate benefit in the mid to high single digit percent range and approximately 3% reduction in diluted shares outstanding and normalized earnings per share in the $50 to 54% range.
We are confident that the strong financial and operational discipline, we've instilled in the organization will empower us to successfully manage through a softening macro environment, while delivering on our strategic agenda. We are excited about the opportunities ahead and continue to see a long runway for value creation operator lessor.
Open up for questions and answers.
Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad.
These ensure that the mute function on your telephone is switched off to allow us to reach our equipment again. It is star one to ask a question.
And our first question today comes from Olivia Tong of Raymond James.
Great. Thank you.
I was wondering if you could talk a little bit about consumption versus selling in any major disconnect there and where they are the most acute and how long do you think that will last and then obviously a few of your retailers are not necessarily in that spot right. Now. So have you changed any of your practices on the more challenged retailers and what are you factoring in for them in the second half.
Thank you.
Good morning Olivia.
So let me start on the.
The consumption side.
Recognize of course last year consumption was very robust and we have in the first half of this year.
And some softness in consumption.
We are going into July we are beginning to see some pickup in <unk>.
Thanks to a great Prime day.
Happen, so that is a little gap between consumption.
And.
Our sales growth.
Clearly I think.
Some of the businesses. The same businesses that are challenged on the sales side home appliances home fragrance or some of the ones that.
Or having some consumption issues.
So I think look there is going to be.
As we work through.
The inventories in.
We're happy to see is that at least in July that uptick. So that is positive. Let me just talk through the second comment.
Question on.
Retailers and retail inventories look for us interestingly enough because of a lot of the supply challenges that we had last year and going into this year.
Bob.
We actually had low in stock levels, and we're trying to get them up and it varies but in most cases, we're kind of still add that targets or maybe slightly below. So we're we're working hard on that so I don't think for us.
Outstanding all the headlines you see on general merchandise.
In terms of our own.
Businesses.
In fact, when you think about writing and stuff.
<unk> been working hard to provide the retailers as you know there was that shift a little bit from Q3.
Q2.
So.
Dot aspect has not been as much of an issue, but we do get caught up because even though it may not be us because theyre looking at overall inventories, including competitors et cetera. So we could get caught up in that aspect of it and so thats sort of the view that I have.
But the fact of the matter as well.
We're off to a great start on Bts, our commercial business is on a railroad and.
And food, while the first half has been a big challenge.
BARDA quickbooks release half our out of stocks and so on so we.
We expect some pick up there as well in the second half.
Great and then on the flip side.
Some of the offset that you could potentially make with respect to the.
Cost containment and savings programs, if you could give a little bit more color in terms of it sounds like it's progressing quite nicely.
Any color in terms of the.
<unk>.
The.
The plans in July with respect to the three businesses that are impacted and then if you could just update us on sort of the path forward on on the on the op unrelated thing.
For the remainder of the year that'd be great.
Yes so.
We passed as I mentioned in the prepared remarks, a major milestone.
Going live with our first wave of businesses into our our single legal entity on July one and frankly, it has gone dramatically better than we than we expected and we're planning for.
We've seen.
As we shut off the old system and turned on the new system, we've seen very minimal to no issues with regard to our ability to receive orders process orders.
<unk> products, our facilities have come up to speed faster than we expected.
And.
And perhaps most importantly, one of the big parts of this program was going and working with the retail with our retail customers to harmonize payment terms and transportation terms. So in many cases with retailers. We were going from 30 different sets of payment terms are 25 set the payment terms.
To one set of payment terms, we've completed that negotiation process with all of our <unk>.
Top retailers and.
And the vast majority of them.
Are now ordering and.
In many cases, we've shipped products on the new system.
<unk> collected receivables at the same time, so I think we're we're very excited about it.
I think it's a testament to the hard work that the teams have done an all of the system integration testing the day in the life testing that I had mentioned previously and I think it sets us up well.
For the remaining businesses to come on to the to the legal entity in early 2023 with.
With regard to the financial impact.
As we've mentioned previously.
This year is going to be relatively neutral on a bit versus last year and we expect the savings from avid really to come in 2023, as we get fully into the new model.
And we remain very much on track with that.
Our next question comes from Peter Grom of UBS.
Hey, good morning, I guess, good afternoon, everyone hope you're doing well.
I guess I just wanted to ask around the comfort.
Or the confidence in maintaining your core sales outlook just in the current environment I mean, it seems like many of your peers or competitors have lowered their outlook to reflect kind of a unique inventory dynamics, you've got changes in demand et cetera. So can you just talk.
Comment on your comfort or degree of flexibility in the guidance should demand deteriorate from here.
So let me kick it off and then Chris can add.
So Peter I think sometimes.
That is a little misunderstanding about our business thinking that everything is discretionary.
We actually have.
Really essentials on everyday in terms of the baby businesses. There are lots of things in writing that are needed from a school standpoint, and then we've got a whole business on commercial.
It's.
But it's other than certain cycles, it's really back on track as the economy is opening up so I would say.
Other than to meet the discretionary side has been home fragrance that's been hit.
Because there was a lot of building up.
During the pandemic as people were stressed that we're using a lot of capital theyre not working their way out of that so I think that's been there and then on home appliance clearly there was some.
Acceleration of consumer purchasing.
Because of the stimulus and so on.
And by the way that happened a little bit on carloads was filed with the.
The stimulus some low income consumers came into the category.
And we're probably not get some of those people back and with the long purchase cycles and home appliances. So it will be difficult, but I think we have got.
Writing that is doing very well with shares continue to be strong.
And then we've got a lot of innovations.
Coming up in the food business, we've got the whole Dura lite from rubbermaid coming out.
That I think we should do well a fresh preserving is doing extremely well.
Got and then that's been our whole emphasis the marketing teams have shifted drove value story. So when you look at food safety for instance, we've just introduced a $99 clients in one of the leading clubs.
Change and we think thats going to do extremely well.
We've looked at sort of food safety rules, and said Hey, we've got consumer input, but we weren't giving too much sense. So we've reduced that and got the price points down and.
So we think that is going to.
Have a positive impact bonus back some things like the steamer we're looking at Bogost on contango. So I think that value message is also going to stimulate consumption.
So we feel.
When you look at the first quarter.
Where we still I'm sorry, the first half, where we had a 4% growth on top of a very challenging.
Comp of about 23%. So the second half we are taking into in the second quarter. We are taking into account what's happened with the shifts and so I'd say that the.
The guidance, we've given is appropriate.
Yes, the only thing I would add is that the guidance that we gave at the beginning of the year heading into this year did contemplate stimulus money coming out and did contemplate categories normalizing.
As Ravi mentioned and so we had factored it into this largely this effect into our initial plan for the year I will say that the plan for the year has changed versus what we thought but the power of the portfolio is what's enabling us to maintain the total company I think relative to.
Our plan at the beginning of the year I think we would say writing in commercial are doing better than we expected.
And home fragrance and home appliances are normalizing a little faster than we expected, but the two of those basically offset which allows us to maintain the guidance for the year on core sales growth.
Got it that's helpful. And then I guess just on writing can you remind us of the normal replenishment cycle or when you would have good visibility on replenishment orders for back to school and I guess the reason I asked some of the inventory dynamics discussed that retail seem to have resulted in fewer replenishment orders in certain categories largely in some of these.
Seasonal items, but just any commentary on that and what you've embedded in your guidance for the third quarter.
The punishment.
Yes.
Which too.
Right now at least three of Etfs and what we're seeing is positive, but it's too early for the replenishment. So I think thats really more late August September that's just not seeing that so Chris do you have anything you want to have the no I think Ravi is exactly right. The only thing I would say is that.
And then Rami mentioned it in his prepared remarks.
Recall that we did.
Custom retailers did order writing earlier this year and so there will be a.
A shift from Q3 into the front half of the year that will disproportionately affect the writing business in Q3 because.
Because we shipped a lot of those back to school display volumes in Q2.
The business itself is very strong and we're very happy with the performance of the brands that are remaining strong and share positions are good so.
Our next question is from Andrea Teixeira of Jpmorgan.
Thank you good afternoon I just wanted to follow on on the inventory level at.
At retail Im assuming with project.
Great.
Hugh.
You had to work with your retailers too.
Just add them up and make sure that they had enough inventory and of course the.
And additionally, the fill rates steady work since the beginning since the beginning of the whole.
Easily.
With just rotation from Asia I.
I worked at your advantage I do remember that being one.
The strength in your results I was just hoping to kind of reconcile all of this and think about what.
I guess the retailers have talked about existing inventory is somewhat discretionary items.
Just thinking about the campaign season, and also the outdoor business, Mike trying to help and just some Peters question in terms of like the back to school was that any anything that we should be aware of there is a pull forward that we are not going to see the benefit in the third quarter.
Anything you can help us kind of understand.
How we should be thinking of the inventory and solving for those categories that benefit from the reopening. Thank you.
Yeah.
Alright, Thanks, Andrea let me try to give it a shot so we monitor weeks of coverage at all of our major retail customers and we get the data Gen.
Generally on about a one month one month lag.
It depends on which retailer.
But we can see exactly how much of our product is that is that retail and I think as Ravi said earlier, we feel pretty good about our retail inventory levels. Overall, we are not at a position broadly where our retail inventories are elevated we have some categories, where our retail inventories are below.
Target levels.
Cause we're still supply constrained and we're still catching up and we've got some categories, where we may be slightly above but broadly speaking we're in good shape with our retail inventory levels I would say.
The first point.
And we do monitor it very closely it doesn't mean that we couldnt get caught up.
With retailers, who make a broad change to their general merchandise inventory.
And.
Inadvertently caught up not because our retail inventories are out of line, but because.
A major retailer it takes an inventory action and.
And frankly, that's why if you looked at our Q3 guidance, we guided our core sales growth in Q3 to a little bit broader range than we typically would.
Because of that uncertainty with regard to do we inadvertently got caught up in something that a retailer does.
But if you look at our Q3 guidance range on core sales and you compare that to 2019.
We're still forecasting a quarter, that's up mid to high single digits versus 2019 levels. So.
<unk>.
Thats.
That's what I would say broadly about our inventory levels.
And in terms of the back to school that's Super helpful. The back to school. So we don't need to worry about those dynamics I'm assuming.
Now back to school were actually.
One of the ones, where we probably have too little inventory at retail.
And what I mean by that is we've we've customers that ordered the displays earlier and thats accounted for the shift from Q3 into the first half of the year that we've talked about.
Some of the major retailers wanted to set up back to school earlier.
We're off to a good start.
But we are supply constrained.
On replenishment orders and so if anything on that business, we're trying to ramp up production capacity to keep up with.
Customer demand.
Our next question comes from Kevin Grundy of Jefferies.
Great. Thanks, good morning, everyone.
First question for Chris just on the EPS guidance.
So I think you touched on some and so it would seem to imply that margins would be down in the back half of the year, albeit modestly versus a pretty strong first half of the year.
Maybe just comment on that and then constraints around pricing or ability to lean on our productivity, particularly versus last year, where you guys held the line and even raise EPS guidance, what was a difficult environment understanding the operating leverage was certainly better and then within that response, because maybe just comment on the transactional effects from FX, which seem to be.
Larger and that is to say.
How about <unk> the impact on top line and then I have a follow up on buybacks next.
Okay, let.
Let me try to try to tackle them one at a time.
So on margins.
Think we think that.
We've talked a lot about the dynamic pricing and fuel productivity savings offsetting the impact from inflation and FX in the pricing now being fully implemented which is why you saw our gross margins in the second quarter being roughly flat with year ago.
Going forward into the back half of the year, we expect pricing and fuel productivity savings to more than offset the impact of inflation and FX and so we're expecting continued gross margin improvement relative to prior years in the back half.
In Q3.
We are expecting our A&P levels to ramp up a bit.
And so A&P as a percent of sales as planned higher.
In the back half versus year ago.
Because at the end of the year ago level, we were <unk>.
Frankly, not spending a lot of A&P, primarily because we were so supply constrained and then I think the other thing thats happening in the back half is that because the revenue growth is somewhat more front half loaded this year because of the base period comparisons there is an overhead deleverage that happens in the back.
Half, that's sort of a onetime in nature type of thing.
But very much on track for the year. So that's sort of where we are on margins, but the new news on margins.
And all of that together.
Guiding operating margins up versus last year on a full year 20 to 40 basis points I think the new news on margins is really the FX impact.
And as I mentioned, the FX impact is really because the Japanese yen has <unk>.
Devalued significantly versus the U S dollar.
As well as the euro and the British pound, which are the three biggest currency exposures for Newell.
One of the things.
In our setup is that much of our manufacturing base is U S.
Dependent where our manufacturing plants are in the United States or sourced from China, which is.
Which is more aligned to the U S dollar.
Because of the remember and as a result, we actually have a bigger transactional exposure than many other CPG companies that have regional sourcing.
So.
The adjustment that we made of the 30 to 40 bps to our operating margin guidance.
Versus.
The beginning going into the year plan is really.
Entirely explained by by the change in transactional FX.
That we see playing out but it's not an underlying issue with regard to our pricing plans or are.
Our fuel productivity savings and what I'll say on the transactional impact is.
Given that this is a relatively recent development. We are now working hard to develop pricing plans in the international markets, but we think a lot of that pricing in the international markets will go into effect.
Probably around January one so it will be more of a next year impact than a this year impact got.
Got it thanks for all that Chris that's helpful. Just one quick follow up just updated thoughts on share buyback you Express some openness.
<unk> seen certainly open.
<unk> is in sort of deep value territory. Ravi you made comments on perhaps some misunderstanding about more of the defensive nature of the business, but that being said this has been the cut within the context of sort of.
Less certain macro as you sort of pull all of that together, we'd love to get your updated thoughts on returning cash to shareholders and how you sort of weighing that within all of these variables and then I'll pass it on thank you.
Very good.
As you know when we sold the CHS business the board authorized $375 million of share repurchase.
Executed $325 million.
To date, and we have $50 million left on the current authorization.
The other thing I would say is from a seasonality standpoint, as you've seen in our results we.
We typically are a back half cash generation company.
Because of the seasonality of our business and so we're expecting to generate a.
Significant amount of operating cash flow in the back half of the year and we will.
We will evaluate when to deploy the $50 million authorization.
Over the next six months or so.
From a longer term perspective, we do expect this company to continue to generate strong operating cash flow. We expect our first use of cash to be to invest in the business and generally we're seeing opportunities to invest that 30% type rates of return is what we're looking at for Capex.
Beyond that we pay a very good dividend of <unk> 92, a share, which we expect to maintain.
And then we expect to generate cash beyond that which we will look to return to shareholders through share repurchase.
Or consider tuck in acquisition.
But I think as we've said in the past.
Tuck in acquisition, we would be very selective on that.
And it would have to be something that was a clear shareholder value winter for us to reenter that.
That.
Strategy.
Our next question comes from Bill Chappell of <unk> Securities.
Thanks, Good afternoon.
Okay.
Hi, Bill most of those.
Both of them.
On the call have listened to I guess P&G. This morning talking about the U S consumers seeing not being very healthy to church <unk> Dwight.
Seeing we've seen trade down happening kind of across the board.
Putting that in context with kind of your comments for the second half of the year of.
We expect low end consumer to be under pressure.
Maybe some trade down is that based on what Youre seeing right now or is that just based on.
What economists are calling for a recession or an expectation, which is understandable just just trying to understand what youre seeing versus what you were expecting.
Yes.
On the.
The.
Losing out.
<unk> of the lower income consumers that we are definitely seeing on the home fragrance business.
And.
And we've done a lot of modeling.
A lot of the work and that is clear and that is probably a more discretionary purchase but also the stimulus really bounced up so we're able to track and see that a lot of new consumer came in and then we've lost and so that is definitely something we're seeing on the trade down.
Different types, one of the interesting hypothesis to say.
Losing to private label, we're not seeing that in the main.
With the exception of again home fragrance and look in home fragrance of private label a lot of the owned brands from the big retailers, but aside from that one category.
Even in rubber made where there is some portions which is susceptible to private label, we're actually not seeing that we're holding our shares which is a positive.
There are some trade downs, so I'll give you two examples one where.
What sort of baby car seats, which is a price sensitive.
<unk> that is sometimes a shift to kind of the <unk>.
Lower the value brands. If you will so some of that we tend to see but because of the power of our brands like.
Holding our own with the innovations, but that's one where you have to be careful. So we are very targeted and because we have put a map policy and so when we do promote.
We're very targeted NBC Big Circus and for instance from time day, we saw a four car seat sell for a minute.
No.
<unk> so so.
So we're understanding the sensitivity and being very laser focus on when we promote the other side of trade down. We're also being the beneficiary like in specialty retailers on our door for instance.
<unk>.
We were.
Where we are kind of more of a value brand with Coleman, we're actually getting the benefits and for the first time on some of the specialty retailers were being included for 'twenty three on some of their big promotions and so on so that's that's what we're seeing and so our thoughts are based on.
What we are seeing I am all rates in the markets.
Teams trying to check stores and looking at behaviors. So that's sort of the.
Quick view.
Only thing I would add is that I think our guidance contemplates a further softening.
Low income consumer.
So to your point of what we're seeing versus what we're expecting and I think we've deliberately chosen to be a little bit more cautious on that.
In the guidance versus what we've seen to date, because we don't want to get in a position, where we're overbuilding inventory and so we've tried to be a little cautious with regard to future trends based on what we've seen so far and we're trying to set the supply plan lower.
So that debt.
That we wind up at the end of the year in a good inventory position and we don't carryover excess inventory as we go into next year on that.
One pivot that we've made as a company is really with all our views focus on value value value and marketing messages and such.
In product offerings and promotions. It is all about trying to demonstrate the value and the value is not just a low price, but its really about the great quality that we have but combined with making it attractive for them.
No I appreciate that and then just follow up on writing.
Yes.
Where do we stand or where do you expect us to be at year end.
Versus 2019 levels I mean, it's tough to sell back to school or are we back to normal back to work, but clearly not 100% back to normal I mean is there an expectation that you're going to be there, Jason youre going to see a surge as we have kind of more normal fall we've had in years.
You look at that versus 2019, this year and even even going into next year.
Yes, I would say I have a very clear answer on that which is the writing business is going from strength to strength as the offices are opening up and even though it's just hybrid.
We're seeing the momentum and we're seeing momentum at Staples and depot as well versus a regular customers on Walmart and Amazon et cetera. So I would say that we would definitely be on the positive side of the ledger versus <unk> 19, and with all the innovations we are driving.
<unk>.
We've got some new activity base stuff that we're driving in Q4, so and with Sharpies, Joe that has been a knockout success.
Paper mate doing very well.
I feel.
And look in the future one other thing as soon as we overcome the chip Sharpie, John Diamond I think that would be another growth.
Items I'd say writing.
A lot of confidence.
Our next question is from Chris Carey of Wells Fargo Securities.
Hi, Thank you.
So a quick margin question and then just a bigger picture question just on margins learning and development.
Historically high margin delivery in the quarter anything atypical there or are we reaching new thresholds from which to improve going forward and then similarly in the home solutions segment.
Historically low margin is that just about sales.
Sales deleverage.
Quick follow up.
So say it again Steve.
Sorry, say again Christie home the home solutions margin I got but I missed the first part.
Learning and development historically high anything out typical over quarter.
Or is that something that ECS sustainable going forward.
Yes.
Let me take both of those because youre right.
Learning and development I think was a function of really strong topline growth across both writing and baby strong fuel productivity savings that we're driving.
<unk>.
And that translates through into.
And the margin improvement in that in that business. So I think it is sustainable going forward on the home solutions I think we had a significant drop in margins during the quarter and that really was largely deleveraging from the from the topline normalizing.
There was some higher A&P spend because of the because.
As a percent of sales because of the topline.
Slowdown there was also some gross margin being down as we started to rightsize the supply plan and we started to get some manufacturing fixed.
Fixed manufacturing cost absorption issues on that so I don't think that the home solutions margin drop is sustainable I think that's sort of a temporary thing that's going to bounce back as we go forward.
Okay got it.
This is bit more big picture, hopefully not too much.
Thank you for your question.
I guess the chat.
So the stocking away is that results are good and resilient.
Overhang is on this general merchandise and the lack of.
Visibility on the demand environment going forward and I guess I'm trying to maybe get a sense of what you might define as success.
Demand environment.
Really changes something thats outside of your control, it's pretty clear that you're looking at taking your own inventory, perhaps in that sort of environment you focus more on cash flow.
Maybe buying back stock, which is something that you can control just just big picture right.
Land environment.
To soften.
How are you.
Positioning yourself or what is the right way to look at successful execution for this business on this curve I realize that's a big question for us.
The end of the call but.
It does feel important in the context of the stock and delivery. So far this year and yet still the lack of visibility on the go forward with demand. So thanks for that.
I'll give a quick one and then Chris can add to it.
I think this variance.
Where you have to walk and chew gum at the same time.
And one thing Newell has demonstrated.
Starting with <unk>.
Then COVID-19 that supply chain challenges that inflation and now FX, we have been in our last 12 quarters. I think continued to demonstrate that the teams can execute and we deliver on our promises so.
We recognize that the environment is tougher, but part of it is just being quick and agile on pivots.
On the topline side it is pivoting to red hat.
How do you make sure that the consumers continue to see the value and continuing to drive our innovations so.
So we will continue to do that but thats. We declared this year again was to go to markets and we're continuing through despite everything we would still guide that will be.
Higher on operating margins. So we're going to continue to be very focused on that long term.
Very determined to get the gross margin right and get it up so I think we've got to do both and.
But if there's one focus it is and we've got all of it which is going to be a real helpful.
As Chris pointed out in 'twenty, three and then finally, we're going to continue to generate cash which gives us flexibility.
And Chris already outlined the uses of it so I don't want to repeat it but.
I'd say.
We just have to and this is where the power of the portfolio and it's yet a little misunderstood portfolio thinking everything is discretionary and it's not.
But we're going to continue to I think our actions and results speak for themselves and finally, I think hopefully investors will say this is a company poised to continue to drive long term shareholder value.
And the final question today comes from Steve powers of Deutsche Bank.
Oh, Hey, thanks, Thanks, guys.
Before the call.
My questions are more clarification.
On the back half outlook.
There's three of them for their quick number one is just I want to be clear what you said, Chris on the gross margin.
Trajectory I think you said that there will be improvement in the back half and sequentially improvement sequential improvement in the rate of year over year Chase.
Change just wanted to clarify that number one number two I don't I guess I got the guidance on the on the.
The tax benefit in the third quarter I don't know if you if you called out exactly what's driving that just for explanation purposes that would be helpful. If theres a E.
The answer and then lastly on cash flow cadence.
Is there a is there a bias to having more of the cash flow come in <unk> versus <unk>, we're different Im guess im I interpreted your comments as more <unk> versus <unk> as you allow for the.
<unk> inventory build ahead of project guarded rollout, but just any.
Any clarity there would be great. Thank you.
Yeah. So let me try to take them one at a time on gross margin.
What I was referring to was the rate of gross margin improvement I expect to improve in the back half we were down versus year ago. In Q1, we were flat in Q2, and I am expecting gross margin to be up versus year ago in the back half.
So that's the answer on that one the tax benefit that we're that we're guiding to in Q3 is a one time discrete tax benefit.
From a tax projects that were working on.
That we expect to implement in Q3, and so that is a sort of onetime discrete tax benefit.
We've got a high degree of confidence that we're going to execute in Q3 and felt like it was appropriate to reflect it in the guidance and then on the cash flow.
I think you're likely to see the cash flow will be larger in Q4 than in Q3 and part of that has to do with the timing of shipments and the timing of collections.
And so typically that's the case for Knoll and I expect this year.
Sort of.
Followed that same trend. So I do think that Youll see Q4 be a significantly larger cash flow quarter than Q3, but I'm expecting Q3 to be positive.
Okay. That's helpful.
At the end, but just on the tax because I've just got a couple of people picking me on it.
What's the right normalized kind of long term tax rate, we've talked in the past about soybean crushing upon 20%, but with discrete discrete benefits over the next couple of years keep you below that below that range, but is there any.
Any way to better describe sort of normalized tax the cadence to get there because it is a question thats with topical right now.
Yes.
And our tax.
Our tax rate is somewhat volatile because we continue to have opportunities that we're going after with Nols structuring work legal entity rationalization et cetera that we think are good value drivers for the company.
And they don't all come sort of in a linear fashion I think in the past I've said that.
Our normalized tax rate for this company, excluding discrete items might be around 20%.
I actually think that that number may wind up being a little bit below that now.
I were to think about it.
Probably say maybe in the high teens to 20% is probably a normalized tax rate for this company.
Based on our existing structure.
Ladies and gentlemen that ends today's question and answer session and concludes the Newell Brands' second quarter 2022 earnings conference call.
Thank you all for your participation and you may now disconnect.
Okay.
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