Newell Brands Inc. Q1 FY2022 Earnings Call

Good morning, and welcome to Newell Brands' First Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. A live webcast of this call is available at ir.newellbrands.com. I will now turn the call over to Sofya Tsinis, Vice President of Investor Relations. Ms. Tsinis, please go ahead.

Thank you. Good morning, everyone. Welcome to Newell Brands' First Quarter Earnings call. On the call with me today are Ravi Saligram, our President and CEO; and Chris Peterson, our CFO and President, Business Operations. Before we begin, I'd like to inform you that during the course of today's call, we will be making forward-looking statements, which involve risks and uncertainty. 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, Forms 10-Q and 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 superior to the measures presented in accordance with GAAP. Explanations of these non-GAAP measures and available reconciliations between GAAP and non-GAAP measures can be found in today's earnings release and tables as well as in other materials on Newell's Investor Relations website. Thank you. And now I'll turn the call over to Ravi.

Thank you, Sofya. Good morning, everyone, and welcome to our first quarter call for Newell. We are pleased with the strong start to 2022, building on the momentum from prior quarters, as our team remains focused on executing with excellence in a challenging environment. Core sales grew 6.9% despite a tough comparison of 20.9% from last year. Normalized operating income and normalized earnings per share increased 10.4% and 20%, respectively, despite significant ongoing inflation. This showcases the strength of our diversified portfolio and the flexibility of our model. We are much better positioned to leverage our brands for growth and efficiency. Our strategy is effective, and we have built a solid foundation for sustainable and profitable growth. This quarter marks the seventh consecutive quarter of core sales growth for our brands. In the first quarter, core sales growth was driven by pricing, while volume remained relatively flat. Core sales increased in 5 out of 7 business units, including Food, Outdoor & Recreation, Baby, and Commercial. The Outdoor & Recreation and Food segments showed double-digit increases compared to the previous year, despite challenging comparisons. Home Fragrance and Home Appliances saw declines in the first quarter due to a significant surge in demand the year before due to the pandemic and U.S. stimulus measures. Notably, on both a 2-year and 3-year stack basis, core sales grew in the double-digit range for all 7 business units, which is a remarkable achievement. As we noted last quarter, given the ongoing supply chain challenges in the industry, retailers increased orders for seasonal products in the first quarter, especially in Outdoor & Recreation and Writing, contributing to our strong top-line results. We are proud that we were able to fulfill these orders despite external challenges, showcasing the resilience and agility of our team, as well as the efficacy of our unified approach. We observed a normalization in category and consumption trends compared to last year, which had been enhanced by U.S. stimulus. Although domestic point-of-sale was below the elevated levels from a year ago, it remained significantly ahead of 2019 and 2020 levels, indicating that the behavioral changes we have witnessed during the pandemic are lasting. Our diverse portfolio is well-positioned to take advantage of evolving consumer trends such as hybrid work and increased emphasis on well-being, outdoor activities, and sustainability. We are continuously improving our brand positioning, enhancing our marketing and innovation capabilities, and strengthening our execution in the marketplace, which has significantly bolstered our iconic brands. These efforts have led to another quarter of strong growth for many of our largest brands, including Coleman, Breo, Rubbermaid, and Sharpie. Fourteen of our top twenty brands saw growth in the first quarter compared to last year. We are elevating the digital capabilities of our organization and believe our early investments in omnichannel execution are fostering stronger connections with our customers and consumers. In early April, we launched a new creative kitchen in Hoboken, New Jersey, which serves as an inspiring space and offers a consistent flow of recipes and tips that connect people with the latest kitchen innovations and trends. Alongside our partners, we aim to develop cutting-edge content for all digital platforms, showcasing our innovations and hosting live events. This is an exciting opportunity to highlight our new and unique innovations that address consumers' needs. One such product is the recently launched Rubbermaid Dura-Lite Bakeware, an all-in-one solution for various cooking and storage needs. Innovation is crucial for every consumer products company, and we have been diligently working to reignite this growth engine at Newell Brands, utilizing consumer insights and market trends. Geographically, core sales in North America grew nearly double the rate of international markets as EMEA softened against a tough comparison and faced challenges from the ongoing situation in Ukraine. Now, I will provide insights into our business unit results, starting with where we observed continuous momentum in both our top line and market share, and fundamentals remain solid. Core sales rose for the fifth consecutive quarter, reflecting a strong double-digit increase compared to the previous year, driven by North America, Latin America, and Asia Pacific. Although the commercial/office channel still lags behind pre-pandemic levels, we are gaining traction there as well, with year-over-year growth in this channel as people return to offices, albeit in a hybrid manner. Writing and creative expression brands performed well in the quarter, helping to offset declines in labeling caused by chip shortages. Due to ongoing supply challenges across the industry, retailers hurried some back-to-school orders into the first quarter, which contributed to our robust results. We believe we are well-prepared for the upcoming back-to-school season and will implement strong merchandising strategies to attract consumer demand. In Baby, core sales increased primarily due to North America and APAC markets. From a category standpoint, both baby gear and Baby Care sales grew even as we compared to a strong double-digit performance from the year before, which was supported by U.S. stimulus. This is especially impressive given the widespread supply challenges affecting product availability. Food performed very well this quarter, with core sales increasing at a low double-digit pace, even as it faced a challenging comparison from a year ago. This reflected robust growth in fresh preserving, cookware, bakeware, food storage, and kitchen organization categories. March saw the highest global sales in over five years for fresh preserving, driven by strong consumer demand and innovation. This segment continues to thrive as our teams exploit favorable trends and new product launches to attract consumers as more return to work environments. Kitchen remains a crucial aspect of consumers' lives. In a hybrid work context and a highly inflationary environment, we believe that home food consumption will continue to exceed pre-pandemic levels, with our leading brands well-positioned to benefit from these trends. Home Fragrance core sales and consumption declined compared to a record first quarter performance last year. The pandemic-driven demand and category trends have normalized as expected. Modest core growth in EMEA could not counterbalance declines in North America. However, on a 2- and 3-year stack basis, core sales showed strong double-digit growth. Similar to home appliances, we anticipate continued normalization in the category for the rest of the year, but we are optimistic about brand health and our new product pipeline. Home appliances experienced a slight decline in core sales as it compared against a significant surge in consumption last year when it grew nearly 39%. Strong core sales in Latin America were offset by declines in other regions, with both 2- and 3-year stack growth rates showing strong double digits. Given the tough comparisons, we expect the slowdown in consumption to persist in this category as shopping behavior stabilizes. The Outdoor & Recreation segment maintained excellent momentum, showing a core sales increase of 22.9% on top of 7% growth in the previous year, marking the fifth consecutive quarter of growth. Strong performance was widespread across all regions and major businesses, aided by retailer optimism regarding the upcoming season and expected robust outdoor participation. Customers placed some outdoor equipment orders earlier than usual due to the unpredictable supply chain environment. The beverage business also enjoyed strong growth, driven by our innovation and brand-building efforts behind Contigo and bubba, benefiting from increased consumer mobility. Core sales growth for the Commercial business jumped to 7.4%, against a challenging comparison, led by North America and Latin America, with pricing supporting strong momentum in the quarter. We have improved product availability and consider our portfolio diversity across both commercial and retail segments as an advantage. Major growth drivers included commercial cleaning, material handling, refuse and recycling, outdoor organization, and washroom solutions, which helped offset declines in disposable products that faced tough comparisons due to COVID. We are encouraged by a strong order book and believe that a return to office work will positively influence the commercial categories. The first quarter external environment remained difficult due to ongoing supply chain and inflation issues, worsened by the unfortunate situation in Ukraine. Although inflationary pressures have become more challenging than we initially anticipated because of the ongoing political circumstances, our determination to improve gross margins and drive operating margins remains steadfast. Despite significant inflation impacts, Newell's normalized operating margin improved by about 50 basis points compared to last year, exceeding our expectations thanks to incremental pricing actions and better management of overhead costs. We are taking swift mitigating actions, which gives us confidence to maintain our outlook for the year, despite the additional inflation burden of about $80 million. We still foresee 2022 as a year of margins, even with ongoing inflation challenges. Our outlook entails growth on both the top and bottom lines despite a tough macro environment. For 2022, we have focused on five key priorities: first, improving gross margins as we work to mitigate significant inflationary pressures and supply chain challenges while enhancing customer service. Our brand strength allows us to implement necessary pricing strategies across all businesses while ensuring we provide value to consumers. We will also optimize commercial spending, align product innovation with margin improvement, target advertising towards higher-margin categories, and drive productivity. Second, we will advance core sales growth and innovation by embracing a comprehensive understanding of the consumer and shopper journey, ensuring we delight consumers at every interaction with compelling narratives centered on consumer value and brand distinction. We aim to capture consumer interest by directing promotional efforts toward brands with the highest margins and growth potential, targeting suitable consumer segments to enhance conversion rates. Third, we will boost international growth to accelerate profits. Fourth, we will continue investment in transforming our supply chain through Project Ovid. Lastly, we will strengthen the culture of One Newell and enhance employee engagement. We are committed to fostering sustainable and profitable growth and achieving operational excellence while being socially responsible. We recently set a target for carbon neutrality by 2040 for all Scope 1 and Scope 2 emissions. We will also address ongoing macro challenges and pursue our strategic initiatives like Project Ovid to realize the International potential. Strong first quarter results are building upon our history of fulfilling commitments, and we remain optimistic about our outlook for 2022. I am grateful to our employees for consistently rising to the challenge and aiding us in successfully navigating an ever-changing operational landscape. I firmly believe that Newell's best days lie ahead, presenting us with a significant opportunity to enhance shareholder value. Now, I’ll turn it over to Chris.

Thank you, Ravi, and good morning, everyone. During the first quarter, we built on the business momentum driving a better-than-anticipated outcome on both top and bottom lines through swift and decisive actions to mitigate the impact of inflation and supply chain challenges. Our actions over the past three-plus years to drive sales growth, reduce complexity and overhead costs, double down on productivity, improve working capital management, and build supply chain agility have put us in a much stronger position to effectively address today's challenges. Before we get into the quarterly discussion, let me provide some perspective on the current operating environment. Inflation remains stubbornly high, and our expectation for the full year has moved up slightly since February. The war in Ukraine has caused an increase in energy prices, which, in turn, has resulted in higher than initially anticipated costs for resin and transportation. We now expect inflation to account for about 9% of the cost of goods sold in 2022, similar to last year and about 1% above our previous forecast. We continue to anticipate that ocean freight, sourced finished goods, and wages will see the largest year-over-year increases. We remain laser-focused on offsetting the inflationary pressure and improving the company's gross margin by implementing the following actions: driving productivity in self-manufactured operations, taking necessary pricing actions across each business unit, reducing overhead costs, optimizing the effectiveness of promotional spend, and executing on the previously communicated product line exits from low-margin categories, primarily in home appliances and Outdoor & Recreation businesses. We realize that the consumer is seeing higher prices across every facet of their lives, and we will remain disciplined with our pricing actions while continuing to carefully monitor elasticities. The contribution from pricing has continued to build sequentially with additional actions expected to be implemented in Q2. For the full year, we still expect pricing and productivity to more than offset the impact of inflation. The external supply chain dynamics have remained challenging as the industry continues to grapple with longer lead times for sourced products due to ongoing shipping delays, port congestion, limited container availability, and constraints on components, labor, and trucking capacity. China's Zero COVID policy also resulted in temporary lockdowns in Shenzhen and Shanghai regions, which further exacerbated these issues. These challenges are not new, nor are they unique to Newell Brands, and our teams have continued to do an incredible job navigating through this operating backdrop. To deal with this, we made a series of decisions that have significantly strengthened our supply chain performance. For example, we made a proactive decision to build inventory on top-selling and high-priority SKUs. We strengthened our labor force through enhanced compensation, benefits, training opportunities, and improved working conditions. We accelerated automation efforts across our facilities, and with Avid, we are creating a scaled distribution and transportation platform to further drive operational excellence. While we do not expect the external supply chain pressures to ease during the balance of the year, our fill rates are improving, and we believe we are well positioned to meet consumer demand in the majority of our businesses. Now let's turn to first quarter performance. Note these results include a contribution from the Connected Home & Security business, which was divested on March 31. The only metric that excludes CH&S is core sales growth. Net sales increased 4.4% to $2.4 billion as core sales growth and higher net sales in the CH&S business were partially offset by unfavorable foreign exchange as well as category and retail store exits. Core sales growth grew 6.9% on top of a challenging 20.9% comparison from last year. Core sales increased in 5 of 7 business units as we lapped difficult comps. On both a 2- and 3-year stack basis, core sales increased in every business unit. Pricing was the primary driver of core sales growth as unit volume was relatively flat to a year ago. Core sales growth was ahead of our expectations due to the timing of customer seasonal orders and improved supply chain performance. Normalized gross margin contracted 100 basis points versus last year to 31.2%, reflecting over 700 basis points of pressure from inflation and the unfavorable impact from foreign exchange, which offset the benefits from pricing and fuel productivity savings. The gross margin performance improved sequentially from Q4, largely due to a higher contribution from pricing. Normalized operating margin expanded 50 basis points year-over-year to 10.6% as SG&A cost leverage, particularly in overheads, more than offset the impact of gross margin contraction. Net interest expense declined by $8 million year-over-year to $59 million as we reduced the company's gross debt by $609 million since March of 2021. The normalized tax rate was 18.4%, below last year's tax rate of 22.4%, largely due to a higher contribution from discrete tax benefits. We reported normalized diluted earnings per share of $0.36, a 20% increase from $0.30 a year ago. Upside relative to the outlook we provided was driven by higher sales growth, better cost control, and a slightly lower-than-expected tax rate. Turning to segment results. Core sales for the Commercial Solutions segment grew 7.4% on top of a double-digit comparison from a year ago. Core sales for home appliances declined 1.9% as the business lapped 38.9% growth in the year-ago quarter, its toughest comparison of the year. Core sales for the Home Solutions segment grew 1.4% on top of a 33.8% comparison last year as growth in the Food business unit more than offset a decline in Home Fragrance due to a difficult comparison. Store sales for the Learning & Development segment increased 7.4% on top of 17.3% last year, driven by growth in both the Writing and Baby businesses. Core sales for the Outdoor & Recreation segment grew 22.9% on top of 7% last year as retailers ordered inventory earlier this year to prepare for the spring/summer season. Moving on to cash flow and balance sheet. In Q1, operating cash flow was a use of $272 million compared to a use of $25 million last year, driven by increased working capital to support sales growth. We continue to strategically build inventories on top-selling SKUs to mitigate the impact of supply chain obstacles and accommodate the shift in timing of customer orders. The cash conversion cycle moved up slightly, mostly due to higher inventory. At the end of the quarter, we completed the divestiture of the CH&S business to Resideo Technologies for a purchase price of $593 million, subject to customary working capital and transaction adjustments. We also used $275 million of the company's $375 million share repurchase authorization to buy back shares from Carl Icahn and certain of his affiliates. We ended Q1 with a leverage ratio of 3.1x, slightly below 3.3x in the year-ago period, reflecting both debt paydown and normalized EBITDA growth. Before going through the outlook for Q2 and the full year 2022, let me provide some context for the forecast. 2022 is off to a strong start with the implementation of the pricing actions that we've announced driving both top line growth and better margin performance. Thus far, volume elasticities have been below historical levels for most of the categories we compete in. This is something we will continue to monitor and evaluate by category. Within the company's outlook, we continue to assume a moderate level of volume elasticity from price increases. While consumption patterns vary by business and moderation continues in some categories, overall, they remain above pre-pandemic levels. Q1 results as well as the outlook for the balance of the year do reflect a shift in customer order patterns as a result of the ongoing supply chain constraints. This is benefiting the first half of the year at the expense of the back half. Given the recent move in inputs, our inflation assumption for the year has gotten slightly worse as we now expect it to account for about 9% of cost of goods sold in 2022. Going forward, we will continue to act with speed to address both inflationary and supply-related dynamics. We will maintain disciplined cost and cash management and continue to build operational excellence as we accelerate automation and move into the implementation stage of Ovid. Strong Q1 results give us confidence to reaffirm the full-year 2022 outlook despite macro uncertainties and external headwinds. For the full year 2022, we continue to expect net sales of $9.93 billion to $10.13 billion, reflecting flat to 2% growth in core sales and an over 6% headwind from the divestiture of the CH&S business, category exits, closure of some Yankee Candle retail stores as well as unfavorable foreign exchange. This guidance contemplates normalized operating margin improvement of about 50 to 80 basis points versus last year to 11.5% to 11.8%. Pricing, productivity, and mix optimization actions are expected to more than offset a nearly 600 basis point unfavorable impact from inflation, as well as higher investment in advertising and promotion. The normalized earnings per share outlook remains unchanged at $1.85 to $1.93 versus $1.82 in 2021 and currently reflects a mid-teens normalized effective tax rate and a 2% decline in diluted shares outstanding. There's also no change in the operating cash flow forecast of $800 million to $850 million, which includes the year-over-year headwind from the loss of profits on CH&S starting in Q2 and one-time cash tax payment on this deal. Although we have made strategic investments in inventory, our forecast does assume that the cash conversion cycle improves year-over-year. We still anticipate about $350 million in capital expenditures for the year, with the increase versus 2021 reflecting one-time capital costs supporting infrastructure build for Project Ovid. For Q2, we are forecasting net sales of $2.52 billion to $2.57 billion, with low single-digit core sales growth being offset by a greater than 8% headwind from the sale of the CH&S business, foreign exchange, category exits as well as closure of some Yankee Candle retail stores. Similar to Q1, we are assuming some acceleration of customer orders from Q3 to Q2 as retailers look to secure inventory earlier in the season, and we have an Ovid implementation wave planned for early July. We expect normalized operating margin to contract 50 to 90 basis points year-over-year to 11.7% to 12.1%, reflecting a meaningful step-up in advertising and promotion spending during the quarter and incremental inflation. We are forecasting a normalized effective tax rate in the low 20% range and approximately 2% reduction in diluted shares outstanding with normalized earnings per share in the $0.45 to $0.48 range. Newell Brands is a stronger and more agile company today due to the decisive actions we have taken to drive the turnaround and position the company for sustainable and profitable growth. We will maintain strong financial and operational discipline as we navigate through this environment. We continue to see a long runway ahead for value creation.

Let's now move to Q&A.

First question, could you discuss the elasticity you are observing or if it might be too early to assess across the business units and your expectations regarding whether there will be a recession as we approach the second half?

Bill, I'll have Chris comment on elasticity, and then I'll talk about your second part of the question.

So far, the pricing elasticity we are observing is better than what our historical models indicate. This means we are not experiencing the usual volume decline from the price increases we have implemented. This situation is largely due to inflationary cost pressures that are affecting all manufacturers. As we increase prices across most categories, our competitors are also raising their prices. Consequently, there is often no significant price gap that would lead to elasticity. We are still in the early stages of assessing this and are closely monitoring the situation. In the first quarter, pricing was the main driver behind a 6.9% increase in our core sales growth, while volumes remained relatively stable. For the remainder of the year, our outlook reflects some expected price elasticity. We still anticipate that pricing will contribute to core sales growth in the high single digits, while volume is projected to decline in the mid-single digits. We have not altered this perspective for the full year, which aligns with our statements at the beginning of the year.

Bill, so the second part of your question, and maybe I'll expand it, which you may not have intended. But I presume You're really the question is about recessionary conditions, the health of the consumer and the impact. Did I get that right?

Yes, absolutely.

In the first quarter, consumption was lower compared to last year, but we must consider that this quarter was unusual. In 2021, we experienced significant stimulus measures in January and March, which led to substantial consumption growth. For example, Home Solutions saw core sales growth of about 34% last year, with Home Fragrance being a major contributor, exceeding that percentage. Therefore, the consumption figures from last year were extraordinary, making it challenging to compare with this year. Understanding the impact of price elasticity versus stimulus is complicated, but we believe stimulus played a significant role. Moving forward, we must be aware of the challenges faced by lower-income consumers and their shopping channels. However, our brands are well-positioned, as we've worked to create clear distinctions between entry-level, mid-tier, and premium products. This differentiation helps us appeal to a variety of consumers. Furthermore, our advertising and social media strategy is focused on promoting value, ensuring that even with price increases, we convey that we offer great value to our customers.

We have launched numerous innovations that provide uniqueness, demonstrating to consumers that despite our price increases, they are seeking value rather than just focusing on the price point. We believe our offerings continue to represent good value. In various categories, we are experiencing consumption increases in different parts of the world, which we expect to continue as the office channel reopens, allowing us to gain market share. With products like Sharpies and Paper Mate, we are seeing strong gross margins and growing share, leading to a positive outlook. The Commercial sector faced significant challenges last year due to inflation and the office closures, but we are seeing a rebound this first quarter with a 7% growth. I am optimistic about end-users even with the price hikes, thanks to the strength of the Rubbermaid Commercial brand and innovations like Rubbermaid Bret with wheels and new material handling technologies. Our efforts in improving distribution and exploring new channels are enhancing our reach to new consumers. We are also mastering the 360-degree journey of consumers and shoppers in today's omnichannel environment, focusing on how to connect with them from initial interest to decision-making. Overall, while there are concerns about consumer demand, I remain optimistic.

And our next question will come from Wendy Nicholson with Citi.

I wanted to ask about Project Ovid because it's clearly yielding benefits, and it's an important part of your sort of next step towards higher margins. So Chris, are you seeing any challenges in terms of implementing Ovid? Or are there any of the things that you're trying to do? I'm just wondering if the supply chain is getting in the way or if there's any impact in terms of the timing of the savings you're going to generate from that program?

Yes. Thank you, Wendy. This topic is very relevant and a priority, not only for me but for many employees across the company. We are currently in the implementation phase and are largely on track with our original timeline. As a reminder, Ovid is being rolled out in phases. To give you an update, last year we completed detailed design work, and we have now finished the systems testing successfully. We have centralized customer service and our distribution and transportation organization. The implementation of a transportation outsourced provider, which is crucial, is mostly complete. These transitions have been made, and as I mentioned earlier, in early July we will launch the first wave of the Newell distribution company. This will impact the Food, Home Appliance, and Baby businesses, transitioning them into the new distribution company, marking a significant milestone for us. We have made significant strides with most of our retail partners, and we’ve negotiated to harmonize payment terms across the board, moving to a single set for Newell, which will be implemented in July. Our two new distribution centers are progressing well: the new distribution center in Pennsylvania is now open and operational, and the Gastonia, South Carolina center will open this fall. We are indeed in the implementation phase, and as I mentioned previously, this year will be an investment year as we focus on this work. Next year, in 2023, we anticipate that the Ovid program will start delivering cost savings for the company.

Wendy, I would like to add one thing. If we had done Ovid, tried to do Ovid 5 years ago, I think it could have been a disaster. Even 3 years ago, it would have been difficult. Just imagine with our company where we've had 33 separate supply chains, unifying them into one. What we've created is a culture of One Newell. And that is so important to the execution of this. We'll have more than 500 people involved in this project. Chris has done a terrific job leading this initiative. But we've galvanized all the people because they believe in One Newell. We've been able to overcome the silos, and the business units have given up control on the stuff to say, "Hey, we think it's right for the company to have one distribution company. This whole concept of one order, one invoice, one truck is very powerful." So I think looking 10 years from now, people will look back and say, this was one of the most extraordinary decisions you have made.

And our next question will come from Andrea Teixeira with JPMorgan.

I was hoping you could provide more details on the Writing segment and the factors we should expect as we approach your peak season. We've heard numerous reports about supply chain issues globally, especially in China. I know you source some materials from there, but you also source from Mexico. If you could give us an update on that, it would be helpful. Additionally, regarding your second quarter guidance, I understand there are increased market investments, but it seems those haven’t fully translated into the EPS growth we observed in the first quarter for the entire year. I'm trying to connect the EPS guidance with what you've accomplished thus far.

I'll address the first question and then let Chris respond to the second, Andrea. The Writing business had an outstanding year last year with 23% growth, which was fantastic. We're off to a strong start in the first quarter, and our brands, like Sharpie and Paper Mate, continue to perform well. We have a solid lineup of innovations, and more are on the way later this year. This success isn't limited to the U.S.; we're seeing positive results in Europe and Australia as well, with market share increases in various regions. The activities segment is also showing signs of a slight rebound. Overall, the Writing business is robust. With the Office segment now reopening, I expect that will contribute positively, as it represents a significant portion of our business. Retailers are also preparing well for the season, and currently, we don't see any concerning signs; in fact, we have an optimistic outlook. The only area where we face challenges is related to supply chain issues with the Dymo brand due to chip shortages. If we had the chips, our performance would likely be even stronger. However, we're still making strides with innovations, including sourcing a new type of chip. This is the main factor slightly holding us back, particularly in Europe. Otherwise, the situation looks good, and I'm very optimistic about the business as we look ahead to the year.

Yes. Regarding the supply chain, I want to emphasize that our supply chain is facing challenges from the external environment. The issues with China and their Zero COVID policies have impacted us due to lockdowns in Shenzhen and Shanghai, where we source some products. However, as I mentioned earlier, our strategy to build inventory on top-selling SKUs, secure our labor force, and accelerate automation is paying off. We are now implementing Ovid, and we have increased our ocean freight to the East Coast instead of the West Coast, diversifying our shipping routes. As a result, our supply chain is better positioned now than it has been since the pandemic began. Our in-stock rates at retailers have significantly improved, and our fill rates are on the rise. There are still challenges, particularly with Dymo due to a chip shortage, but overall, our supply chain situation is much more favorable than it was during the pandemic.

On the actual Writing business itself, we self-manufacture in the States in Tennessee. While yes, there are always some components that come from different parts of the world, that has been a good competitive advantage for us and it remains so. So that's encouraging us all.

On the question on the guidance, what I would say is that certainly, we're excited about the Q1 results coming in better than we expected. There was a portion of that, that is related to customer order timing being earlier in the season that we think is not necessarily incremental for the year. There is a portion of the Q1 results that was ahead of our expectation, and that would be incremental for the year. On the other hand, we've had incremental inflation that we've built into the outlook for the year of $80 million, as we mentioned. So there are a number of moving parts. We think that the Q1 results give us confidence to maintain the outlook for the year despite the incremental inflation that we're going to incur, which largely is coming in Q2, 3, and 4. We feel good about the outlook, and that's how I would describe where we are from a guidance perspective. The other point I would note is Q1 is our seasonally smallest quarter. Although we started off better than we expected, we're just heading into the big seasonal periods here over the next 3 to 6 months.

And our next question comes from Peter Grom with UBS.

Congratulations on the strong results. I wanted to ask about the core sales outlook. Can you help us understand what you're observing from a category perspective in terms of point of sale? There seems to be significant uncertainty regarding consumer health and its impact on demand for durable goods. Additionally, while ScanData may not have been a reliable performance indicator historically, it has shown a slowdown in the U.S. I would appreciate any insights you have regarding your core categories. Furthermore, focusing on the core sales outlook, is there something in demand that led you to reaffirm your core sales expectations? You mentioned a shift in customer ordering patterns. In the first quarter, you achieved 6% growth, and you anticipate low single-digit growth in Q2. This suggests a considerable slowdown in the latter half of the year despite easier comparisons to achieve the flat to plus 2% range for the year. Any thoughts on this or guidance on the extent of those shifts in ordering patterns would be helpful.

All right. Let me give it a shot. So Peter, look, I think always have in context. Last year, we grew 12.5% core sales growth. Before that, for three years, this is a declining company and 5%, 6%. In those times, people would have said 0 to 2, oh my God, that's great for Newell. At least that's positive that everyone is now saying why only 0 to 2. I take that as a complement. If there's anything that's probably upside, more upside than downside. Having said that, right now, you're right, the first half, but we've had that acceleration, right, and that we've talked about. Then the big question, Mark, is in the second half, there will be a couple of uncertainties: one, will there really be a recession? Who knows? 30% of the people seem to think so. If that happens, what's the impact? The second thing is we now have all the right supplies. We're beginning to get our in-stocks up. People have now built up their inventories. If the pull-through is not there, then how will replenishment go? That's a question mark. So we don't know. We think the strength of our brands will all pull through, and we're optimistic. But we think where this guidance we're giving is prudent especially because of not just the first quarter but also second quarter, remember, because of COVID, we said there will be a little bit more and also just the seasonal side. I think that really is how we're thinking about the first half and second half. The second question about consumer demand really varies. The most encouraging thing is that compared to 2019, we are seeing double-digit growth across all our businesses. This indicates that Newell's brands are truly stronger and that the growth is not just a pandemic phenomenon, which is a positive sign. However, in certain areas like home appliances, after years of decline, we experienced significant growth in the latter half of 2020 and double-digit growth in 2021. We do anticipate a potential slowdown in some categories such as toasters and coffee makers since there’s only so much consumers can buy, but we're innovating with new products like iced coffee, frappes, and espresso. For Home Fragrance, while last year's high consumption is challenging to match, we believe the brand remains strong. Factors such as increased mobility and mental health issues have people wanting to burn candles, and we're also entering the diffuser market with innovations from our Yankee Candle line and our well-being collection. Innovation is key, and with targeted smart marketing and social media strategies, we aim to reach the right consumers and improve conversion rates. Currently, consumer demand is uncertain, but in several categories like food, we expect to benefit during a recession because people will likely eat out less, leading to more meals at home. This trend supports products like food savers and Rubbermaid, which performed well in the first quarter. The commercial segment remains strong as well. Overall, I feel optimistic and believe our guidance is prudent, taking into account both the first and second quarters.

And our next question will come from Kevin Grundy with Jefferies.

Great. Congrats on the strong results and the tremendous progress that you guys have made with the organization; it's been remarkable. Congrats on that. A couple of questions for me. Chris, just on the guidance, which I think collectively people kind of view as conservative, which is understandable given the environment. But you did say commodities move higher, so that's probably about $0.15. What implicitly, I guess, is better because you guys are kind of seemingly sitting tight with everything else? So maybe just comment on that. And then, Chris, just with respect to buyback, sort of setting aside the unique buyback with your largest shareholder around the proceeds. Maybe just outline again a little bit on timing. It seems like there's a strong argument to be made that you guys could be moving sooner than later, very positive on the business. The results are good. The balance sheet and free cash flow are much, much better. The margin opportunity is enormous, particularly in a more stable sort of cost environment. That you kind of pull that together for stock trading at 10x EBITDA, like why the decision not to lean in now when the stock could be materially higher if you deliver on what you think you can do? So your comments there would be helpful.

Very good. So let me start with inflation. So you're right, the incremental $80 million of inflation that we've now baked into the outlook. We've been offsetting that through three things or plan to offset that through three things. There's some selective incremental pricing that we plan to put in the market this year that will cover a portion of it. We also think that we have an opportunity to optimize particularly promotional spend, which is another big lever that we're seeing an opportunity to partially offset. The third piece is we are doubling down on the opportunity to drive more overhead cost savings. Therefore, those three elements we see upside in that basically are being used to offset the incremental inflation, which is allowing us to hold the outlook for the year. That's what's baked into the plan. Regarding the buyback, we authorized $375 million as part of the CH&S divestiture. We repurchased $275 million in the first quarter and executed a 10b-5 program in April, purchasing an additional $50 million that month. We have $50 million left, which we aim to complete before the year ends. Our cash flow tends to be stronger at the end of the calendar year due to seasonal business patterns, so we anticipate generating good cash flow. We plan to complete the additional share repurchase program this year and will look for further opportunities as we approach year-end.

Thank you. A replay of today's call will be available later today on our website, ir.newellbrands.com. This concludes our conference. Thank you for your participation. You may now disconnect.