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 yourselves 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 ir.newellbrands.com. I will now turn the call over to Sofya Tsinis, VP of Investor Relations. Ms. Tsinis, you may begin.
Thank you. Good morning, everyone. Welcome to Newell Brands' second quarter earnings call. On the call with me today are Ravi Saligram, our CEO, and Chris Peterson, our President and CFO. Before we begin, I'd like to inform you that during the course of today's call, we'll 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, and other SEC filings available on our investor relations website for 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 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 our team. We delivered balanced performance across core sales and normalized operating margin in a difficult environment as we remained laser-focused on driving sustainable and profitable growth and operational excellence. For the quarter, core sales increased 1.7%, 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 in normalized operating margin, which is excellent performance. Q2 was the eighth consecutive quarter of core sales growth for Newell Brands.
This is 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, although this was less meaningful than we initially anticipated, given retailers' increased focus on rightsizing their inventory levels. Core sales increased year-over-year across four of our seven business units as growth in commercial, Writing, Baby, and Outdoor and 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 businesses as some, such as Writing and Commercial, are benefiting from the reopening activities, while others, such as Home Fragrance, Home Appliance, and Food, are in challenging parts of the cycle due to elevated levels of demand during the pandemic and prior year 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, and Rubbermaid Commercial Products, and 11 of our top 20, which included Elmer's, Campingaz, Contigo, NUK, and Mr. Coffee. The strength of our brands has enabled us to take pricing actions across our businesses to help mitigate the impact of inflation.
Looking at the geographic results, core sales increased across each of Newell's major regions. International markets grew 2.9%, 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 Ukraine. While it's early days in our journey to turbocharge international, we are actively analyzing ways to best leverage existing Newell 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 was gearing up for the back-to-school season. The top-line momentum remained strong, and Writing 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 and continued recovery in the commercial channels as more employees returned to their offices. We did see a shift in retailer back-to-school orders into the first half as some customers decided to set their shelves earlier. Although we remain enthusiastic about the back-to-school season, we believe the shift in orders to the first half will unfavorably affect the third quarter. We are focused on ensuring we're in 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 of the year, driven by Baby care. A slight shift in shipments from Q3 to Q2 ahead of Project Orbit implementation helped this quarter. As anticipated, the category is softening modestly against unprecedented growth in 2021.
Given the essential nature of this category, parents and caregivers continue to show the willingness to invest in gearing up for babies and keeping their children riding 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 Turn2Me and Baby Jogger City Turn, are off to a very strong start. Commercial was our top-performing business unit in Q2. This was 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 our major categories, with the exception of disposable gloves, which continue to moderate relative to elevated prior-period levels. Strong price realization, along with improved product availability, return to offices, and improved mobility, all contributed to the excellent Q2 performance.
Despite the disruption to some of its verticals throughout the pandemic, the commercial business boasts a strong track record of consistent top-line delivery. Its core sales grew during nine of the past 10 quarters, as the team has been quick to adapt to evolving trends and has leveraged the diversity of the portfolio, which serves both B2B and consumers. In Food, core sales were below last year's elevated level as sustained strength in our fresh preserving business was more than offset by softness in other categories, particularly cookware, which along with others, continued to normalize relative to the pandemic peak. We're in the process of restaging some of our Calphalon products with exciting new offerings providing superior non-stick cookware. While tough comparisons due to pandemic-related surges in demand are impacting quarterly results, the food 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 occasions relative to pre-pandemic levels, with hybrid work only accentuating this behavior, increased investment in gardening, heightened propensity to buy food in bulk and find ways to avoid food waste. Our 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 surged, 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 levels and was further constrained by broad-based inflationary pressure on low-income consumers.
Although the business was down in Q2, core sales grew relative to the pre-pandemic level. We expect the Home Fragrance category to remain challenged in the near term due to both difficult comps, albeit below first half levels, as well as softening macros. We're focusing 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. Core sales grew on a three-year stack basis. The appliance category is expected to continue to normalize relative to 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 of Mr. Coffee.
Coffee Iced + Hot and Frappe 3-in-1 have 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 Oster's leadership position across many markets. The outdoor recreation business lagged 25% core sales growth a year ago and still delivered a 2.4%-2.5% increase this quarter. Growth in outdoor equipment across the international markets was complemented by continued post-pandemic recovery of the beverage business. Accounting for the shift of some retailer orders into the first quarter and assuming that inflationary conditions impact purchase 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 and Writing businesses are on a very solid footing, and we are leaning in. We're particularly encouraged that our swift and decisive actions to alleviate the significant impact of inflation through initiatives such as pricing and FUEL productivity, have enabled us to maintain gross margin in the second quarter. This is 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.
There is 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 is pressuring shoppers' 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 pullback in consumer demand has been more acute than initially anticipated, and we are pivoting our plan of action accordingly. Strengthening of the dollar has been another key development in the past few months, presenting a significant challenge both on top and bottom lines relative to our initial forecast. We're 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 previously declared 2022 a year of margins, and that is the outcome we've been driving forward towards. In fact, during the first half, Newell Brands' normalized operating margin expanded 70 basis points, which was ahead of our expectations, mostly due to stronger overhead cost management. With the recent appreciation of the US dollar, we expect an unfavorable transactional impact and as a result, we are adjusting our margin outlook for the year accordingly. Importantly, there 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 are equally focused on navigating the difficult macro backdrop and simultaneously executing on our strategic priorities surrounding driving the top line innovations and mastering the 360-degree consumer and shopping journey, driving margin improvement in spite of significant inflationary and currency headwinds, turbocharging international, enhancing customer service levels, and transforming our supply chain through Project Ovid and automation, and strengthening the one Newell culture and building on our employee engagement 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 backdrop while building competitive advantage and driving operational excellence. We remain committed to unlocking and realizing cost savings opportunities across the organization while driving top line.
I'd like to express my gratitude to our employees whose resilience, hard work, passion, and commitment pave the way to a bright future. I continue to believe that our best days are ahead of us. Onwards and upwards. 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 challenges. Before discussing the details of Newell's quarterly performance, I wanna provide an update on the current operating environment and Project Ovid. While we continue to face elevated levels of inflation, the outlook on cost 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 to 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 in businesses such as commercial and Writing, where we are experiencing strong growth, and we are maintaining appropriate inventory levels in 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 on 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 Ovid. We are very pleased to share that we reached a significant milestone in Newell's transformation journey. On July first, we successfully implemented the first wave of Project Ovid. 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 a successful implementation of the cutover. Project Ovid is instrumental in empowering the company to improve customer service, optimize transportation cost, mitigate the external pressures of port congestion and supply bottlenecks, better enable omni-channel 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 6.5% year-over-year to $2.5 billion as core sales growth was offset by the impact of the sale of the CHNS business at the end of the first quarter, unfavorable foreign exchange and category and retail store exits. Core sales grew 1.7% 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 Ovid 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 and FUEL productivity savings offset a nearly 700 basis point headwind from inflation and foreign exchange. The sequential improvement in Newell's 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 $0.57 versus $0.56 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 8.5% as the business lapped 33.7% growth a year ago. Both the food and the Home Fragrance businesses posted lower core sales against challenging comps. Core sales for the learning and development segment increased 5.7% on top of a 31.6% comp, with growth in both the Baby and Writing businesses, notwithstanding tough compares.
Core sales for the Outdoor and Recreation business grew 2.5% on top of 25%, its toughest comparison of the year. Moving on to cash flow and balance sheet. 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 Ovid implementation. We believe that the company's inventory position peaked in the second quarter. While longer lead times and other supply chain challenges have warranted higher than normal inventory levels in recent quarters, we are planning for a 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 enable the company to de-lever from the 3.4 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, gas, and housing constrains discretionary spending. We expect more dynamic customer order patterns even though most of Newell's businesses are at 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 end, adjust to the current realities. While we expect greater normalization across businesses that disproportionately benefited during the pandemic, particularly Home Fragrance and Home Appliances, we also anticipate stronger performance across the commercial and Writing businesses that are recovering with improved mobility. We are taking decisive actions to address the macro changes, including accelerating efforts to drive Fuel productivity savings, tightly 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 are the euro, Japanese yen, 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 is about $0.10 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-$9.98 billion, which incorporates flat to 2% core sales growth and a nearly 8% headwind from the divestiture of the CHNS business, foreign exchange, category exits, and closure of some Yankee Candle retail stores. This guidance contemplates normalized operating margin improvement of about 20-40 basis points versus last year to 11.2%-11.4%. Recent strength in the dollar is pressuring net sales and normalized operating margin by more than $150 million and about 30-40 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 CHNS in both years. We are updating the normalized earnings per share outlook to $1.79-$1.86 versus $1.82 in 2021, including a tax rate in the low double-digit % range and approximately 2% decline in diluted shares outstanding. We are also revising the operating cash flow forecast to a range of $700 million-$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 Ovid early next year.
For Q3, we are forecasting net sales of $2.39-$2.5 billion, including core sales decline of 1%-5% and an approximately 9% headwind from the sale of the CHNS 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 unfavorably impacting core sales this quarter by a couple of points. We expect normalized operating margin to contract 40-70 basis points year-over-year to 10.7%-11.0%, reflecting a year-over-year increase in A&P-to-sales ratio as well as deleveraging impact on overheads and sequentially stronger gross margin performance.
We are forecasting a normalized effective tax rate benefit in the mid- to high-single-digit % range and approximately 3% reduction in diluted shares outstanding and normalized earnings per share in the $0.50-$0.54 range. We are confident that the strong financial and operational discipline we have 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, let's 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. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, it is star one to ask a question. 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 sell-in and any major disconnects there and where they're the most acute and how long you think that'll last. Obviously a few of your retailers are not necessarily in the best spot right now. Have you changed any of your practices on the more challenged retailers? What are you factoring in for them in the second half? Thank you.
Good morning, Olivia. Let me start on the consumption side. Recognize, of course, last year consumption was very robust, and we have in the first half of this year seen some softness in consumption. Though as we're going into July, we're beginning to see some pickup and thanks to a great Prime Day that happened. There 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, are some of the ones that are having some consumption issues.
I think, look, there is gonna be, I think as we work through the inventories and what 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, the second 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, we actually had low in-stock levels, and we're trying to get them up, and it varies. In most cases, we're kind of still at their targets or maybe slightly below. We're working hard on that.
I don't think for us, notwithstanding all the headlines you see on general merchandise, in terms of our own businesses, in fact, when you think about Writing and stuff, we've been working hard to provide the retailers. As you know, there was that shift a little bit from Q3 into Q2. That aspect has not been as much of an issue. Look, we do get caught up because even though it may not be us, because they're looking at overall inventories, including competitors, et cetera, so we could get caught up in that aspect of it. That's sort of the view that I have. Look, the fact of the matter is we're off to a great start on BTS. Our commercial business is on a real roll.
Food, while the first half has been a bit challenged, part of it was really kind of our out of stocks and so on. We expect some pickup there as well in the second half.
Great. On the flip side, some of the offsets 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 Ovid. It sounds like it's progressing quite nicely. Any color in terms of the plans in July with respect to the three businesses that are impacted? If you could just update us on sort of the path forward on the Ovid-related things for the remainder of the year, that'd be great.
We passed, as I mentioned in the prepared remarks, a major milestone, going live with our first wave of businesses into our single legal entity on July first. Frankly, it's gone dramatically better than we expected and were planning for. We've seen, as we shut off the old system and turned on the new system, very minimal to no issues with regard to our ability to receive orders, process orders, ship products. Our facilities have come up to speed faster than we expected. Perhaps most importantly, one of the big parts of this program was going and working with our retail customers to harmonize payment terms and transportation terms.
In many cases with retailers, we were going from 30 different sets of payment terms or 25 sets of payment terms down to one set of payment terms. We've completed that negotiation process with all of our top retailers, and the vast majority of them are now ordering. In many cases, we've shipped products on the new system and collected receivables at the same time. I think we're very excited about it. I think it's a testament to the hard work that the teams have done and all of the system integration testing, the day in the life testing that I had mentioned previously.
I think it sets us up well for the remaining businesses to come on to the legal entity in early 2023. With regard to the financial impact, as we've mentioned previously, this year is gonna be relatively neutral on Ovid versus last year, and we expect the savings from Ovid really to come in 2023 as we get
Fully into the new model. We remain very much on track with that.
Our next question comes from Peter Grom of UBS.
Hey, good morning, or 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 the inventory dynamics, you know, changes in demand, et cetera. Can you just comment on your comfort or degree of flexibility in the guidance, you know, should demand deteriorate from here?
Let me kick it off, and then Chris can add. Peter, I think sometimes there is a little misunderstanding about our business thinking that everything is discretionary. We actually have really essentials in every day in terms of the Baby businesses. There are lots of things in Writing that are needed from a school standpoint. We've got a whole business on commercial where it's, when it's other than certain cycles, it's really back on track as the economy is opening up. I would say, other than to me, 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, and they were using a lot of candles.
They're now working their way out of that, so I think that's been there. Then on Home Appliance, clearly, there was some acceleration of consumer purchasing because of the stimulus and so on. By the way, that happened a little bit on candles as well with the stimulus. Some low-income consumers came into the category, and we'll probably not get some of those people back. With the long purchase cycles in Home Appliances, it'll be difficult. I think we've got Writing that is doing very well with sales continuing to be strong. Then we've got a lot of innovations coming out in the food business. We've got the whole DuraLite from Rubbermaid coming out that I think we should do well.
Our fresh preserving is doing extremely well. There's been a whole emphasis, the marketing teams have shifted to a value story. When you look at FoodSaver, for instance, we've just introduced a $99 appliance in one of the leading club chains, and we think that's gonna do extremely well. We've looked at sort of FoodSaver rolls and said, "Hey, we got consumer input that we were giving too much," and we've reduced that and got the price points down. We think that is going to have a positive impact. Bonus packs on things like Sistema. We're looking at BOGOs on Contigo. I think that value message is also going to stimulate consumption.
We feel, and when you look at the first half, where we had 4% growth on top of a very challenging comp of about 23%. The second half and the second quarter, we're taking into account what's happened with the shifts. I'd say that the guidance we've given is appropriate.
Yeah. 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. We had largely factored 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 and Commercial are doing better than we expected, and Home Fragrance and Home Appliances are normalizing a little faster than we expected. 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. Then I guess just on Writing, can you remind us of the normal replenishment cycle or when you would have visibility on replenishment orders for back to school? I guess the reason I ask is, you know, some of the inventory dynamics discussed at retail, you know, seem to have resulted in fewer replenishment orders in certain categories, but, you know, largely in some of these seasonal items. You know, just any commentary on that and then what you have embedded in your guidance for the third quarter around replenishment.
Yeah. Look, it's too early. We are right now in week three of BTS, and what we are seeing is positive, but it's too early for replenishments. I think that's really more late August, September that you start seeing that. Chris, do you have anything you wanna add there?
No, I think Ravi is exactly right. The only thing I would say is that and then Ravi mentioned it in his prepared remarks, is recall that retailers did order Writing earlier this year, and so there will be a shift from Q3 into the front half of the year that will disproportionately affect the Writing business in Q3, because we shipped a lot of those back-to-school display volumes in Q2.
All right. The business itself is very strong, and we're very happy with the performance and the brands are remaining strong and share positions are good.
Our next question is from Andrea Teixeira of J.P. Morgan.
Thank you. Good afternoon. I just wanted to follow on the inventory level, but at retail, I'm assuming with Project Ovid, you had to work with your retailers to set them up and make sure that they had enough inventory. Of course, you know, the fill rates that you worked since the beginning of the whole issues with transportation from Asia, it worked at your advantage. I do remember that being one of the strengths in your results. I was just hoping to kind of reconcile all of this and think about what I guess the retailers had talked about reducing inventory, some of the discretionary items.
Just thinking about the camping season, also the outdoor business, like trying to help and just on Peter's question in terms of like the back to school, is there anything that we should be aware of this pull forward that we are now gonna see the benefit in the third quarter? Anything you can help us kind of understand how we should be thinking of inventory and sell in, sell out for those categories that benefit from the reopening. Thank you.
All right. Thanks, Andrea. Let me try to give it a shot. We monitor weeks of coverage at all of our major retail customers, and we get the data, generally on about a one-month, you know, one-month lag, you know, depends on which retailer. We can see exactly how much of our product is at retail. 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, because we're still supply constrained, and we're still catching up.
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 is sort of the first point. We do monitor it very closely. It doesn't mean that we couldn't 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 takes an inventory action. 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 get caught up in something that a retailer does.
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. You know, that's what I would say broadly about our inventory levels.
In terms of the back to school, that's super helpful. The back to school also we don't need to worry about those dynamics, I'm assuming.
Now, back to school is one of the ones where we probably have too little inventory at retail. What I mean by that is the customers have ordered the displays earlier, and that's 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, and we're off to a good start. We are supply constrained on replenishment orders. 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, I think you touched on some of this. 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 productivity, particularly versus last year where you guys held the line and even raised EPS guidance what was a difficult environment, understanding the operating leverage was certainly better. Within that response, Chris, maybe just comment on the transactional effects from FX, which seem to be larger. That is to say, you know, about 3x the impact on top line.
I have a follow-up on buybacks. Thanks.
Okay. Let me try to tackle them one at a time. On margins, I think that we've talked a lot about the dynamic of pricing and fuel productivity savings offsetting the impact from inflation and FX and 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. 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.
A&P as a percent of sales is planned higher in the back half versus year ago, because in the year-ago level, we were frankly not spending a lot of A&P, primarily because we were so supply constrained. I think the other thing that's 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 one-time in nature type of thing. Very much on track for the year. That's sort of where we are on margins. The new news on margins.
All of that together has us guiding operating margins up versus last year on the full year 20-40 basis points. I think the new news on margins is really the FX impact. As I mentioned, the FX impact is really because the Japanese yen has 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 more aligned to the U.S. dollar because of the renminbi.
As a result, we actually have a bigger transactional exposure than many other CPG companies that have regional sourcing. The adjustment that we made of the 30-40 basis points to our operating margin guidance, versus the beginning going into the year plan is really entirely explained by the change in transactional FX that we see playing out. It's not an underlying issue with regard to our pricing plans or our pure productivity savings. 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 first.
It'll be more of a next year impact than a this year impact.
Got it. Thanks for all that, Chris. That's helpful. Just one quick follow-up. Just updated thoughts on share buyback. You expressed some openness, the board seems certainly open. The stock is in sort of deep value territory. Ravi, you made comments on perhaps a misunderstanding about more the defensive nature of the business. That being said, this is when within the context of sort of a 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're sort of weighing that within all of these variables, then I'll pass it on. Thank you.
Very good. Yeah. We, as you know, when we sold the CH&S business, the board authorized $375 million of share repurchase. We've 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 typically are a back half cash generation company, because of the seasonality of our business. We're expecting to generate a significant amount of operating cash flow in the back half of the year. We will evaluate when to deploy the $50 million of 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 at 30% type rates of return is what we're looking at for CapEx. Beyond that, we pay a very good dividend of $0.92 a share, which we expect to maintain. Then we expect to generate cash beyond that, which we will look to return to shareholders through share repurchase or consider tuck-in acquisition. 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 winner for us to reenter that strategy.
Our next question comes from Bill Chappell of Truist Securities.
Thanks. Good afternoon.
Hey.
Hi, Bill.
Most of us on the call have listened to, I guess, P&G this morning talk about the U.S. consumer seeing not that, you know, being very healthy to Church & Dwight saying we've seen trade down happen kind of across the board. Putting that in context with kind of your comments for the second half of the year of expected low-end consumer to be under pressure and maybe some trade down, is that based on what you're seeing right now? Or is that just based on, you know, reading what economists are calling for a recession or, you know, an expectation and which is understandable. Just trying to understand what you're seeing versus what you're expecting.
Yeah. Bill, on losing out a tranche of the lower income consumers, that we are definitely seeing on the Home Fragrance business. We've done a lot of modeling and a lot of the work, and that is clear. That is probably a more discretionary purchase. Also the stimulus really bounced up, so we're able to track and see that a lot of new consumers came in, and we've lost them. That is definitely something we're seeing. On the trade down, yeah, there's different types. One of the interesting hypotheses to say, losing to private label. We're not seeing that in the main, with the exception of, again, Home Fragrance. Look, in Home Fragrance, the private label is a lot of the own brands from the big retailers.
Aside from that one category, even in Rubbermaid, 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. I'll give you two examples. One where, with sort of Baby car seats, which is a price sensitive segment, there is sometimes a shift to kind of the lower, the value brands, if you will. Some of that we tend to see. Because the power of our brands, like, we're holding our own with the innovations. That's one we have to be careful. We are very targeted and because we've put a MAP policy in, when we do promote, we're very targeted, and we see big surges.
For instance, on Prime Day, we saw like four car seats sell per minute of Graco. We're understanding the sensitivities and being very laser focused on when we promote. The other side of trade down, we're also being the beneficiary, like in specialty retailers on outdoor, for instance. Where we are kind of more the value brand with Coleman, we're actually getting the benefits. For the first time on some of these specialty retailers, we're being included for 2023 on some of their big promotions and so on. That's what we're seeing. Our thoughts are based on what we're seeing. I'm always in the markets with my teams trying to check stores and looking at behaviors. That's sort of the quick view.
The only thing I would add is that I think our guidance contemplates a further softening of low-income consumer, so to your point of what we're seeing versus what we're expecting. 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 wanna get in a position where we're overbuilding inventory. 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 we wind up at the end of the year in a good inventory position, and we don't carry over excess inventory as we go into next year.
On that bet, one pivot that we've made as a company is really with all our views focused on value, value. In marketing messages, in search terms, in product offerings, in promotions, it is all about trying to demonstrate the value. The value is not just low price, but it's really about, A, the great quality that we have, but combined with making it attractive for them.
No. I appreciate that. To just follow up on Writing, it's where do we stand, or where do you expect us to be at maybe at year-end versus 2019 levels? I mean, it's tough to tell back to school. Are we back to normal, back to work? We're clearly not 100% back to normal. I mean, is there an expectation you're gonna see a surge as we have kind of the most normal fall we've had in years? You know, how do you look at that versus 2019, this year and even going into next year?
Yeah. I would say I have a very clear answer on that, Bill, which is the Writing business is going from strength to strength as the offices are opening up. Even though it's just hybrid, we're seeing the momentum and momentum with Staples and Office Depot as well versus our regular customers on Walmart and Amazon, et cetera. I would say that we would definitely be on the positive side of the ledger versus 2019. With all the innovations we are driving, that we've got some new activity based stuff that we're driving in Q4, and with Sharpie S-Gel, that has been a knockout success. Paper Mate doing very well. I feel, you know...
Look, in the future, one other thing, as soon as we overcome the chip shortage on Dymo, I think that'll be another great item. 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 was a historically high margin delivery in the quarter. Anything atypical there? Are we reaching new thresholds from which to improve going forward? Similarly, in the home solutions segment, kind of historically low margin, is that just about, you know, sales deleverage. Just a quick follow-up.
Say it again, Steve. I'm sorry, say it again, Chris. The Home Solutions margin I got, I missed the first part.
Learning and development historically high. Anything atypical in the quarter or is that something that you see as sustainable going forward?
Let me take both of those because you're right. Learning and Development, I think, was a function of really strong top-line growth across both Writing and Baby, strong field productivity savings that we're driving, and that translates through into margin improvement in that business. It is sustainable, I think, 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 top line normalizing. There was some higher A&P spend because of that as a percent of sales because of the top-line slowdown.
There was also some gross margin being down as we started to right-size the supply plan, and we started to get some fixed manufacturing cost absorption issues on that. 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 a bit more big picture, hopefully not too big of a question, but, you know, I guess, you know, the challenge for the stock in a way is that results are good and resilient, yet the overhanging is on this general merchandise and the lack of, you know, visibility on the demand environment going forward. I guess I'm trying to maybe get a sense of what you might define as success if the demand environment, you know, significantly changes something that's, you know, outside of your control. It's pretty clear that you're looking at tightening 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 big picture, right?
Like, if the demand environment continues to soften, you know, how are you positioning yourself or what is the right way to look at, you know, successful execution, you know, for this business on this curve? I realize that's a big question for, you know, the end of the call, but, you know, 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 demand. Thanks for that.
I'll give a quick one, and then Chris can add to it. Look, I think these periods are where you have to walk and chew gum at the same time. One thing Newell has demonstrated, starting with the turnaround, then COVID, then supply chain challenges, then 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. We recognize that the environment's tougher, but look, part of it is just being quick and agile on pivots. On the top-line side, it is pivoting to really, how do you make sure that the consumers continue to see the value and continue to drive our innovations. We'll continue to do that.
As we declared this year again was the year of the margins, and we're continuing to, despite everything, we've still guided that we'll be higher on operating margins. We're gonna continue to be very focused on that. Long term, we are very determined to get the gross margin right and get it up. I think we've got to do both. If there's one focus, it is. We've got Ovid, which is going to be a real help for us, as Chris pointed out, in 2023. Finally, we're gonna continue to generate cash, which gives us flexibility. Chris already outlined the uses of it, so I don't want to repeat it.
This is where the power of the portfolio, and it's, yes, a little misunderstood portfolio, thinking everything is discretionary when it's not, but we're gonna continue to. I think our actions and results will speak for themselves. Finally, I think hopefully investors will say, "This is a company poised to continue to drive long-term shareholder value.
The final question today comes from Steve Powers of Deutsche Bank.
Oh, hey. Thanks. Thanks, guys. It's late in the call, so my questions are more clarification on the back half outlook. And there's three of them, but they're quick. Number one is just I wanna be clear what you said, Chris, on the gross margin trajectory. I think you said that there'll be improvement in the back half and sequential improvement in the rate of year-over-year change. Just wanted to clarify that, number one. Number two, I got the guidance on the tax benefit in the third quarter. I don't know if you called out exactly what's driving that just for explanation purposes. That'd be helpful if there's an easy answer.
Then lastly, on cash flow cadence, just, is there a bias to having more of the cash flow come in 3Q versus 4Q or different? I guess I interpreted your comments as more 3Q versus 4Q as you allow for the additional inventory build ahead of Project Ovid rollout. Just any clarity there would be great. Thank you.
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 100 basis points versus year ago in Q1, we were flat in Q2, and I'm expecting gross margin to be up versus year ago in the back half. That's the answer on that one. The tax benefit that we're guiding to in Q3 is a one-time discrete tax benefit from a tax project that we're working on that we expect to implement in Q3.
That is a sort of one-time discrete tax benefit that we've got a high degree of confidence that we're gonna execute in Q3 and felt like it was appropriate to reflect it in the guidance. On the cash flow, I think you're likely to see the cash flow be larger in Q4 than in Q3, and part of that has to do with the timing of shipments and the timing of collections. Typically, that's the case for Newell, and I expect this year to sort of follow that same trend. I do think that you'll see Q4 be a significantly larger cash flow quarter than Q3, but I'm expecting Q3 to be positive.
That's helpful. I know we're at the end, but just on the tax, 'cause I've just gotten a couple people ping me on it. What's the right normalized kind of long-term tax rate? We've talked in the past about sort of encroaching upon 20%, but with discrete benefits over the next couple years, you know, keeping you below that range. Is there any way to better describe sort of normalized tax and the cadence to get there? 'Cause it is a question that's topical right now.
In 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. They don't all come sort of in a linear fashion. I think in the past I've said that a normalized tax rate for this company, excluding discrete items, might be around 20%. I actually think that number may wind up being a little bit below that now, if I were to think about it. I'd 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. We thank you all for your participation, and you may now disconnect.