Q3 2020 WD-40 Co Earnings Call
Ladies and gentlemen, thank you for standing by welcome.
Welcome to the WD 40 company third quarter fiscal year 2020 earnings Conference call. Today's call is being recorded at this time, all participants are not listen only mode.
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Like to turn the conference over to your prison.
For today's call Ms., Wendy Kelly director of Investor Relations and corporate Communications. Please proceed. Thank you good afternoon, and thanks to everyone for joining us today.
On our call today, I WD 40 companies, Chairman and Chief Executive Officer, Gary Ridge, Vice President and Chief Financial Officer, Jay Rembolt, and President and Chief operating Officer, Steve Fresh.
In addition to the financial information presented on today's call. We encourage investors to review our earnings presentation earnings press release and form 10-Q for the period ending May 31 2020.
These documents are available on our Investor Relations website at Investor that WD 40 company Dot com.
A replay and transcript of today's call will also be made available at that location. Shortly after this call.
On today's call, we will discuss certain non-GAAP measures, but descriptions and reconciliations of these non-GAAP measures are available in our SCC filings as well as <unk> earnings presentation.
As a reminder, today's call includes forward looking statements about our expectations for the company's future performance of course actual results could differ materially.
The company's expectations beliefs projections are expressing good C.
There could be no assurance that they will be achieved all accomplished.
Please refer to the risk factors detailed in our FCC filings for further discussion.
Finally for anyone listening to a webcast replay or reviewing a written transcript of this call. Please note that all information presented his current only as of today's date July 9th 2020.
The company disclaims any duty or obligation to update any forward looking information, whether as a result of new information teacher event or otherwise.
With that I'd now like to turn the call over to Gary.
Thanks Wendy.
Good day, and thanks for joining us for today's conference call.
Hi, Steve when do you know I once again dialing in from our respective huh.
We hope you in your families and staying safe and healthy and these on pretty good times.
I am so grateful for the highly engaged try we habit WD 40 company.
As a global business that operates in 176 countries around the world.
Each of allocations has been impacted by Cobiz 90 different ways, but one thing you said.
I tried members everywhere adapted quickly to an unparallel situation.
True considerable effort and ingenuity to try this demonstrated agility and innovation quickly, making dramatic changes to how we conduct business.
This has enabled us to hold there right this quarter, even when confronted by extremely challenging circumstances.
Well I tried to being able to delever during these volatile oil and I'm certain car.
Has reinforced to me the importance of a highly engaged workforce.
On a completely different topic I'd like to take a mine to share something that has been on everyone's mind.
WD 40 company has a long history of doing the right thing as it relates to how we conduct ourselves, but we typically refrain from speaking publicly about social well political issues. Because we have tried members in 16 countries, which span range of political structure. It's initially length.
We religions and cultures. However, we want ask stakeholders to know that racism runs counter to if we think we teach.
And the senseless acts of racial injustice to continue to play get will both Rome and deep Lisa.
At WD 40 company, we celebrate a quality diversity and inclusion.
And while these things are central to our culture and how we operate there was always room for improvement to that end, we're listening learning and reflecting and evaluating how practices protocols and initiatives to find ways, we can make a meaningful impact.
We expect to share how continuing efforts and focus on part of question the series of diversity.
You should read that stakeholders you know initial Iasci report that we expect to file in October 2020.
Given the disruption and disturbances that 'cause it 19 has cost for the past several months, we have a lot to cover today.
For most Abbas candidate has touched every aspects of their lives in has created challenges beyond anything we'd experience.
Often heard me say that physical awareness and mental awareness or simply said, making the end use aware of the value out products still do by inviting them easy to bite you have multi country multi channel distribution strategy is the core to ask success.
Well, we have the easy to buy like in E commerce, and certain countries and trade channels that have not been locked down due to coded 19, we performed very well in this quarter.
To the country in geography with strict movement restrictions in place all places, where our ecommerce businesses less developed asked styles mature.
Today.
We reported net sales of 98.2 million for the third quarter fiscal Twentytwenty down 14% compared to the third quarter of last year.
This decline was primarily due to disruptions related to the coded daunting pandemic.
A few minutes, Steve will discuss in greater detail the impacts that kind of that 19 pandemic have had on our individual segments, particularly those with the strictest locked out measures in place during the third quarter.
Translation about foreign subsidiaries results from their functional currencies to the U.S. dollar had an unfavorable impact on sales this quarter on a constant currency basis sales would have the 100.5 really didnt say cool.
That's a global health crisis is not over yet I.
I do believe we have maneuver through the immediate crisis very well.
The test has not been just simply get through this period, but to stabilize the business in such a wide that we can reset and thrive in the future.
We've always had a very clear strategy with very clear targets enabled by culture.
What this crisis has required us to do is pools reset and become even more laser focused on how we will achieve growth aspirations.
As a reminder of growth aspirations, a guide posts on cadence and that probably wrong and roughly right.
Growth aspirations to drive consolidated net sales to approximately 700 million and to do that wall following out.
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Because of the uncertain global economy ahead, the talking about growth aspirations I still unclear.
We hope to be able to provide an update to investors on outbreaks aspirations later this calendar year.
I want to strategic initiative number one.
Which is to grow WD 40, multi use product.
Goal under this initiative is to grow WD 40, multi use product to approximately 513, maybe did revenue.
In the third quarter silence of WD 40, multi use product was 71.7 million down 19% compared to last year.
The decline in WD 40, multi use product was driven primarily by 30% decline in southeast EMA jus to the significant locked down measures adopted by many countries in the region in response to the code 19 pandemic.
This decline was additionally impacted by lower solves a WD 40 multi use product.
In both the Americas, and Asia Pacific, which declined 11, and 13% respectively due to the impacts of kinda did not see.
As the Blue and yellow brand has evolved we have focused on ways to premium wise that delivery systems delivery systems like Smart school have been so successful because in uses a lot of the convenience and the value they didnt.
I'm very excited to share with you that our latest innovation smart straw next generation, which has the ability to be sold with or without a tool box friendly lucky capability has arrived on store shelves in Canada.
Smart store next generation has a more durable easy to spray actuator and will create a better end user experience as we have shared with you in the past our objective is to grow smartcycle penetration to 60%.
WD 40, multi use product local sales, Canada is leading the way and launching Smartstrand next generation and we will begin to ramp up how conversion efforts globally next fiscal year.
[noise] strategic initiative number two is to grow WD 40 specialist product line.
We remain optimistic about the long term opportunities for WD 40 specialist and believe we can grow the product line to approximately a 100 million revenue in the third quarter South of WD 40 specialist remained relatively constant compared to the third quarter of last year, which we view as a we need these challenging times.
The stability is primarily attributed to a 28% increase in WD 40 specialist sales in Asia Pacific much of which was driven by strong sales in China.
In addition, during the third quarter experienced strong solves a WD 40 specialist with you'd be E Commerce channel.
We've made significant progress on the global rebranded WD 40 specialist, which we shared with you earlier this year for the first time never WD 40 specialist will fully leverage at most iconic asset.
Blue and yellow can become to rental.
We believe the refresh brand will accelerate awareness and improve find ability in store.
Happy to share with you the product wearing the new WD 40 specialist packaging hit some store shelves and buy ahead of schedule and we are getting very close to be feedback from their customers onto a fresh packaging for the problem.
Strategic initiative number three is to broaden product and revenue base strategic initiative number three includes maintenance products like three in one WD 40 bike and G. T 85, but also includes homecare brands, such as spot shot and love or the Americas.
1001, and EMA and know that can solve all in Asia Pacific.
Goal for the products on the these initiatives is to reach combined revenues of approximately 17.
Global sales of products included in this initiative were 14.1 million in the third quarter relatively constant compared to last year.
Although cells on at this category were flat in the quarter cells on homecare and cleaning and bike products were up 10, and 51% respectively compared to last year due to the increased demand as a result of code of the coded 19 pandemic sounds of WD 40 bike with particularly strong in Eva as.
People in areas hardest hit by Kb buying and fixing a bicycles and riding that more than ever before.
Strategic initiative number floors to attract develop and retained outstanding tribe members.
The safety it will be about tribe and their families remain a top priority to read the self crashes accordingly, the vast majority of employees have been working from home for the last four months.
It seems counterintuitive.
What I see this prolonged sequestering is actually making us a more connected and collaborative tried as they say necessity is the mother of invention and twentytwenty as the year that have tried blood to be more technically savvy and how to work more efficiently as a global team from the comfort of their lives that being said I'm happy.
The report that some of their offices around the world out either open or and the progress phase returns to an office in Barb.
Being thoughtful deliberate and flexible and how we retained I've tried to safely to offices and there is not one size that's it'll be many of these approach.
Strategic initiative number five is operational excellence I believe our commitment to operational excellence has been an enormous asset over the last four months.
From a financial specie, we've always being good stewards of our shareholders' capital resources and conservative enough financial commitments and this has served us well in times like these.
From an operational perspective at triumph has never been more focused or better a quick to execute and deliver despite these considerable hurdles.
They must have become a short term due to the impacts of the global Hawk cautious.
I'll now pass the call to Steve who will discuss some of the operational highlights.
Thanks, Kerry and good afternoon.
It back to the global health crisis in our operations presents us with unique challenges that we continue to evaluate and address on a daily basis.
Let me spend to back in March we didn't know how hard would be it as a result to the code at 19 pandemic, we were optimistic and shared with you that despite the enormous destruction experience in many countries much revenue levels were roughly inline with what we've historically see.
Unfortunately April and May became much more of a challenge for us as more and more countries around the world went into look down.
The wall cells held up relatively well compared to some industries. The performance of our individual segments in the third quarter was driven primarily by whether or not distribution channels will open in any particular market.
We saw the most significant sales declines in markets that will hardest hit by Cobot 19, which had the most stringent looked at all what is in place.
For example, in the United States in Australia sales increased 1% in 16% respectively. This is because in these markets most of our traditional distribution channels will open in the U.S.. We have developed E commerce business, which helped to offset losses, we experienced you know the trade channels.
In markets with very strict Lockdowns for example in many of our emerging markets distribution was simply shut down I know recon. This business in those markets is less developed.
As a result sales in these markets was severely restricted in the third quarter.
One other thing that's become very clear to us in the last couple months, how important it is for us to have a robust ecommerce strategy in place.
Since a pandemic began the number of consumers who is shopping online has been rapidly increasing we're fortunate that the investments. We've made in this space have positioned us to take advantage of the seismic shift to E. Commerce studies currently taking place during the third quarter, a global ecommerce sales grew by approximately 100 and.
25%, we'd strong sales growth across all three trading books here to date E Commerce sales rose by approximately 77% and this helped to offset some of the loss we experienced in brick and mortar distribution in many markets.
So now let's take a closer look at what's happening not trade block starting with the Americas.
Net sales in the Americas, which includes the United States Latin America in Canada were down 5% into two quota to $50.1 million.
Sales of maintenance products decreased nearly 10% in the Americas, primarily due to a 46% decline in sales Adobe 40, multi use product in Latin America.
This decline was driven by the decreased availability about product due to disruptions around the distribution in sale about products due to the complete look down of many markets within the region due to the coated 19 pandemic.
In addition sales in Latin America were negatively impacted because two into third quarter, we recently shifted to a direct distribution model in Mexico.
While we anticipate a successful build about direct customer base in Mexico in future periods sounds in this region were unfavorably impacted by the initial transition.
The good news is a consolidated net sales in the United States held up reasonably well talk a little over 1% in the third quarter to $43.7 million. We consider this a win getting the current environment.
The sales increase is attributable to higher sales of homecare and cleaning products in the United States, which increased to $5.9 million into third quarter.
43% compared to last year.
As Gary mentioned earlier, we're seeing an increased demand for cleaning products as a result to the code in 19 pandemic.
Despite the significant increase in sales of these products in the third quarter. We continue to consider all I'm, Karen cleaning products, except for those tied to our growth aspirations as harvest brands continue to generate meaningful contributions and cash flows, but generally expected to become a smaller parts of the business over time.
Finally, consolidated net sales decreased 10% in Canada to $2.7 million, primarily due to a 16% decline in cells of maintenance products driven by the negative impacts of the cobot 19 pandemic in total our Americas segment made up 51% of our consolidated net sales in the third quota.
Well there has been a short term impact on the Americas segment in two to code at 19.
The long term, we anticipate sales in this segment will grow between 3% to 6% annually.
Now onto even than.
Net sales in the Mayo, which includes Europe, the Middle East Africa, India decreased to $32.5 million into third quarter down 27% from last year.
He may as reported results in the third quarter, two were negatively impacted by foreign currency exchange rates.
On a constant currency basis sales anemia would have decreased to $33.8 million down about 24% compared to last year.
As you know in March through May Europe, as he Epicentral Koby 19, and that will nearly all of our European markets were negatively impacted by the pandemic June 3rd quarter sales.
So the maintenance products decreased nearly 26% any man, primarily due to lower sales of difficulty multi use product throughout both our direct an empty markets. As result of the comprehensive look down measures adopted by many countries in the region at brick and motor locations.
Look downs limited many retailers ability to participate in promotional activities and sell high volumes of certain products such as our WD 40 multi use product.
We also experienced slower sales of homecare and cleaning products any man, which decreased to $1.7 million in the third quarter down 45% compared to last year.
These declines were driven entirely by lower sales of 1001 comp in fresh in the UK.
So the 1001 carpet fresh was significantly higher in the third quarter of last fiscal year, two to the favorable impacts of digital marketing associated with the brand.
Net sales and already med direct markets accounted for 67% of the region sales wholesales normally may a distributor markets accounted for 33% in total our remain segment made up 33% about consolidated net sales in the third quarter.
Well that's been a short term impact on the mass segment due to covert 19 I was a long term we anticipate cells within this segment will grow between 8% to 11% annually.
Now on to Asia Pacific.
Consolidated net sales in Asia Pacific, which includes Australia, China and other countries in the Asia region decreased to $15.6 million into third quarter down 5% from last year changes in foreign currency exchange rates had an unfavorable impact on sales in the region on a constant currency basis sales in Asia.
Your Pacific would have decreased to $16.4 million in the third quarter down only 1% from last year.
Strictly a net sales were $4.9 million in the third quarter up 16% compared to last year driven by increased demand from Novak console cleaning products as a result at the code at 19 pandemic. In addition, WD 40, multi use product and 50 40 specialists are up 4% and 18% respect.
Thirdly from period to period.
The impact to the Cobot 19 pandemic with very limited in Australia compared to many other countries. Since cobot 19 case them as remained relatively low in the country adopted less severe locdown requirements.
Changes in foreign currency exchange rates had an unfavorable impact on sales in the region on a constant currency basis cells in Australia would've increased 28% from last year.
In our Asia distributor markets net sales were $5.8 million for the quarter down 30% compared to last year.
This decrease in sales was primarily due to various disruptions in the market related to the cobot 19 pandemic similar to what we experienced see many emerging markets in Latin America, we experienced temporary closure is complete lockdowns and restrictions required by local government authorities as a result to the cobot 19 pandemic.
Hi, raise your distributor markets are not impacted by currency since we set up products in us dollars in the region.
The good news is it in China, where we experienced significant disruptions from coated 19 in the second quarter net sales in the third quarter increased to $4.9 million, 26% compared to last year sales in China. During the quarter was strong as I began to resumed normal operations also we had some very sizable.
Does that was we were finally able to ship that had previously been delayed due to covert 19.
We remain optimistic about the long term opportunities in China, Although we expect a lot of volatility underway due to the possibility of further disruption from cobot 19, the timing of promotional programs. The building a distribution shifting economic patterns in varying industrial activities.
In total our Asia Pacific segment made up 16% of our consolidated net sales in the third quarter.
Well there has been a short term impact on the Asia Pacific segment to covert 19 over the long term, we anticipate cells within this segment will grow between 10% to 13% annually.
Looking forward given the exceptionally volatile external environment, we are experiencing I want to share some thoughts with you regarding the remainder of the fiscal year.
During the third quarter, a large majority of our revenue shortfall came from our in May of segment. We are pleased to report that all remain at business saw a very strong rebound in June, particularly in our direct markets as most countries in the region have relax the restrictions which had been implemented from March through May.
We also saw solid performances from the U.S., Canada and Australia in June. These current market conditions suggest it for the full fiscal year consolidated revenue is likely to be in a range of $395 million to $405 million.
Now ill turn the call over to change for an update on the financials.
Thank you Steve.
From a financial perspective, we believe we're in a enviable position with a very strong balance sheet, a manageable amount of debt good cash flow and historical precedent that indicates our revenue numbers can hold up during an economic recession, then rebound fairly quickly thereafter.
We believe these factors will help us navigator world filled with continued uncertainty.
Let's start with a discussion about our 50 530 25 business model.
The long term targets that we used to guide her business.
In the third quarter.
Our gross margin was 54% compared to the 54.5% last year.
This represents a decline at 50 basis points.
Higher warehousing and inbound freight primarily in EMEA.
Negatively impacted our gross margin by 120 basis points. In addition increased promotional activities primarily in the Americas had an unfavorable impact on our gross margin of 70 basis points.
The cost of promotional activities such as.
Sales incentives trade promotions and Cas discounts that we give to our customers are recorded as a reduction to sales and the timing and magnitude of these activities can cause fluctuations gross margin from period to period.
Changes in major input costs positively impacted our gross margin in total by 60 basis points.
Probably in based specialty chemical costs, although the impacted our gross margin by 80 basis points period over period.
However increased cost of aerosol cans negatively impacted our gross margin by 20 basis points and offset some of the gains we realize due to the lower petroleum based costs.
Beginning in late February crude oil reached multiyear lows and we expect falling oil prices will continue to be a net positive to our gross margin.
Typically takes between 90 and 120 days before we begin to realize the benefits of lower crude oil prices.
In the third quarter, we began to see some benefit from the steep drop in oil prices experienced earlier this year and we would expect to see this trend to continue.
Also positively impacting our gross margin for foreign currency exchange rates and sales price incentives and EMEA as well as sales mix changes.
Merrily in the Americas, and Asia Pacific segments.
When combined these items positively impacted gross margin by 80 basis points in the third quarter.
Now I'll address the 34, our cost of doing business.
In the third quarter, our cost of doing business was approximately 32% compared to 33% last year.
You know a majority of our cost of doing business comes from three areas people costs or the investments we make in our tried. This also includes the costs associated with any earned incentives.
Or what some other companies call bonuses.
Investments, we make in marketing advertising and promotion.
And freight cost to get our products to our customers.
Despite the reported revenue decline we experienced in the third quarter, we managed to reduce our cost of doing business as a percentage of sales because we took immediate actions to reduce the spending levels within our business.
We've always been good stewards of our resources, Google in our spending and conservative in our financial commitments. However, the covert 19 pandemic has required us to become even more prudent and how we invest during these uncertain times.
In 2008 during the last significant economic downturn, we took actions enabled us to adjust our cost structure.
Allowed us to support our business model and keep our try intact.
We are focused on achieving similar outcomes now in 2020.
This brings us to EBITDA.
Last of our 50 530 25 measures EBITDA was 22% of net sales for the third quarter, which is flat compared to last year.
That wraps up the discussion about 50, 530 25 business model.
Now ill discuss a few other items.
The provision for income taxes was 23.9% in the third quarter this year compared to 19.8% last year and the increase in the tax rate was primarily due.
To a much lower benefit expected from foreign derived intangible income.
Net income for the third quarter was $14.5 billion versus $18.1 million in the prior year, reflecting a decrease of 20%.
This resulted in diluted.
Earnings per common share of a dollar six cents for the third quarter compared to a $1.30 for the same period last year.
Weighted to average.
Alluded shares outstanding.
Decreased to 13.7 million shares from 13.8 million shares a year ago.
Now are worried about.
Working capital and capital allocation.
We define working capital as accounts receivables and inventory less accounts payable and accrued liabilities.
In the current environment, repaying, particularly close attention to our working capital are using appropriate levels of working capital to manage the profitable growth of our business.
When compared to the second quarter of.
2020.
Inventories have remained relatively constant.
And accounts receivable has increased only slightly.
We are keeping a close eye on accounts receivable do not expect any material changes as a result of the impacts of cope with 19 pandemic.
We do believe inventory levels may trend up slightly over the next few quarters. This is due to changes or potentially making to support the business.
First we have to ensure that we have adequate levels of inventory on hand.
In this uncertain manufacturing environment.
Second we recently launched direct operations in Mexico, which requires that we build up inventory to keep and meet the requirements of this do market.
Finally, the launch of Smartstrand next generation because inventories to be elevated for a time.
Our capital allocation strategy includes a comprehensive approach to balance investing in long term growth.
While providing strong returns to our shareholders.
In fiscal 2020, we will invest approximately 25 million in capital projects.
George <unk> of which is being used to clear the proprietary equipment and machinery, we will use to manufacture our smartstrand next generation delivery system.
So we elected in April to suspend the stock repurchases under our current share buyback plan, we continue to return capital to our shareholders through regular dividends.
On June 16th our board of Directors approved our regular quarterly cash dividend up 67 cents per share payable to shareholders of record on the close of business. The July 17th.
So with that let's turn to fiscal 2020 guidance.
<unk> 19 pandemic has continued to inject a measure of uncertainty into our business, which makes it very difficult for us to accurately forecast short term financial results for the company.
Due to these events in April we with your guidance for fiscal 2020.
And we'll not be issuing any financial guidance for the remainder of the year.
That completes the financial overview I'll turn it back to Gary.
Thanks Jay.
In summary, what did you hear from us on this call.
You heard that global silence declines in the third quarter were primarily due to end uses not being able to easily bioproducts due to the disruptions related to code that 90.
You heard despite these disruptions styles of WD 40 specialist remain constant in the third quarter, which we view as a win and a credit to where he called this strategy.
You heard that sounds of WD 40 bike were up 51% in the third quarter, primarily due to strong demonty now even segment and strong styles in E Commerce.
You heard that sounds about homecare and cleaning products were up 10% due to the strong demand for cleaning products due to kind of been my team.
You heard that we continued to make outstanding progress in the area of digital and he called this and L. E Commerce sales have grown approximately 77% you today.
You heard that smart straw next generation has arrived on some store shelves in Canada.
You heard that the refresh packaging for WD 40 specialist product line has arrived in some on some store shelves in the U.S.
You heard that we continue to return capital to invest is through regular dividends.
And you heard the current market conditions suggest that our full year fiscal consolidated revenue is likely to be in the range of $395 million to $405 million and you heard that we remain confident that our growth aspirations remain a realistic future opportunity.
In closing today I'd like to share a quote from Dr. Martin Luther King Julia.
If you can't fly FINRA, if you count Ron then war if you caught war then cruel, but whatever you do you have to keep moving forward.
Thank you for joining us on our call today, we'd be pleased to open the conference call to any questions as it should be okay.
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One moment please for the first question.
Our first question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.
Hi, how are you.
Good Linda.
That's good [noise]. So thank you for the commentary on what you think sales might be for the year I guess that implies.
If I did my math right about down 8% to up 1% for the fourth quarter or something like that.
What do you see as being the main factors that determine whether you come in at the lower end of that are the higher end of that.
I think there's one thing that plays in completely and then how Steve to give his point of view.
It's really what we'll get shutdown that were not aware off right now.
He now in my comments silly I think it's become very clear to us in this last quarter is that there's high demand for our product, particularly given the increased amount of deal or why activity that's going on in United States in Europe and wed trade channels are open up quite a style is ahead of last year.
But when consumers cod or did you discuss uses caught by a product that Ah that's shuts down so I think the because it's the biggest.
Risk factor is the risk of unknown of what's going to happen mix I'm, sorry, Steve what what would you say about that.
I think that's very true Gary So, it's certainly seen a considerable uptick tick as people have been kind of stuck at home and around the world a significant no ticking deal I won't activity, which has been proven certainly across the U.S. and are in Europe.
I think secondly, and you know we're in a position to fortunate position with a a recall this capability to be able to respond to some of those looked down conditions that have occurred and and as you've seen our E. Commerce businesses is absolutely boomed in this quarter and taken up some of the slack Oh distribution.
In channels that have been closed down elsewhere.
Great. Thank you and then.
Can you talk about the new product line in Canada and can you just.
Mentioned, maybe why you chose Canada first for that once and then what do you think the timing of the next market entry might be and what the next market be the U.S.
We chose Canada because.
A number of years ago, we were we weren't we were in Canada with Smart school and we learned through discussion with regulators there that.
We would have to have a lockable delivery system.
To meet the regulations and that was the one of the main reasons behind the development of Smartstrand next generation.
So Canada was obviously the first place because we've not had smock school they'd be cool and you know given that we're in early stages of production volumes and though we'd me where they need to be yes.
So in Canada was a great place for Stott smartphone extend duration is made up of two different delivery systems, it's or what we call to point out which has the toolbox friendly walkable.
Delivery system and then it has 1.1 0.5, which is an improvement all the.
Current smart school, but not lockable.
So we won't stop to convert a lot of markets to 1.5 as we bring up.
Production and that'll happen start to happen you know into the the mid part of next year.
Which will lead will have a better product at a it with the capabilities to manufacture quantities at a level that will allow us to now so we push a the conversion of markets that don't have smarts, Google. So it's going to be you know a year 18 month program.
I will bleed into two.
Two weeks to we see the original snobs for one gone and its replaced by 1.5 or two point.
Okay. Thanks, and then.
Can you just talk about if you're seeing I mean, you mentioned some areas, where you're actually benefiting like the bike you know from sort of these stay at home doing Outdoorsy type stuff. They are you seeing any recessionary type weakness or signs of it.
As a result of reduce industrial production or anything of that sort in any of your markets.
I don't know lead the how I would dissect that from these economic ice age that we're going through right now I mean I'm not sure.
Whose back who's not and why now having said that we've seen a manufacturing start to return in China.
But at this time I think that there was such a disruption in.
So.
The market and the distribution channels that it's very difficult to get paid clear read on what's moving where what we have got which we.
Which is very reliable his point of sale and where were you know where for example point of sale is is extremely positive for us in areas, where we know that assistance and trades people would normally buy so that we tells us that there was a.
Great study and see you might Wanna mention this there is a great studies that we came out in a in Europe, just last week around DRA why activity and Steve you might want to just touch on on the headline if that if you if you've got that information handy.
Yeah. It was just showing a a study across multiple countries I believe setting the right key countries across here that show deal I want activity during the cold 19, I looked down period was up by around 30% to close here.
Oh.
Thank you that's very interesting.
And then finally when you report the fourth fiscal quarter in a few months do you think that you will have enough visibility to be able to give up by 21 guidance do you have any sense for that right now I.
I don't know.
Okay.
Uh huh.
It depends on.
Where we are the world I mean, if if we've got a vaccine and things are starting to normalize we might be all too but.
I think if we come in at that 395 to four Eyeq five you know were gonna be.
Really flat, we're gonna be nearly flat with last year in some ways of I think we'll be off you know between core and 8%.
And I think that's a pretty good result, given the trauma that the businesses are going through.
Thanks, and just one more than I thought of it seems that the distributor markets are the ones, where sometimes these disruptions occur or can you just remind us what percentage of your revenue is direct versus through distributors.
70, I think Steve you might have the update but I think 75 is direct and 25 is through distributors that rights. They.
Correct.
Okay. Thanks, very much I appreciate it.
Thanks for the stay safe and well thanks.
Our next question comes from the line.
Daniel Rizzo with Jefferies. Please.
Please proceed with your question.
Hi, everyone, how you doing.
Hi, Daniel.
I you mentioned that you made reopening in that the outlook for sales is dependent upon you know what shutdown not I was wondering if your other emerging markets like in Southeast Asia, and Latin America, or starting to show signs of a reopening too 'cause distribution channels.
You know it.
I knew it varies week to week L. leadership team currently meets on a weekly basis, and we have out global leaders from Europe, and Asia Pacific and the Americas on that cool and I must say it varies from week to week, certainly countries like Indonesia, India.
The.
I have been very very hardly here, how do you know the time so.
It's it's uncertain yet.
Which countries.
I'm moving faster or not you know just this week, even though its stride here, who is doing very well they had a and melba flare up in Victoria and milk and now you know where is this thing going mix, we don't we don't know.
Okay, and then with the rollout of the of the next generation of Smart straw I'd be disclosed if there's a put another <unk> price premium on that if you if you're I don't know to resin prices just going through the new introduction or maybe not.
Certainly the 2.0 version, which is the lockable one has a pays a premium or the 1.5 states doesn't have a premium but because of manufacturing hack improvements, it's that's going to be accretive the gross margin.
Okay and then finally it was mentioned that the one who is where the touch we jumped just because of less sales offshore lets foreign sales now with you made a rebound in the world opening up again I was wondering.
Is it possible say that that would go back to a more I mean, he's worked more normalized rate for fourth quarter and going forward from there.
I'll, let Jay answer that question.
Oh, Yeah, certainly a you know the rebounded somewhat it depends on the rebound in EMEA Ah, but it also depends on the rebound and in some of the other markets a like for example, Asia and Latin America, whereby we.
Achieve.
The intangible benefits.
From sales into those markets as well so it it's in some of our foreign markets are more impactful than others.
EMEA.
Latin America, and Asian distributors or or are key to that.
Thank you very much.
Our next question comes from the line Rosemary Morbelli.
She research. Please proceed with your question.
Thank you good afternoon, everyone.
My last me glad to see away when it's well I was wondering if you're doing this then they make the different locked down into different regions until on you have established a new marketing message that you are going to pursue.
As we come out to into what I call, the new normal which may not be normal at all.
So I know when she's a in the way you are operating in the wage the tri be they'll pay waiting lists fewer people and offices.
Which could mean that you don't need as many offices city. These if you could help give us a feel for what do you intend to do or how you will change.
Yes, so one of the things that we're taking advantage of at this time is really making sure that we are very conscious of what loonies. We've had so we haven't made any decisions you know already a great number about people were mostly.
But we believe strongly that social interaction is important that created CBD is driven what has happened, though as we become much better at the virtual so I think how how overall communication and collaboration will improve.
Then I would before as far as marketing is concerned no we have.
Sticking to the tried and true you don't make the end user where it make it easy to buy.
I think the one area that is continuing and Steve mentioned it was around E commerce and and the White that's changed over time and Steve you might want to touch on how E. Commerce is really playing into what we do particularly given the the development of the major ecommerce players and and how they now.
Distributed around the world.
Sure Gary. Thank you. So yeah, I mean, we are absolutely and reallocating resources. So following the money to the gross is happening online around the world and yeah. There's been certain news out there about all product I'm not being suitable for almost two to transportation.
Reasons I mean, that's just completed hogwash in terms of transport ability of our product and that number is but distribution centers are out there in E Commerce network today.
U.S. alone there's over 100 distribution centers for the major.
Retailer so when.
It's it's just not a barrier to our growth and that's why we're reallocating resources in terms of I'm tone and treasure tools with very very positive results around the world.
So you obviously strong in North America based on what I mean, if I had properly what about Europe. So.
He called me season European economies in Europe, Yes.
Yes in terms of E Commerce would we have a global string so.
It would the marketplaces him in the same play as a strong in and North America. We have a considerable strength also in the EMEA region across multiple countries and also China is the largest ecommerce market in the world. We have a very strong E commerce capability. There also.
And there was a 25 million of Capex for these here or how much are you adding to you know the okay. The E Com ask project and ticking away from another area. If you are.
So E commerce is not capital intensive.
It's it's really people intensive that capital. This year is really primarily going towards the smartphone next generation.
But what we have done is brought in some very good talent and Steve you might Wanna mention we brought about our global.
Our global digital advice that we brought in and some of the the way we are bringing the E commerce squad together around the world.
Sure. Thanks, Gary So yes, so a couple of years ago, we put one of Opus then I'm coming global leaders in terms of are known to individual to add up all global ecommerce squad. They've achieved just wonderful results for is really doing what we're able to do as a global players so taking learnings out of China will remain well the U.S.
Say inspecting them across the world and to make great progress on our E. Commerce business. So that's been a Ah I think striving to be recently added a cheap dipped a little advisor.
Who came in from a a major consultancy I need advising the business, Gary and myself in terms of our long term digital strategy. So we're making great progress study called notice, but in the digital strategies that support and E. Commerce, all our internet traffic doing this pandemic, because just going through the roof and that's certainly.
Leading to conversion in sales around the world.
No one of the yeah. There was a mock sneak one of the Mockups that's performed very well with the problem is easily.
I think you today.
Now Italian styles are up over last year, but we've made significant.
Progress against the competitive landscape in Italy correct.
That is correct. It's just one example interim anymore. So yeah, we're achieving very very strong growth in many places like Italy.
In the U.S. performance, obviously, the U.S. market.
It is a law is a very large ecommerce market for isn't growing very very strongly so really taking some very nice share and there's a very fast growing situation.
Alright. Thank you very much appreciate the hill.
Thank you.
Ladies and gentlemen that concludes our allotted time for the question.
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