Q2 2022 Tupperware Brands Corp Earnings Call
Good morning, my name is Joanne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tupperware Brands Corporation, second quarter 2022 earnings call. Second quarter 2022 earnings call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
If you would like to enjoy your question, press the star again.
Thank you.
Alexis Callahan, you may begin your conference.
Thank you, operator. Good morning and welcome to Tupperware Brand's second quarter 2022 earnings conference call. Joining me today are Miguel Fernandez, President and CEO and Mary Ella Matute, CFO . We will all be available for Q&A following our prepared remarks.
Earlier this morning, we issued a press release announcing our financial results for the second quarter of 2022, as well as a supplemental deck to accompany our prepared remarks. Both items can be found on our Investor Relations website.
Let me remind you that the following discussion and our responses to your questions reflects management views out of today, August 3, 2022, and may include forward looking statements. Actual results may differ materially from such statements.
Additional information about factors that could potentially impact our financial results is included in our Form 10Q for the first quarter of 2022, subsequent filings with the SEC and in our press release filed this morning.
Please review the forward-looking statements disclosure on page 3 of today's press release.
Please note that all references today are being made on a constant currency basis, which reflects the application of the current period for an exchange rate to any prior period results, enabling comparisons excluding the impact of foreign exchange rate fluctuations.
Please also note that all references, unless otherwise noted, are being made on a continuing operations basis.
During this call, we'll discuss certain non-GAT measures, including those we refer to as normalized measures.
Additional disclosures regarding these non- GAAP measures , including explanations and reconcilations of these measures to the most comparable GAAP measures , can be found in today's press release.
Finally, a replay of this call will be available on our investor relations website later today.
And with that, let me turn the call over to you, Miguel.
Thank you, Alexis. Good morning to everyone and welcome to our second quarter call.
Our journey to turn around and transform this business started just over two years ago. And this journey has a goal, to make the business as big as our iconic brand.
Our turnaround plan began in early 2020. With first defining what was the core to our business, I'm finding another home for those businesses that did not fit into our vision. And that did not fit into our vision.
As you saw in our press release this morning, we divested two more of our beauty businesses over the past three months. We don't want small non-corpethanous remain.
Next, we need to fix our capital structure to enable the term run times a success. We took aggressive bright-sized action in 2020 and followed up in the late 2021 with the refinancing of our credit fertility at a very favorable terms.
All of these steps enable us to pre-opness our investment dollars for our term round plan initiatives and build the expansion plans.
As we mentioned last quarter, we're investing ahead of expected growth to open new channels and distribution, to make the necessary upgrades and enhancements to our assistance and processes, and to attract new talent that can help us successfully take the top of our brand to all consumers wherever they shop.
This investment, a care of growth, is often uncommon, but for us it's necessary.
With these efforts, we're building a new company within our 76 year old direct selling company. We said that a turnaround would take three years, but with the global headwinds of the pandemic inflation and stronger dollar, that time has lived. We also said that the financial recovery of the company would be bumpy and it has, just like in the first quarter. But with every quarter of performance, our confidence increases that our turnaround plan will be successful.
As a result, we are creating a stronger, pure-play premium branded consumer product company with a singular focus to design, produce, and distribute our products in all channels of our consumer shop.
Let me now address our second quarter performance. Overall, while we are not pleased with our current financial performance, we are encouraged by the improvements in profitability reflecting the Minnesota improvement that we made during the future. Thank you.
We are navigating the company through difficult global events, general inflation and currency headwinds.
all while executing a multi-year turnaround in our core direction in business and a transformation to become more accessible to today's consumers.
The improvement in the profitability compared to the first quarter reflects many of the structural improvements that we have made during the quarter.
Specifically, ongoing lockdowns in China and lower consumer sentiment in Europe , along with dramatic business model changes in the U.S. and Canada, were primarily responsible for the year-over-year declining tests.
These revenue declines were partially upset by outperformance in South America. Inflationary pressures continued to weigh in on our margins, but were partially mitigated by widespread pricing actions taken during the quarter.
together with tighter cost controls, which resulted in sequentially higher for profitability compared to the first quarter. Second quarter performance was also impacted by impermanent, foreign currents, translation adjustments, which reduced sales of proximity in 400 basis points and adjusted earnings per share by approximately $0.06 compared to 2021. $0.06 compared to 2021.
Let me now highlight performance in our top four mark. In the US and Canada, we made drastic but necessary changes to our business model and we increased prices 10% mid-quarter.
This was the first time we've taken pricing actions in quite some time.
As a result of these changes, while since we're down 24% in the quarter, operating profitability improved to 100 basis points.
and we further expect expansion the second part of this year.
The investments and changes we were making were not easy to do, but we knew they were necessary to increase profitability and create a more sustainable business.
While these changes had an emotional impact that caused our active sales force to decline 18% compared to the first quarter, these changes had the desired effect as productivity improved 23%.
and resulting in better service levels over the end of the quarter. Now we're turningign in at 7 a.m. The almost secondary le over the end of the course.
The Mehri Soul was a permanent multi-profitability across the corner, which is both encouraging and confirming that we made the right choice.
From this malware, but much more profitable and sustainable base, we believe that we are a very well positioned for a more profitable growth in the future. I should also know that we will be hosting our Annel Cell for Reconciliation event this week in person, something that we have not done for more than two years.
As you know, the direct selling industry is a person-to-person business.
We believe that lack of in-person meetings has cooled recurrent in solid activity over the past year. cool recurrent and solid activity over the past year.
And we're hopeful that these trends will improve that's when we return to more normal median schedules. The
In Mexico, service challenges that began the first quarter continued to the second quarter. We believe that the sales growth of 1% could have been higher had those issues not persisted. In other words, we believe that the sales growth of 1% could have been higher had those issues not persisted.
We launch initiatives to address those issues.
things like back quarter and delayed shipments, and began to see slight improvements towards the end of the quarter.
These service issues, however, have caused a reduction in number of active Salesforce members, which were down 4% compared to the first quarter.
and it will take some time to rebuild ourselves for us back up in the upcoming quarters.
In Brazil, we are pleased to deliver a growth of 1% in the San Juan quarter following two quarters of double duty planks.
The growth was ruined by improvements of the level, successful commercial campaigns, and increasing e-person gatherings.
Well, we have always the positive momentum that appears to be building in the market. As evidence by a 12% increase in agro-ashractic sales force compared to the first quarter, we also know that upcoming events include potential election and the workup. And the workup.
May cause destruction and low utility for the second couple of years. The second couple of years.
Currently to do so.
China was down 32% versus last year.
China is a critical market for all since its profitability. And our performance there, like many other companies that rely on food traffic, has suffered due to that ongoing lockdowns over the past several months, and overall impact it caused by COVID over the last two years. And our role impacted caused by COVID over the last two years.
Despite the lockdowns, our local team continue to make investments for the long term, including upgrading the new confil of our retail studio locations. And in tradition, new product offerings only effort to uplive the brand in the eyes of consumer.
The reason we believe these investments will prove a great return is that the newly upgraded students are shown an increase in productivity of over 20%.
While we cannot predict the timing and severity of the further lockdowns, we believe the investments that we are making now are important to make and eventually will pay off when commerce begins to rot normally.
Sclootie China, our Asia-Pacific business was about 8%.
with markets like Indonesia driving the Netherlands.
Particularly in countries with low digital adoption, the community lack of in-person gathering has severely impacted the Salesforce engagement over the last two years.
I actually just got back from a trip to that region where we hosted a first-team person event in the last three years.
Asia is a key region for us with a lot of opportunity to grow.
We are hopeful that a return to more in-person gathering as well as more attractive promotional programs and new product offerings will help to incentivize selling behavior, generate momentum and drive long-term sustainable growth.
On the business expansion side, we are pleased to see the early success in Korea, which saw growth of 15% in the quarter by implementing our omnichannel strategy, including success in-home shopping channels, and we expect other countries in Asia to follow this winning strategy.
And as it relates to channel expansion and this to report our omni-channel expansion, we plan to remain on track.
During the second quarter, we launched small-scale efforts on Amazon, Bad and Beyond, and HomeGoods in the US, and Intermachine France, and Soriana in Mexico, to name a few.
As you are aware, this is new territory for us. We are testing pricing and merchandising strategies at these retailers on a very limited number of products in order to help us.
Assets what resonates with today's consumer.
We're also working closely with our direct selling forces. We create a healthy ecosystem where our entry into the channels provides them with customer relief and raises brand awareness for a comparable brand.
These tests are not yet in large scale, but instead more like pilots to help us see how consumers react to our products and this in the media channels. And this in the media channels.
These tests are also helping us to refine our supply chain to better service the retail channel. And since this is a new muscle cross.
In addition, we have made meaningful progress with meeting retailers in North America and we expect to gain additional retail distribution in the next few months.
We believe your patient with our transformation will begin to pay off. Our top-of-the-proc will begin to appear in each channels including retail shelves and online.
For competitive reasons, we're not planning to provide any details until our products are actual in these channels. We're excited to update you further on the next journey scope.
Our direct selling channel remains our core business and a main source of cash flow and one that needs to continue to improve. To that end, we've made several challenges to our direct selling business in the quarter, including changing business models and distribution arrangements in various markets to boost service levels and attract and return more people.
or which we believe will yield growth and higher profitability.
We also believe that not hosting in-person events for over two years in most developer markets.
has community negative effect in our direct selling business, resulting in lower sales and workforce engagement, low recruiting and unproductable sales.
But with the opening of Troubling, we're beginning to host events again.
I mentioned hosting one in Malaysia last month. Our first event in the US is this week. We're planning to hold 72 events in 21 markets during the second half of 2022.
with more than 50 of those in person.
We believe this activity will help us set up a positive momentum as we head into 2023.
We also continue to implement a global direct selling best practice, including using a more data driven approach to make better as more decisions.
segmenting how we look at our sales force and our customers to personalize their experience with Tupperware.
In tradition, preferred customer loyalty programs is in our biggest market and sharing detailed inventory catalogs for global trade.
It's one example of the changes we're making marked by marker. We launched a new member referral program in Japan during the quarter and are seeing significant improvement in recruiting and retention. Twice in the sky is the legacy program in the first month.
As we continue to add detail and headings to selling models, we expect further improvement.
And speaking of detail, I'd like to provide a technology update. As I've mentioned before, technology has to be foundational to our future business and we're continuing to work to upgrade and centralize your system.
During the second quarter, we continue to enhance our direct selling order systems across the globe, while carefully balancing change management needs. We stabilized our direct selling order and platform in the US, which was a pain point for our sales force over the past year. We also invested in EDI capabilities that will aid in our business expansion efforts.
We have also been making progress in terms of the product innovation.
And our police that are total sales for new progress was 13% in the second quarter, or from 9% the same period of last quarter.
We plan to accelerate these efforts in the second half of the year, bringing even more products into the market.
One recent and highly successful example was the launch of the portable blender in Asia Pacific, which did much better than expected and indicated the significant potential that exist as we accelerate new products of action efforts.
We're also testing new materials such as glass storage in a few markets.
We believe there is tremendous opportunity to expand into new categories where consumers give our brand permission to compete.
On the branding front, we launched two collaborations during the quarter that drove conversation around our top of our brand and showcased our marketing capabilities as a branded consumer products company. On the branding front, we launched two partnerships during the quarter that drove conversation
First, we collaborated with Berra Bradley to bring three sets of uniquely patterned products just in time for the summer. The crochet was until the end.
And second, when Top of our Party's scene was featured in the newest Minions movie, The Rise of Groove, we collaborated with Universal Pictures to create a limited edition Minions v Themes product.
On the ESG front, our very purpose has a sustainability mission to design and develop environmentally friendly reusable product.
We continue to work towards the ESG targets we established for the very first time last year and we recently pledged our commitment to the Ellen MacArthur Foundation to promote a circular economy. We also anticipate publishing our next ESG report soon.
We're proud of our contributions to our more sustainable world and continue to make progress in this important area.
Next, turn to organizational updates. During the quarter, we made difficult organizational decisions to streamline and delay our organization. And began a new round of right-sizing and give them the current rate of our directs
But as importantly, we continue to attract new talent that can help us achieve our business expansion goals.
We hire a new VP of supply chain, an area of critical importance to us as branded consumer product company, with 11 global manufacturing facilities.
Jim Van Ingen has significant experience in global manufacturing distribution and in leading complex global organization.
We also hire a new SVP of the US and Canada omnichannel expansion.
Jonathan Schiffer, who probably work for Spectrum Brands, and who brings the leadership methods to the British Solar Expansion and Branding Effors in North America.
Lastly, we strengthen our talent in the boardroom as well, with a appointment of Marburgus, who brings us a wealth of experience in manufacturing and packaging industries, and in leading global businesses going through transformations.
His expertise will be particularly helpful to us as we continue our Army Channel expansion plan.
I encourage you to read the press release we issued this morning for more details.
In summary.
While we are beginning to see encouraging trends in many of the markets as a result of the efforts that we've been making, we really, the extreme volatility in Europe and China has adversely impacted us in the near term and expect this situation to improve sequentially over the next 12 to 18 months.
We have plenty of work ahead of us to optimize our operations and supply chain.
We remain committed to improving the profitability of our core business and we believe we will remain on track to further penetrate retail channels later this year, which will be the milestone of our omni-chang revolution and provide a needed catalyst for long-term growth.
We acknowledge the challenges we have in front of us to transform this business.
However, when we have a wavering confidence that we're on the right path and execute against the right strategy, that we've ultimately succeeded making the business of a big, us-er-aconic brand.
I will now turn the call over to Mariela, who will cover our second quarter performance in more detail.
Thank you Miguel. I'm excited to be on board and involved in the transformation of such an iconic brand. In the transformation of such an iconic brand.
Before we discuss our financial results, I would like to remind you that we made an accounting change in the third quarter of 2021 to classify our results and help for self-beauty and personal care businesses as this continued opened.
consistent with our strategy to fix our core. Our comments today, therefore, results from continued operations only.
Now turning to our second quarter results, net sales for the quarter were $340 million, representing a decrease of 14 percent compared to last year, driven by weaknesses in Europe and lockdowns in China, partially upset by trends in South America.
Next, I will discuss sales-wide regions, including the specific performance of our largest markets.
Next, South Asia declined 16%, and China declined 32%, driven primarily by continual unknowns in the region. //
severely impacted as consumer sentiment in this fell from 115 in March to 87 in May.
and fewer total studios.
Excluding China, net cells in the remainder of Asia-Pacific declined by 8%.
Driven by significantly lower source of activity in Indonesia.
It is worth mentioning that the impact of COVID on developing countries is quite different than in developed countries.
due to healthcare systems.
under 4, even when lockdowns are lifted, people remain more hesitant to congregate in general.
The lack of important gatherings for the past two years have had a cumulative negative effect on the overall self-force activity, as Miguel previously mentioned, with our total active self-force down 6% year-on-year. The lack of important gatherings for the past two years
From Q1, our active source grew by 1%, as we started to host in person events in many countries for the first time in years. For the first time in years. For the first time in years. For the first time in years.
In Europe , net sales declined by 30%, driven primarily by low consumer sentiment as well as the timing of our retail loyalty programs, which are larger and seasonal in nature. Excluded loyalty programs self-declined by 25%.
European consumer confidence is very low. Consumer budgets are shifting toward basic needs like food, energy, and transportation in response to the inflation.
Consumers are beginning to spend less and save more, and they are also switching to lower price products.
Germany, which is one of our largest markets in the region, had the largest decline due to service issues that negatively impacted self-force engagements.
as well as the timing of large retail deals that did not repeat from the prior year.
We're working to fix this important market by making organizational and supply chain changes that we believe will improve performance over time.
Moving to the Americas, net sales in North America declined by 14% in the quarter, driven primarily by lower sales force engagement and productivity.
and depart from service issues that persisted into the second quarter.
In the US and Canada, net sales declined by 24%. driven by lower sales force engagement partially assessed by improving service levels.
We also intentionally delay some achievements in an effort to reduce single item shipping cost, which improved profitability but resulted into lower sales.
Profitability was also improved by a 10% price increase we took in the quarter, as well as the difficult but necessary business model changes that Miguel referred to earlier.
Next, South America increased by 1% in the quarter. While we acknowledge the growth, service issues, and inflation cost minimally lower sales force engagement. And inflation cost minimally lower sales force engagement.
We kick off an initiative during the quarter to address service issues in part by offering a special incentive and we now to see a slight improvement in them. And we now to see a slight improvement in them.
More work remains to further improve service levels.
and build back our self-force numbers. We also increase prices by 6% in the water. We also increase prices by 6% in the water.
Lower retail shops for their contribute to relative witness, as inflation is causing consumers to read in loyalty points for food rather than goods.
In South America, net sales increased by 12% in the second quarter. Driven by a transient Argentina, which lets successful investment campaigns, social media efforts promoting the business opportunity, as well as pricing increases, which enabled it to wear 17% for the water.
Brazil, one of our largest markets, also showed growth with next sales increasing by 1%, driven by higher retention, service improvements, and effective commercial campaigns.
I will also note that we increased prices by 8% in Brazil.
Next, moving down to the P&N.
And good profit
In the second quarter, gross profit was 221 million, which represents a decrease of 19% compared to last year.
Gross margin in the second quarter was 64.9%, approximately 400 basis points lower than left here.
The decrease was driven by manufacturing efficiencies driven by lower volume, higher retina and transportation cost and country and proud mix. The decrease was driven by lower volume, higher retina and transportation and proud mix.
partially offset by price increases taken in the quarter.
As print-and-so actions were taken in the second half of the quarter, when participate, their full favorable impact to be seen across the violence of the year. For the full year, when participate, increase in prices by an average of 15%.
Continue around the P&M, as you may, expenses were 187 million in the second quarter, or 54.9% as percentage of sales.
This compares to 50.1% on a reported basis for the prior year, or 51.6% adjusting for a one-time favorable tax ruling in Brazil.
The increase on an adjusted basis of approximately 300 basis points was driven by lower sales, higher selling expenses and investments in technology and processes.
to support our omnichannel expansion of strategy.
partially upset by lower promotions and improved collection efforts.
I just have Ivetta, per dead covenant, for the second quarter was 38 million, or 11% of net sales. These represents a decrease of 11% compared to last year. These represents a decrease of 11% compared to last year.
driven by lower volume and margins.
For adjusted operating income, adjustments in the quarter included approximately 7 million in green engineering charges related to organizational changes, primarily in Europe , to reduce fixed costs and improved distribution, as one has 2 million breakdown in technology assets no longer in use.
Our operating tax rate for the second quarter was 45.8%, as compared to 34.7 in the same quarter last year, and 52.5 in the first quarter this year.
The operating tax rate was driven by an unfavorable mix of earnings by country, including receiving no tax benefits for substantial entity losses in countries including the US.
Concurrents with the recent organizational changes and market volatility, we continue to refine our supply chain and tax planning strategies to achieve a lower-ward-old tax rate.
I should also note that for the full year with PET-CAD taxes to be lower than the prior year.
And finally, I just have earned in for sure where 41 cents in the second quarter compared to 90 cents last year, driven by all factors previously discussed, including approximately six cents of favorable for encountered inflation.
Turning now into cashflow.
On a reported basis, year-to-date operating cash flow, net-of-investment activities, was negative 64 million, compared to negative 1 million last year. Driven by lower earnings, together with an increase in working capital for preparation of our only channel expansion.
We also recently amended our credit facility to provide for greater flexibility in anticipation of continued market volatility and the timing of our turnaround plan.
We completed our previously announced 75 million and accelerated the tour repartures during the water.
Repurchasing and retiring a total of 4.9 million shares, which contributed to 9 sounds to adjust the EPS.
While delusives in the immediate term, given where our stock price has trended, we believe that this will be highly effective as the company performance becomes more predictable and more profitable in the years to come. I'm trying to do that.
We ended the quarter with a cash balance of $119 million.
Following the chair, report just when announcing the first quarter, our capital allocation priority is chipset over the paydown of debt, which we review the violence by nearly 110 million.
Ended with a total debt of $700.2 million. At quarter and our consolidated net leverage ratio was 3.1 million.
In summary, what second quarter nets up the line year and year, profitability sequentially improves compared to the first quarter, driven by pricing actions, and tighter cost control measures. While our performance is trending in the right direction, we also knowledge the potential for near-term volatility as we continue to address internal challenges and navigate external headwinds.
We now are the last, we'll continue work into strengthen our financial foundation to enable to continue executing our turn around funds. We now are the last, we'll continue to continue executing our turn around funds.
And now with this, let's take some questions.
At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. What pulse would just a moment to compile the Q&A roster?
And your first question comes from the line of Chase and Bender with Citi. Your line is open. Your line is open.
Great, thank you. Good morning, everyone, and thanks for slotting me in. I guess Miguel, where I'd like to start, is just on the transformation plan. And I guess the question is, what are the big mile markers you really need to achieve to get us from this kind of stabilization phase to back to that expansion? And where do you think you stand on those and relative?
to kind of that original three year plan. How do you think the timeline has changed?
Good morning, Jason. Nice to talk to you. So basically, as you know, our turnaround planning, you know,
It can be divided into one is fixing our core business and the second part was to meet the consumers where they shop in their response to the world which is our omnichannel strategy.
And obviously, we had a three-year plan, and there were a few things, so major things outside of our control that were not taken into account, right? When we put the plan together a couple of years ago, which one was obviously the conflict in Europe and the other one was COVID in different versions, but now, kidding, it was important being China, which is one of our most important markets. So what are the milestones that I'm looking at? Well, first, we're...
you're going to be able to see it in some of our markets when you see the top of our brand pretty much in your everyday life which basically is being translated when you see it online and when you see it on the shelves and that's getting closer and closer day in and day by day and as you heard in the script you know you're going to see a lot of those examples in real life examples towards the end of Q3 a lot more in Q4 and even more in Q1 of next year
The other part of the strategy, and you know, you already see this in some parts of the world. You already see a lot of this presence in Europe with our essentials brand and the expansion that we've been carrying with a lot of our loyalty programs that we have there.
and some of the retail expansion that we're having there.
in terms of our core business and fixing the basics.
Obviously, you know, COVID and not having in-person meetings, that created a new variable for us, which little by little we're seeing in many parts of the world.
So we believe that every time we have the environment that we want to create in the market, we see growth and we see accelerate growth.
So to answer more specific, the timeline, I say, obviously, this headwind that we had probably delay everything, it's hard to put a number, but I'm going to say between nine months to a year, but it could be accelerated because obviously COVID releases, China becomes normal, then not accelerated things or if Europe turns around quickly, then we can turn around just as fast. And I know it's a long winded air.
answer, but it's kind of hard to predict the exact time. But the good thing is that any time that we create an environment, interaction that we want to create, we see growth. And every time we approach retailers,
They're open up, you know, they open up with all the like our brands and so on. So, so that that would be it.
Great, thanks for that, that's helpful. And then I just wanna spend a little bit of time on the price increases you've been taking, obviously come across a number of markets and you know, pretty substantial. Can you talk about the demand elasticity you've seen in response to those price increases? And whether you've seen any...
pull forward a demand and pre-buy ahead of those purchases? And if so, is there any way to quantify what that might have been? Thanks.
Hi Jason, it's Mariaela and yes we have the on price in more than 30 markets.
throughout the course of Q2 and it varies from 3% price increase to...
56% price increase depending on the country and inflation conditions.
And with that, we are analyzing the effects on volume. We've seen some countries that yes, some groups of sales force buy ahead of the price increase, in other markets it's the opposite. So at this point we are learning the elasticity of our demand and as of now with PECT, we are being conservative with the forecast and with PECT to learn more in the next price rounds we're gonna be throughout the year.
Great. Thank you. I'll pass it on.
Your next question comes from the line of Anthony with Sedoti. Your line is open.
I guess good morning and thank you for taking the questions.
So I guess, as far as on the cost out of the business, so you're just curious since the end of the second quarter, have you seen any meaningful changes that you're caused specifically resin and logistics? Are you sure you're caused specifically resin and logistics?
Anthony, hi, Mariaela. Ressens continue to be in an inflationary environment for Marley, due to the situation in Europe . And in our P&L, in Q2, we receive a cost increase between 9 and 13% for rising cost. And a similar fashion increase for freight and distribution cost. For the rest of the year, we are predicting the same inflationary environment for rising on freight.
The good news is that we don't see further increases from what we already have reflected in our P&L.
Gotcha. Okay. And then with the changes that you made to your credit agreement that you announced today, how should we think about your cash flows and your leverage ratios for the back half of the year?
Yes, so we negotiated with the banks an amendment to create more flexibility and being able to invest in our turnaround plan initiatives. So we will continue to restructure in parts of our direct selling business, mainly in Europe . And as far as the covenants, we have plans to continue using our debt capacity and being within the debt to avatar.
Corbinant ratio that we have with it with the bank.
Okay, got it. Okay. And then, yes, so as you look to continue to transform Tupperware and enter the new sales channels, I know you've made some strategic hires. Miguel, are you satisfied with the, you know, as far as the executive team, do you think you have the right people in place or do you think you need to add more talent to make this journey into the new sales channels?
So I think we're good now mostly in America. I feel very good in some parts of the rest of the world. Probably in EMEA we might bring a couple more new executives but it's not only bringing that key leader but also you know the teams that actually execute on that on the strategy and they've operated under those circumstances so they know what the will looks like.
Got you, okay. And then, you know, and I guess lastly, your tax rate has been kind of all over the place. Any sort of, any thoughts about it?
Yeah, how should we think about the tax rates for the back half of the year?
Yes, that's a good description all over the place. That happens when you have more than 50 different tax rates and growth patterns in different countries. So, the tax rate, just the tax rate for the quarter was 45%, and that was slightly lower than the 52% we reported in Q1, but higher than what we reported last year of 34%. And the dynamics with Top of the World is that the mix of earnings
Chipped it from countries where we can take a deduction.
and a higher tax rate to countries where we have a loss. Unfortunately, at this point, we cannot take those losses as credit for taxes. As credit for taxes.
So, in other words, in countries where we have losses, we don't get the benefit of lowering the tax rate. So, we just have the tax rate in countries where we have yet to put our tax planning initiative. The San Diego Room andBIE
And we expected the tax rate. We continue to be high in the short term. And we are working on a complete net income basis to understand where are the priorities and where are the countries that we can execute tax initiatives to lower the tax rate over the long term.
Got it. Okay. Thank you and best of luck.
Thank you.
Your next question comes from the line of Linda Bolton-Wiser with D.A. Davidson. Your line is open. Your line is open.
Yes, hi, and welcome, Mariela. Thank you. So I was wondering, I think one of the things that was mentioned in the quarter that affected SG&A expense was higher technology spending. How much investment in technology do you anticipate in the remainder of the turnaround efforts for the company? Because you do have a lot of work to do on that front. So are there any estimates of how...
multi-year plan that I am working right now to be presented to the board and this roadmap will be designed with data to enable digital era in this direction selling channel as well as enable the company to sell in retail. So with respect the IT investment will be approximately between 50% and double of what we spend today.
So, what's next for a year, once we have the plan together to take the company to lead the tough era?
Okay, thank you, that's helpful. And then also, I think Miguel in your commentary at one point you said something about you expect improvement sequentially. So I wasn't sure what you meant. Do you mean in the decline of constant currency sales, like the decline will improve sequentially? Did you mean profits? You know EBITDA will decline or will improve sequentially. What did you mean exactly when you said that?
the top line and the bottom line and everywhere in between for us.
Okay.
So.
Can you just talk about as you expand more the omni-channel strategy in the US?
There were probably some costs in the second quarter related to that. Do you think the cost or the investment in the P&L to execute that will increase materially more in the second half or does the second quarter represent an ongoing rate of investment to bring that strategy to fruition?
I think in terms of investment,
It's it's going Chris.
but also revenue is gonna hit, so it's gonna come. Because so far we only invested when we haven't had any revenue or meaningful revenue, but starting towards the end of Q3 and obviously Q4 and going ongoing, we're gonna have a lot more investment around obviously merchandising strategies and activations and brand activities, but also the revenue is gonna come and take for that. But also the revenue is gonna come and take for that.
Okay.
Okay.
You touched on your cash flow performance, and certainly we can see the operating cash flow in the first half was worse than last year. So can you explain why that is? Because you're supposed to be working on reducing excess inventory, which I would expect would release cash flow as an in-appositive sense.
So what are the elements that are making the cash flow deteriorate year over year?
Yes, Linda. And so in Q2, our cash deterioration was better than in Q1. Of the 70 or so million of cash operations plus investing about 16 million was the using Q2. And what is driving the uses of cash are our margin erosion. As you know, we decline our growth margins from 60 to 400 basis points here and here.
So that took some cash. And the second item was the investment in the SGA where we also went from about 51% report a jocer last year to 54. Those are the two main cracks of cash. And we had indeed a benefit in inventories between Q1 and Q2. We're working very hard to prove our ethanol p-flans as well as our produce development cycles.
so that we manage our inventories better. So we have that in our eyes and plan to continue a reduction reduce an inventory as a source of cash.
Now, so in addition to that, what you also see in our free cash flow for working capital is an investment to prepare for the retail expansion. So you will see our AAR and some of our GDP terms increasing to enable the multi-channel strategy.
Okay, and then when you mentioned the pricing averaging 15% increase for the year, is that reflecting what's already been taken or do you still need to take some actions to get to that 15% increase for the full year?
Yes, so we are taking more actions. The price increases were into effect at different times of the quarter, so you don't see the full effect in Q2. You will see more of that benefit coming in Q3 and Q4.
Okay. And then.
On the retail initiative in the US, you mentioned initiatives at home goods and bat bats and beyond. Are you talking about online initiatives or is that actually product that we can see in the stores at this time, in those brick and mortar stores?
So as I mentioned on the screen those were I'm going to call them pilots and tests for us to make sure that our let's say the pipeline is working you know supply chain our systems and everything right I think the product that we sold to them in let's say in home goods I think it's already gone I think they already sold all of it the best of them beyond it was online and I think they're pretty much it's all gone by now but what are you going to start seeing in Q3 am
more importantly, Q4. So at the end of Q3 and Q4 is our products on the shelf and online in the next ?? in May your return.
Okay, and then just finally, I mean, I guess...
I'm sort of wondering, I mean, if profitability meaning evita will improve the quenchily in the second half. If the evita will improve the quenchily in the second half.
Why was there the necessity, I'm still not understanding, in order to get that credit agreement amendment and to raise that leverage ratio cap or whatever for the second half. Is that because of the working capital requirements for the Omni channel strategy or what is the real reason for needing to change that credit agreement?
Yes, Linda. Ivita is suspected from two, but also we are accelerating some of our restricted initiatives as part of our turnaround plan, primarily to take action in Europe as we have had more decline revenues and originally anticipated as well as in Asia. So you will see some cash.
required to to to retract our part of the business and also there is another cash requirement to enable the technology investments and the working capital for our retail expansion.
And the last piece is uncertainty of the inflation that we are seeing in the different markets and the lockdowns in China and the situation in China. Obviously, we are all – everybody is expecting to COVID becoming an event of the past, but as you know, there are still ramifications of the pandemic.
of the COVID pandemic in our business. So with that uncertainty, we thought it was prudent to revise the credit agreement so that we have the flexibility to execute both. The turnaround of the direct selling market as well as our expansion in retail for our brand.
Okay, thank you, that's very helpful. And then one last one, on your sharey purchase.
Just can you clarify what your stance is right now? So you've completed the accelerated share repurchase in terms of what you're gonna do going forward. Is it your focus on debt reduction or could there be some further share repurchase on an opportunistic basis? Or are you prevented from that temporarily under the terms of the credit agreement?
Yes, so we have 150, well first we did finish the share repurchase in May and we repurchase 4.9 million shares. That had an effect of nine cents to EPS and then we have still remaining 150 million in capacity of our original 250 million.
But at this time, we do not anticipate additional travel purchases for the remaining of the year, as we have shifted to a managed working capital and debt and then the retail expansion this year. So those are the priorities, but obviously we will manage in our capital allocation closely on the monthly basis.
Okay, thank you so much for answering all my questions. I really appreciate it.
Thank you, Linda.
There are no further questions at this time. Mr. Fernandez, I turn the call back over to you.
Thank you. In closing, while we're not pleased with our second quarter results, they were in line with our expectations and we're pleased to see the sequential improvement in profitability as a result of the changes we're making to our core direct funding business.
Our omnichannel expansion plan remains on track and we look forward to the future penetration into retail channels later this year.
We acknowledge that there is plenty of work still remains ahead of us.
that there's plenty of work still remains ahead of us to transform this business.
But this quarter marked incremental progress towards our goal of making this business as big as our iconic brand.
Thank you for your time today. We look forward to talking to you against her.
Just concludes today's conference call. You may now disconnect.