Q4 2022 WD-40 Co Earnings Call
New information future events or otherwise.
With that I'd now like to turn the call over to Gary.
Thank you Wendy and.
And thanks for joining us for today's conference call.
Today is my 100 earnings call at WD 40 company its wholesale by loss as.
As we shared earlier this year by formally handed the CEO range, Steve on September 1st as part of our planned leadership transition.
However, I wanted to join you all one last time to wrap up fiscal year 2022.
25 years ago, we had a dream to take the blue and yellow can with little Red top to the world.
Today I'm extremely pleased to say you can find WD 40, multi use product in <unk>.
Third 76 countries and territories around the world.
Deed the Sun never sets on WD 40.
As Marshall Goldsmith says the best leaders understand that long term results are created by the great people doing the work not just the one person who has the privilege of being at the top.
I've had the honor of working with many exceptional people. During my tenure at WD 40 company, many of whom remain on the global leadership team today, and who will continue to work closely with Steve in the coming years in.
In addition to the leadership team there are many talented people within the organization from all functions trade blocks countries and time zones.
<unk> to ensuring that millions of new people will meet the blue and yellow can with little Red top for the first time in the years to come now, let's take a bit of a closer look on fiscal year 2022.
In business, there are often headwinds and <unk>.
It's a somewhat manageable because you know they are coming and you can plan accordingly.
We've had plenty of headwinds and <unk> this fiscal year, but we've also had turbulence.
It would be months is more difficult to navigate you don't see it coming you don't know how long it will last and you cant properly planned for it.
Turbulence, we experienced this fiscal year was primarily in the form of inflation.
Unfortunately, we continue to face a challenging inflationary environment in our fourth quarter gross margin came in at 47%, reflecting significant increases to our cost of products sold.
In a few minutes Jody will share an update with you on gross margin and what we have been doing and will continue to do to restore.
Today I will walk you through the results of our six strategic initiatives for the last time.
Our strategic initiatives support our 2025 revenue growth target, which is to drive net sales to between $650 700 million by the end of fiscal year 2025.
We strive to do that while following our 50 530 25 business model.
And Sarah remain committed to the company's long term revenue aspirations and to the $55 $30 25 business model. However.
However, a lot of excellent work has been completed over the last several months to better understand how we will continue to build our business for the future, Steve Sarah and Wendy will be evolving the company's investor messaging over the next couple of quarters to better communicate how they intend to execute against the company's strategic initiatives.
Strategic initiative number one is to build the business for the future.
Our goal under this initiative is to build an enduring business that will be proud to pass onto the next generation the desired outcome for this strategic initiative is to fully integrate our ESG initiatives into the heart of our strategic planning process.
ESG team made excellent progress in fiscal year, 2022, and we'll be publishing our next ESG report.
Then the second 2022.
In this report we will detail our ESG related objectives targets and progress for the last two year period, and well established objectives and targets through fiscal year 2024.
Strategic initiative number two is to attract develop and engage outstanding tribe members.
We believe that by building and nurturing an inclusive and diverse purpose driven learning and teaching organization. Our tribe members will succeed together, while accelerants individuals' maintaining this people first mindset is an important strategic advantage for the company.
In fiscal year 2022, our biannual employee engagement survey revealed a slight increase in engagement from 93, 1% in January 2020 to 93, 5% in January 2022.
Nearly 600 tribe members truly create a culture that is a competitive advantage.
Strategic initiatives three is to strive for operational excellence our golf under this initiative is to foster a culture of continuous improvement in which operational excellence is the responsibility of every chart number.
<unk> to operational excellence continues to be an enormous asset as we navigate a world of constant change using a 50 530 25 business model as a framework we measure ourselves against this operational excellence initiative.
Strategic initiative number four is to grow WD 40, multi use product.
Under this initiative is to make the blue and yellow can with little Red top available in more places to more people who find more uses more often in fiscal year 2022 sales of WD 40, multi use product increased 8% politically to $399 4 billion.
Strategic initiative number five is to grow the WD 40 specialist product line alcohol under this initiative is to leverage the WD 40 brand by developing new products and categories, which build and reinforce the cole brand positioning and create growth through the continued geographic and digital expansion.
In fiscal year 2022 sales of WD 40 specialist decreased 19% globally to $59 9 million.
<unk> initiative number six is to expand and support portfolio opportunities that help us grow.
Although this initiative include three in moderate GTA and fraud as well as our homecare and cleaning brands in fiscal year 2022 sales of products included in this initiative declined 11% globally to $59 5 million.
This decline is linked primarily to lower sales of our non strategic homecare and cleaning brands. Many of our brands in this category, our harvest brands, which we expect a decline in sales over time, but continue to.
To contribute healthy returns to our business.
That ends my review of the strategic initiatives.
I'd like to say, thank you to our tribe members at WD 40 company for allowing me the privilege of being a leader for the last 25 years.
Honored to stand on the shoulders of Giants. Thank you for helping me build an enduring business that arent proud to pass on to the next generation.
Before I pass the call to Steve for the lost time.
I'd like to share with you a quote from my friend Kim.
Blanchard.
To learn from the past is good.
But there is a waste to plan for the future is good.
It is a waste happiest and most productive in life. When you are living in the present.
But one last time every year.
Thank you Gary and good afternoon, today's quote an emotional day for this earnings team as both Gary and Jay complete that final earnings call.
I want to take a moment to thank Gary and Jay for their relentless commitment to our company and its stakeholders.
Thank you Prince are all over this wonderful company and I honestly don't think I could be inheriting a better situation.
Part of Gary's legacy has created a powerful global infrastructure over the last two and a half decades, the blue and yellow brand with the little Red top is stronger than ever and is one of the most widely distributed and most consistently executed global brands out there.
And then of course, there's a secret formula not the one found inside of the blue and yellow can with little Red top rather a wonderful global tribe minutes. We believe in the will of the people well is not tangible you won't find it on our balance sheet. It encompasses morale motivation collaboration and a desire to offer discretionary effort.
Our special culture is absolutely a key source of competitive advantage and a critical multiplier of our strategic effectiveness, which will enable us to drive progress and sustained success.
Now, let's take a closer look at our results last quarter, we shared with you the market condition suggested that for the full fiscal year sales will likely to be in a range of between $519 million to $532 million, reflecting year over year growth of between six and 9%.
Today, we reported net sales of $518 8 million for fiscal year 'twenty, two up 6% over last fiscal year.
Changes in foreign currency exchange rates had an unfavorable impact of $8 3 million on net sales for fiscal year 2022 on at constant currency basis, net sales would have been up 8%.
Fiscal year 2022 is it challenging year dominated by inflation geopolitical tensions currency headwinds and continuing disruptions caused by the Covid pandemic, we learned to expect the unexpected in fiscal year 2022.
We are a better prepared and more agile organization because of the challenges. We faced we are pleased we were able to achieve top line growth in this volatile environment.
Fortunately gross margin was the Achilles heel for fiscal year 2022.
As inflation hit 40 year highs, we had to make exceptional efforts to adapt which meant implementing our largest set of price increases.
Jay will share the details of how those price increases impacted our gross margin with you in a moment, but first let's dive into the fourth quarter.
For the fourth quarter, we reported net sales of $130 4 million, which reflects an increase of 13% over the fourth quarter of last year.
<unk> and foreign currency exchange rates had a larger than anticipated impact on sales in the fourth quarter, resulting in an unfavorable impact of $6 7 million on net sales for the fourth quarter.
On a constant currency basis net sales would have increased 19% over last year.
So now let's take a closer look at fourth quarter results and our trade blocks, starting with the Americas.
Sales in the Americas, which includes the United States Latin America, and Canada were up 25% in the fourth quarter to 68 million sales of maintenance products increased 30% in the Americas due to increased sales of maintenance products in the U S, Canada, and Latin America, which all experienced double digit growth.
Maintenance product sales in the United States increased 21% or $8 1 million in the fourth quarter due to strong sales of both 740 specialist WD 40 multi use product.
The strong sales were driven by the timing of promotional programs the impact of price increases as well as continued strength in the industrial channel.
<unk> hundred 40, especially sales were up 73% in the quarter due to increased production capacity and improved availability as our supply chain continues to strengthen.
Maintenance products sales in Canada increased 41% to $1 3 million in the fourth quarter due to the timing of customer orders and the impact of price increases and successful promotional programs.
<unk>, Canada has seen phenomenal results with premium amortization assay with the first country to launch smart straw next generation.
Maintenance product sales in Latin America increased 80% for $5 4 million in the fourth quarter, resulting in the strongest sales quarter in the region's history.
The increase in sales in our Latin American distributor markets was partially due to many distributor customers purchasing product in advance of price increases that went into effect in the fourth quarter.
In addition, we continue to experience positive momentum in our direct market in Mexico from the shift we made in 2020 from a distributor model to a direct market.
In total our Americas segment made up 52% of our global business in the fourth quarter over the long term, we anticipate sales within this segment will grow between 5% to 8% annually. As a reminder, the compound annual growth rates associated with our segments reflect our long term growth expectations for the segment may not always alert.
And with shorter term trends and results.
Okay.
Now onto M&A.
Sales in EMEA, which includes Europe , the Middle East Africa, and India, but down 3% in the fourth quarter to $43 6 million currency fluctuation has significantly impacted our sales results for EMEA a trade block during the quarter.
Changes in foreign currency exchange rates had an unfavorable impact of $5 9 million on net sales for the fourth quarter.
On a constant currency basis sales would have increased 10% over the fourth quarter last year.
In addition, lower sales of homecare and cleaning products negatively impacted <unk> sales in the fourth quarter.
The COVID-19 pandemic resulted in particularly strong demand in homecare and cleaning products last year, which was not repeated this year.
As you know we sell into EMEA through a combination of direct operations as well as through marketing distributors sales in our EMEA direct markets, which accounted for 71% of the region's sales in the fourth quarter declined by 7% during the quarter to $31 million in U S dollars.
Changes in foreign currency exchange rates had an unfavorable impact on net sales for the fourth quarter on a constant currency basis sales would have increased 6% over the fourth quarter last year.
But foreign currency fluctuates from period to period. It can sometimes be informative to look at our results in the local currencies in which we conduct sales transactions in our direct markets.
Euro based direct markets and local transaction currencies, we experienced double digit growth in nearly every market. We're seeing strong sales of both to be 40, multi use product and debit 40 specialists in these direct markets. We do believe that a portion of this activity was due to some customers purchasing product in advance of the price increases that went.
Into effect late in the fourth quarter or going into effect early in the first quarter of fiscal year 2023.
In the United Kingdom, our pound Sterling based direct market total sales and transaction currency decreased by 24% in the fourth quarter. This decrease in sales is primarily attributable to reduced demand for our maintenance products compared to the prior year period.
In the comparable period of last fiscal year, we experienced increased demand due to isolation renovation trends associated with the pandemic.
It sounds and Rmi distributor markets, which accounted for 29% at the regional sales in the fourth quarter increased by 7% during the quarter to $12 6 million in U S dollars.
Currency does not materially impact our EMEA distributor markets sales continued to be impacted by our values got a decision to suspend sales of our products to a market and distributor customers in Russia and Belarus.
In total our EMEA segment made up 34% of our global business in the fourth quarter over the long term, we anticipate sales within this segment will grow between 8% to 11% annually.
Now on to Asia Pacific sales in Asia Pacific, which includes Australia, China and other countries in the Asia region were up 18% in the fourth quarter to $18 8 million.
Our Asia Pacific distributor markets sales were $9 5 million in the fourth quarter up 64% compared to last year.
Product, we sell in our Asia Pacific distributor markets.
From a third party manufacturer in Shanghai, you'll recall that there was severe lockdown measures in place last quarter in Shanghai, which were lifted on June 1st after the Lockdown was lifted we resumed shipping product to our customers and our Asia Pacific distributor markets, resulting in strong fourth quarter sales results.
In Australia sales were $5 5 million in the fourth quarter up 3% compared to last year change.
Changes in foreign currency exchange rates had an unfavorable impact on sales for the fourth quarter on a constant currency basis sales would have increased by 11% compared to last year.
Sales increases were driven by strong sales activity 40, multi use product due to increased growth of our base business increased promotional activities and price increases that went into effect in February .
And China ourselves with $3 8 million in the fourth quarter down 21% compared to last year, driven primarily by the timing of customer orders in the industrial channel and decreased sales for the E Commerce channel.
Changes in foreign currency exchange rates had an unfavorable impact on net sales for the fourth quarter on a constant currency basis sales would have decreased by 18% compared to last year.
We remain optimistic about the long term opportunities in China, we expect volatility along the way due to the economic and health related impacts of COVID-19, the timing of promotional programs the building of distribution shifting economic patterns and varying industrial activities.
In total our Asia Pacific segment made up 14% of our global business in the fourth quarter over the long term, we anticipate sales within this segment will grow between 10% to 13% annually.
Now a brief update on our must win battles must win battles are the primary areas of action that will enable us to deliver against our revenue growth aspirations to drive sales to between $650 million to $700 million by the end of fiscal year 2025. These hyper focused actions are the key drivers of revenue growth.
Our largest growth opportunity in first must win battle is the geographic expansion of the blue and yellow can with the little Red top we continue to experience growth of our flagship brand with global sales of WD 40, multi use product up 8% in fiscal year 2022, we've experienced significant growth in priority markets like China, Mexico and India.
Where sales increased by 13%, 31% and 45% respectively.
Mexico is a shining example of how we can drive strong growth in emerging markets with appropriate Resourcing, we transition Mexico from an indirect to direct market two years ago and since that time, we have two five times the sales in FY 'twenty two compared to FY 'twenty, we have identified 20 priority markets.
Which show the highest potential for growth and will continue to prioritize investing in these priority markets to drive stronger growth into the future.
Our second must win battle as a premium amortization Adobe 40, multi use product criminalization creates opportunities for revenue growth gross margin expansion and most importantly, it delights our end users in fiscal year 2022 sales of WD 40, Smart straw EZ reach when combined grew 4% year over year with growth.
Across all three trade blocks and currently represent 47% of global sales of WD 40, multi use product.
It's worth noting that as a percentage of premium myself has remained relatively constant compared to last fiscal year that is because as we continue to drive premium amortization in many markets the growth of our classic WD 40, multi use product.
It's growing at a faster pace in many emerging markets, particularly in some of our emerging markets, where smart straw is not yet available.
Over the long term, we continue to believe that there is significant opportunity to drive sales of <unk> products in both developed and emerging markets.
Additional capacity for Smart straw next generation comes online we will move closer to our objective for this must win battle, which is to grow sales of premium products to greater than 60% of Devry 40, multi use product sales by the end of 2025, which represents a growth opportunity for approximately $114 million.
A third must win battle is to grow to be 40 specialist in fiscal year 2022 sales of WD 40 specialist were up 19% compared to last year we.
We saw sales growth of WD 40 specialist across all our segments, but the United States. So outstanding growth reporting an increase of 51% compared to last year.
This was driven by several things first we've turned the corner on the capacity constraints, we had been experiencing in our U S supply chain. In addition, the new brand architecture is completely rolled out in the United States and improving the sell through about every 40 specialist brand products as.
As I've shared with you in the past, we fully rolled out the new brand architecture, and Australia. Adobe 40 specialists continues to set a new benchmark there with sales of WD 40 specialist, reaching over 35% to be 40, multi use product sales in FY 'twenty two.
Our final must win Battle is digital commerce, our vision for digital Commerce is to engage with end users at scale, making it easy to access to learn about and purchase all brands in fiscal year 2022, global ecommerce sales were down 8% compared to last fiscal year, partially due to the continued rebalancing of south towards brick and mortar.
Locations.
Despite a slow results. This fiscal year, there was a significant opportunity ahead of us in the digital commerce space and the Americas Digital Commerce sales roared back in the <unk>.
Latter part of the year, which gives us great confidence that we're through the worst of the downturn. We expect sales in the E. Commerce channel were returned to strong growth in fiscal year 2023, more importantly, we will continue to leverage our digital capabilities as an accelerator of our growth going forward.
Now I'll turn the call over to Jay who will provide you with a financial update on the business.
Thank you Steve.
It's hard for me to believe that today is my final earnings call at WD 40 company.
Over I will remain in my current role as CFO until the end of the month.
As we shared with you earlier this year, Sir Hi, there will officially step into the role of CFO on November one.
I'm thrilled to be handing the baton to such a capable leader.
<unk> worked alongside our global financial and accounting team as a financial strategist for a year now and her financial expertise and growth mindset.
Excellent fit for our company and its culture.
I know you will enjoy working with her as much as I have.
Let's start with a discussion about how we performed against our most recently issued fiscal year 2022 guidance.
We expected net sales growth to be between six and 9%.
With net sales.
Of between $519 million and $532 million.
Today, we reported.
<unk> revenue of $518 $8 million up 6% compared to the prior fiscal year.
As a reminder, our guidance excludes the impact of foreign currency exchange rates.
Fluctuations in foreign currency had a significant negative impact on both the fourth quarter and full fiscal year sales results, we expected gross margin to be around 50%.
Today, we reported gross margin of 49.1% slightly below our guidance expectations.
We expected our global advertising and promotional investment to be between five and five 5% that's net sales.
Today, we reported an A&P investment of five 3%.
We expected net income to be between 69 and $71 million.
On a diluted EPS of between $5 and <unk>.
And $5 10.
Today, we reported net income of $67 3 million and earnings per diluted share of $4 90.
Slightly below our guidance expectations.
To better understand what is driving these results lets review our 50 530 25 business model. The long term targets, we use to guide our business as you may recall, the 55 represents gross margin, which we target to be at or above 55% of net sales the third.
<unk> represents our cost of doing business, which is our total operating expenses, excluding depreciation and amortization.
Goal is to drive our cost of doing business over time towards 30% of net sales and finally, the 25 represents our target for EBITDA.
First the $55 or gross margin in.
In the fourth quarter, our gross margin was 47, 4% compared to 51, 2% last year.
This represents a decline of 380 basis points due primarily to the challenging inflationary environment, we continue to operate in.
The good news is that we believe we have finally reached an inflection point.
We put significant price increases into place in the third and fourth quarters, and we are seeing positive impacts to gross margin due to those price increases I'll speak more about these impacts in a moment.
Changes in major input costs, which include specialty chemicals and aerosol cans were the primary drivers of this decline rising specialty chemical costs negatively impacted our gross margin by 560 basis points period over period as you know crude oil is one of the primary.
Stocks of our specialty chemicals and costs associated with crude oil distillate continued to remain high even though crude oil has come down in price.
This continues to put pressure on our cost of goods and all three trade blocks.
In addition, steel and tin plate continued to be at historic highs and the increased cost of aerosol cans negatively impacted our gross margin by 520 basis points in my 14 years as CFO I've never seen inflationary impacts like the ones. We are currently experiencing linked to specialty chemicals.
Steel and tin plate.
Also negatively impacting our gross margin were higher filling teams primarily in the Americas, which negatively impacted our gross margin by 140 basis points.
So offset the impacts of inflation, we began tactical price increases across all our markets and geographies beginning in the first quarter of fiscal 2022.
Price increases take time to embed their way into our results, but I am happy to share with you that gross margin was positively impacted in the fourth quarter by 810 basis points from sales price increases which were implemented during fiscal 2022.
We have been implementing price increases across our business throughout 2022, However, we can.
We did a significant round of price increases in our largest market. The U S. In the third quarter that resulted in sequential improvement to the U S. Gross margin up 400 basis points in the fourth quarter compared to the third quarter of this fiscal year, we expect to experience similar path.
<unk> margin increased trends.
As the full impact of price increases in other markets become embedded into our results.
We implemented significant price increases in Europe , beginning in July through September and we began to see a recovery of EMEA gross margin in the first month of fiscal 2023.
We will continue to see further benefits from those and other price increases in future quarters.
We're confident that our action plans to rebuild margin coupled with the advancement of our margin accretive must win battles will enable us to deliver our long term margin goals.
Current inflationary environment.
Bierley disrupted our ability to achieve our 55% gross margin goals over the near term, we recognize our recovery and progress toward our target of 55.
<unk> will take time to achieve.
Well it may take some time, we will continue to take the necessary actions to restore our gross margins.
55 or higher over the long term.
Now I'll address the 30 or our cost of doing business in the fourth quarter, our cost of doing business decreased to 31% down from 39% last year.
The fourth quarter, 69% of our cost of doing business came from three areas people costs or the investments we make in our tribe.
People costs decreased by approximately $4 $5 million in the fourth quarter compared to.
Last year, primarily due to lower incentive compensation.
The investments, we make in marketing advertising and promotions.
As a percentage of sales of advertising and promotion investment was seven 7% in the fourth quarter.
Similar to the fourth quarter of last year, we made a deliberate decision to increase our A&P investment to accelerate our efforts in building long term brand awareness and market penetration.
And finally, the freight costs to get our products to our customers.
And that brings us to EBITDA the last of our 50 530.
<unk> 25 measures EBITDA was 16% of net sales for the fourth quarter, which is up compared to the fourth quarter of last year, but lower than we would like to see.
We would expect to move closer to historic EBITDA levels in the future.
Well that completes the discussion on our business model now.
Now, let's discuss some items that fall below the EBIT line. The provision for income taxes was 19, 1% in the fourth quarter compared to 25, 9% last year.
The change in our income tax rate was primarily due to the favorable mix of income in jurisdictions taxed at lower tax rates, coupled with a one time adjustment to state tax expense.
Net income for the fourth quarter was $14.8 million compared to $8 $4 million last year.
Diluted earnings per common share for the fourth quarter.
<unk> eight compared to 61 for the same period last year.
Now a word about our balance sheet and capital allocation strategy.
<unk> financial condition and liquidity remained strong.
Capital allocation strategy includes a comprehensive approach to balance investing in long term growth.
Providing strong returns to our shareholders, we continue to return capital to shareholders.
Combination of regular share repurchases and regular dividends.
On October 11th our board of Directors declared a quarterly cash dividend of <unk> 78 per share payable October 31.
Stockholders of record at the close of business on October 21.
During fiscal year 2022, we repurchased approximately 139000 shares of our stock at a total cost of approximately $29 million.
One other item I'd like to call your attention to is the increase in inventory on our balance sheet to $104 million.
You hear a lot of noise right now about how some consumer companies.
Heightened concerns about managing excess inventory and reducing inventory levels I'd.
I would like to assure you that we do not have that concern we've intentionally buildup of raw materials components and finished goods, particularly in the U S.
To ensure supply and improve our ability to meet our market demands.
We believe that this is a good use of our working capital.
Eventually we would like to see inventory turnover go back to pre pandemic ratios, but in the current supply chain environment, we have limited visibility as to when that may occur.
In closing I would like to take this opportunity to say, thank you to the tribe and to all stakeholders for allowing me to serve as CFO of this wonderful company for the last 14 years.
I've made so many positive lasting memories with you and I am grateful for each one.
I'm now going to turn the call over to Sarah.
I'll share a few thoughts with you on the future and provide a summary of the company's fiscal 2023 guidance.
Now it is my honor to pass the baton over to you Sarah.
Thanks, Jay and thank you for that lovely introduction.
I am very happy to be here and eager to get started in my new role on November 1st My primary objective will be to sustain the financial success at WD 40 company has experienced throughout Gerry and James tenure.
All factors have contributed to the company's financial success, but there are two that I would like to focus on today.
First is the 50 530 25 business model.
For many years, we've run our business guided by these targets and have demonstrated that by aligning the organization behind this target we have continually improved the financial performance of our business.
Our model is being tested right now due to the inflationary environment, we are operating in.
However, we remain committed to our 50 530 25 business model and our focus on managing our business. So that we can restore gross margin to our target of 55% share.
Second the company's comprehensive capital allocation strategy.
I am committed to maintain.
Our capital allocation strategy begins with targeted revenue and earnings growth in the mid to high single digit.
We have a cash flow accretive business that generate adequate liquidity to support our near and long term growth strategy.
Historically, our business model has been asset light, which is typically required low levels of capital investment roughly between one and 2% of sales in fiscal year 2023, we expect to return to those historic levels and invest approximately $9 million capital project we have.
Believe that we will continue to see our investments in capital project returned to historical levels in the future.
Excess capital generated by the business that's been allocated to the highest return alternative.
We don't anticipate any brand or product acquisition, where.
We're in the business of acquiring new users and points of distribution every day and that is where our focus will remain there.
Therefore, we return the excess capital to our stockholder dividends and share buyback.
Annual dividends will continue to be targeted at greater than 50% of earnings.
Maximizing return on invested capital remains a priority and we will continue to target a return on invested capital greater than 25%.
Now, let's turn to fiscal year 2023 guidance, we expect net sales growth to be between five and 10% with net sales between 545 and $570 million.
Margin for the full year is expected to be between 51 and 53%.
Advertising and promotion investment is projected to be between five and 6% of net sales.
The provision for income tax is expected to be around 22%.
Net income is projected to be between 69 and $71 million.
And diluted earnings per share is expected to be between $5 and nine.
And $5 24.
Based on an estimated $13 6 million weighted average shares outstanding.
Our projections for fiscal year 2023 reflects the recent strengthening of the U S dollar against the pound Sterling Chinese RMB and Australian dollar.
Without those currency headwinds our sales growth projection would have been between 10 and 15% of net sales.
In addition, we are managing through disruption in the market from our various price increases and expect much of our growth to be weighted towards the second half of fiscal year 2023.
Our net income and EPS projection included planned investments for ESG initiatives.
New cloud based systems and strategic investments in our people to support our longer term growth aspiration.
We want to remind everyone that there are dynamics outside our control that may impact our forecasted fiscal year 2023 result.
The impact of fluctuating foreign currency exchange rate.
Unanticipated inflationary headwinds and other unforeseen events.
This guidance does not include any future acquisitions arent divestiture.
That completes the outlook discussion now back to you Steve.
Thanks Sarah.
Do you have a summary of FY 'twenty, two and our financial expectations for FY 'twenty three let's spend a few minutes on the longer term view, we have a simple strategy, a practical business model and a significant and realistic opportunity to drive revenue growth well beyond the 2025 targets over the longer term.
Sarah and I are absolutely committed to our 2025 revenue growth target, which is to drive net sales to between 650 and $700 million by the end of fiscal year 2025, we will strive to do so while following all 50 530 25 aspirational business model.
Looking beyond 2025, I believe there was a huge runway for long term revenue growth for our company as Gary alluded to earlier, we will be evolving our communications over the next couple of quarters to better share. How we will achieve this growth in the future for now I'd like to share with you My three strategic priorities for my tenure as CEO .
Firstly to pivot the company towards a sustainable future I consider the environment to be a key stakeholder in making decisions that create and protect long term values must take that key stakeholder into consideration.
Secondly to further leverage our capability as a global learning and teaching organization I believe if we learn faster we can grow faster.
And thirdly to realize a huge growth potential president and emerging markets I believe the long term global market growth opportunity Protiviti 40, multi use product.
$1 billion in it.
The fastest growth will be achieved and our emerging markets.
I look forward to sharing more with you on these and other developing areas in the coming quarters.
In summary, what did you hear from US on this call you heard that this will be Gary and Jay his last earnings call.
Sarah and I are committed to the 2025 revenue growth targets under 50, 530 25 business model.
Yes, it sounds Adobe 40, multi use product were up 8% in fiscal 2022.
It sounds like <unk> 40 specialists were up 19% in fiscal year 2022.
Yes, with the exception of digital Commerce hold the must win battles are performing well and supporting our revenue growth objectives and that we expect digital commerce to return to solid growth next fiscal year.
You heard that although we've been experiencing pressure on gross margins from the challenging inflationary environment in the fourth quarter, we saw a strong margin recovery in the United States and we've begun to see a recovery the mayor's gross margin in the first month of fiscal year 2023.
And you heard that I am very focused on my strategic priorities, let's see but we'll be sharing more with investors in coming quarters.
In closing today I'd like to share with you a quote from Jim Collins.
World of constant change the fundamentals are more important than ever.
Thank you for joining our call today, we'd now be pleased to take your questions.
Ladies and gentlemen, if you would like to register a question. Please press star one on your telephone keypad. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
If your question has been answered and you would like to withdraw your registration. Please press the star one again one.
One moment for the first question.
Your first question comes from the line of Linda Bolton Weiser with Davidson. Your line is now open.
Yes, Hello, Thank you farewell.
And Gary I will Miss you and welcome to the New management team, we look forward to working with you.
So could I just yeah.
For my first question is about your.
Questions around gross margin in the quarter.
I think that you have been saying that you expected gross margins to be up sequentially and yet it was down a little bit.
What were the things that came out in different in the quarter versus what you had been expecting to point the gross margin in the quarter being down.
Yeah.
Hi, Linda this is Jay.
Yes, if you recall, we had price increases going in in the third quarter in the Americas in the U S and the Americas.
We also had them going in in the fourth quarter in EMEA.
What we found is those price increases took well well they didn't <unk>.
<unk> generated a significant amount of resistance.
We were able to it took us longer than we had anticipated so the delay of price increases.
The delay of the implementation of price increases was the primary driver. We've also had some disconnection with respect to our.
Our.
Petroleum distorts the various components, we use and their index is not necessarily tied to the directly to oil and in the past it's tracked fairly closely to that.
But what we did see as a significant variation from that.
<unk> maintained itself.
A fairly high level and continues to this day.
Okay. So I guess when you look at the maintenance product sales in the U S. I think you said it was up 21%.
So that's really close to the 25% price increase by not quite so it was what did you experience volume declines as you were taking any price increases some volume softness.
Hi, Linda this is Steve overall.
Overall, the volumes or for the year I mean, it's a slightly different story for Oh, The Asia Pacific, where we continued strong volume growth, but yes in the.
In the United States and also the Americas totally and then any mega as well our volumes were kind of flattish for the year.
Obviously in EMEA, we had the the lawsuit a half of year with the Russian business.
So that was that was that was a hit in EMEA, but overall in terms of N P and piece of multipurpose maintenance products volumes were flat for the year. So there was some decline all of our volume all about price all of that growth is price driven for the year. When you look at it globally.
But I guess, what I'm not so much interested in the fiscal year I'm interested in the period during which you started to take significant price increases.
Did the volume declines get more significant as we're taking these price increases in 2025%.
Yes, so what happens when you when you implement price increases of that kind of magnitude you did quite a lot of disruption in the market. So.
Theres been lots of promotions and a lot of our volume is driven by lots of displays and <unk>.
Home centers in major retailers and so losing some of that momentum is what causes some of that volume loss Southern U S. In Q4 to answer your question specifically there were some volume loss as we went through some of this disruption and we expect that to continue the first part of FY 'twenty three.
So what are your local constant currency sales estimate for FY 'twenty three of up 10% to 15% how does that very roughly breakdown between volume and price.
So going looking forward overall, we did see volumes overall being flat.
Flat to slightly negative for the year and so all of the price increases.
Basically globally, that's all being driven by bye bye price and absorbing those price increases so it's slightly different again by trading blocks.
We haven't had the same inflationary impact.
We've seen elsewhere in Asia Pacific.
So look for Europe and for the.
And don't forget in Europe , it's still going to absorb a half year of the Russo loss, So thats out there as well in terms of the volume loss.
Volume expectations for FY 'twenty, three are flat to slightly negative.
Recovering as we work our way through this disruption by the second half here.
Okay. Thank you that's very helpful and then.
Alice meeting.
We're kind of talking about getting back.
Back to what 55% ish gross margin by the end of fiscal 'twenty three.
I'm still trying to what you're expecting but yeah.
Sequentially going up slower than we thought or what is the cadence that you're now thinking versus when you were talking in July .
Yeah.
Hi, Linda this is Sarah so yes, I think we had hoped that we are going to be there by the end of fiscal 'twenty three but as Jay mentioned the timing of these price increases coming in what was a little bit later than we expected when we started to see them actually flow through the results and so we will see a slower uptake and we're anxious.
Painting, a slower uptick for the upcoming year. So at this point, we don't think we'll be able to get to the 55 by the end of this year, but I think there are still.
There are still opportunities both a premium inflation and other margin accretion activities that we're working on that but we believe that we can that we can get there at some point in FY 'twenty four.
Okay and then.
Just one final one for me.
Yeah.
I mean, you're talking about inventory and Youre right a lot of companies are carrying higher inventory.
Slower than expected it working it down it seems like.
A permanent situation because of component availability and all that.
In which case.
You did sort of technically borrow to pay your dividend your free cash flow is lower than your dividend. So that's not a great situation so going forward I mean.
I guess, that's inventory because it doesn't increase anymore your cash flow will improve but what's the outlook for cash flow relative to your cash dividend in FY 'twenty three.
Sorry, Linda I was on mute.
So we would certainly expect it to cover it.
As we go into the next year. So this was a year of outsized investment in inventory and one that we are we might see some incremental movement, but it certainly is not going to be of the similar magnitude.
As we go forward. So you know our our view is that the <unk>.
Inventory at some point will normalize back to the terms that we've historically had.
It's just that right now we can't see when that will be.
Because of things like lead time.
Availability of certain components et cetera et cetera.
Okay, well that's fair enough. Thank you so much for answering my questions best of luck.
Thank you Linda.
Your next question comes from the line of Daniel Rizzo with Jefferies. Your.
Your line is now open hi.
Everyone. Thanks for taking my questions.
Just for clarification. There is I think you said there was a sales.
FX headwinds expected in sales I think it was I think 500 basis points.
Did you have you clarified what you would expect FX to mean to EBIT EBITDA or EPS.
No. We have we have not quantified that but we have built and those expectations into our guidance.
Okay.
And then.
I think north North American was fairly strong I don't know if I missed this but did you indicate that there was some pre buying in North America.
Because of anticipation of the price hikes.
In Q4.
Hey, Daniel this is Steve So in Latin America that was some pretty some limited pre buying so it's not overly material but.
In Latin America, with our distributor markets and we did have some pre buy on price and get correct.
But not North America.
No.
North American increases were in Q3.
Alright, Thank you very much.
Ladies and gentlemen that does.
That does conclude our allotted time for questions.
Great. Thank you for participation on today's conference call and ask that you. Please disconnect. Your line. Thank you.
Okay.
[music].
Okay.