Q2 2023 Logitech International SA Earnings Call
During this call we will make forward looking statements, including with respect to future operating results under the Safe Harbor of the private Securities Litigation Reform Act of 1095.
We're making these statements based on our views only as of today.
And our actual results could differ materially and we undertake no obligation to update or revise any of these statements and.
And we will also discuss non-GAAP financial results you can find a reconciliation of these non-GAAP and GAAP results and information about our use of non-GAAP measures and factors that could impact our financial results in our press release and in our filings with the SEC.
Including our most annual most recent annual report and subsequent filings these materials as well as our prepared remarks and slides and a webcast of this call are all available at the Investor Relations page of our website.
We encourage you to review these materials carefully.
Unless noted otherwise comparisons between periods are year over year and in constant currency in sales our net sales.
This call is being recorded and will be available for replay on our website.
With that I will now turn the call over to Bracken Bracken.
Thank you Nate.
Thanks to all of you as usual for joining us.
Last quarter, we discussed the ongoing macroeconomic and geopolitical challenges impacting monster in the world.
And the short story is that the industry is volatile.
Inflation continues to be an issue. The dollar remains strong the work continues and consumer confidence appears to be tougher.
Despite this volatility we're committed to a straightforward approach because we manage the business.
We will continue to invest in product innovation volume as the near term conservatively.
First let's talk about innovation.
We love the categories. We're in we're optimistic about their growth trends from the markets the strategy and our business model.
We just had one of the most impressive sets of product launches in the history of Logitech.
All told we announced more than 20, new products in the quarter 20.
In my time at Logitech, I don't think we've ever launched as many.
More important than the sheer number though is that I believe this year they have never been more innovative.
We've increased our product development investments over the past three years.
And Youre seeing the results of those investments as we further separate ourselves from others in the market.
And with everything going on in the World our teams are doubling down.
So exciting.
Any of these new products by the way are additive to our existing portfolio, we are increasing our addressable markets.
And equally as important.
To take advantage of the big durable trends we've been highlighting.
Video everywhere hybrid work and the explosion of gaming into content creation.
We continue to develop products to help businesses and employees thrive in this new and evolving work from anywhere world.
And as the environment changes, we'll continue to learn something new every day every week about what the future holds.
And it's that evolution that creates a demand for innovation and that's the kind of markets, we'd like to be in <unk>.
Markets, where our expertise in design and user insights is rewarded by customers.
For example.
<unk> customers, we announced logitech site.
The question, we hear most from enterprise about video conferencing.
What do I really need in a conference room to make hybrid work work.
We're passionate about creating an equitable experience for remote participants and in room participants.
<unk> is the next step bridging this gap is.
It's a tabletop camera will be sold as part of our conference room solutions and it uses AI to more intelligently truck conversations and provided more natural video perspective to enhance meeting effectiveness.
I'm, especially excited about this product because it highlights two important areas, where we continue to make strides it's powered by AI software an excellent example of our increasingly software driven solutions.
And it's a perfect example of a product that's completely additive to our existing portfolio of conference room products seamlessly working with rally Barnes <unk> just to name a couple of them.
Nobody else has a solution like this it's such an important product I think it was the missing piece of the copper term setup.
For the personal workspace, we launched a new set of keyboards and mice designed especially for Mac users, which will expand our addressable market and the work from anywhere trend.
And now let's look at gaming for the team had a really strong quarter of product launches similar.
Similar to the trend in video and hybrid work, we're seeing more gamers demanding products to lytham game from anywhere.
We announced G cloud gaming device designed for cloud gamers that excess is PC and console games from nearly anywhere.
And as a site for <unk> customers. This product is completely additive to our gaming lineup.
Gamers want on demand access to their favorite games and high quality gaming experiences whereas.
They happen to be.
And Thats exactly what G cloud provides.
Later in the quarter, we released our lineup of pro racing wheels, and pedals when should I believe are far and away the best in the industry.
These are the high end high performing products and the response has been incredibly positive.
List goes on and on gaming launched its Aurora suite of products.
A new set of keyboards mice microphones and headsets targeting larger customers with expanded color and design choices.
And new features like headsets more easily warm with earrings and abroad broader range of hair styles.
For creators, we have a new studio quality microphone and lighting.
We're pushing ahead of them on the meta versus and in partnership with meta released an immersive audio solution Logitech course.
You get the point.
So what's the common thread that runs through these product launches.
They offer a high quality seamless experience for people to work play and create wherever and whenever they want.
They are tightly integrated with our existing product portfolio and in some cases expand the addressable market.
By investing in our product roadmap, while also focusing on operational efficiency.
We will ultimately come out of this downturn better positioned and poised for strong growth.
Many companies talk about investing through times of economic uncertainty we're doing it.
But make no mistake, we're not operating in normal times, and we're acutely aware of the macro challenges.
We're focused on what we can control.
Last quarter, we discussed the plan into this thing.
What you saw this quarter was the first steps in executing that plan, we decreased our expenses focused on operational efficiency.
We committed to reducing operating expenses by $150 million or 11% by the end of the fiscal year.
We're on track to meet that goal for Q2 Opex was down 15%.
And part of the operational efficiency is realigning our org structure.
Earlier this year, we merged our commercial organizations into one team.
The goal is to serve <unk> customers in a coordinated way leveraging one logitech to sell a portfolio of logistics relevant products.
This quarter, we evolved our business group and engineering structures to directly align with our new commercial structure and customer audiences.
B to b customers and users and gamers plus streamers.
Along with operational efficiencies this will allow us to better compete.
Within the enterprise market and better serve end users at the same time.
We executed targeted pricing increases and our operations team continues to look for more cost effective ways of getting our products to market.
Our gross margin for the quarter was a strong 38, 6% given inflation and currency headwinds and.
And we've not yet started to see the lower shipping rates flow through our P&L.
Looking ahead, you should expect us to continue to operate this way.
We will be prudent in the near term while investing in our priorities to grow in the long term.
And that's why I'm, so optimistic about our future.
People will invest in their workspaces people will participate in video calls people will gain people will create content and logic will be right in the middle of all of it.
Before I turn the call over to Nate for a breakdown of our financial performance I'd like to say a few things about what you saw in our press release about Nate's next steps.
They spend my CFO for nearly four years, we've worked through a pandemic through the pandemic and have grown this company nearly twice the size. It was twice the size of those when I hired him.
He has done an amazing job as CFO in a period thats, Unlike anything logistics ever gone through.
And I talk regularly about his personal aspirations and those for the company.
And over the course of these conversations we came to an understanding that now it would be a reasonable time for him to move onto the next opportunity.
He's built a best in class finance team over the last few years that will support the transition for a new CFO .
And as important Nate plants to stay onboard until his replacement is in place.
I am very grateful to <unk> for everything you've done for Logitech and I can speak for the board and so they are too.
So Nate with that can you take us through the quarter's financial performance.
Thanks, Brad and thanks, Thanks for your kind words.
Let me walk you through the quarter in more detail in Q2, net sales were down 7% and one 5 billion.
While sales were down this was the third consecutive quarter of improved year over year growth performance.
We grew in video collaboration in pointing devices, while gaming showed nice sequential improvement in year over year growth down 4% after being down 13% in Q1.
Gross margin decreased versus last quarter as expected to 38, 6%.
Versus the prior year product cost and freight rate increases were unfavorable three points and currency was unfavorable two points we.
We partially offset these headwinds with our pricing actions and by driving down our use of air freight.
Operating profit was $156 million, reflecting lower demand inflationary cost pressures and unfavorable currency and.
And our continued investment in our product development capabilities cash.
Cash flow from operations was $73 million in Q2, and cash flow is up $215 million year to date versus last year.
Turning to results across our product categories gaming showed some resilience in the quarter led by growth in racing wheels for.
For Q2 gaming was down 4%, which is a marked improvement from last quarter <unk>.
Americas and Europe gaming sales remain pressured while Asia continues to grow up 25%.
As with last quarter, we outperformed the market and gained PC gaming chair.
We think our product portfolio is in great shape.
With strong new product introductions, as we head into the holiday season.
Video collaboration posted a second consecutive quarter of 7% growth video conference from cameras and peripherals grew nearly 30% this.
This growth was offset by a decline in business oriented web cans, which were down more than 30%. Although their sales remained more than three times higher than pre pandemic levels.
We talked about this dynamic for several quarters pressure in web Kansas following the incredible dynamic.
And a pandemic driven growth.
Somewhat offsetting solid and strong growth in conference room cameras and peripherals.
Pointing devices were up 3% driven by our new Lyft ergonomic mouse and our high end Amex Masters Iis.
Keyboards, <unk> combos net sales declined 10% due to the low end market softness in China, and Europe , partially offset by a strong start from our new high end Amex mechanical keyboard.
Keyboard sell through was essentially flat in the quarter.
And as with our business webcams consumer webcams were pressured and down 33% from pandemic highs.
In any given quarter results across our categories may not move up or down in concert.
The benefit of having a diversified portfolio that we like so much.
This quarter was no different.
So what we focus on is the performance of the categories that are addressing secular trends in gaming video collaboration and hybrid work.
Sales of our pointing devices keyboards, and combos, gaining in DC products were 80% of our total net sales this quarter.
And were up 1% year over year in constant currency and excluding Russia. Their sales grew 1% year over year in constant currency and excluding Russia.
It's also important to note that the combined gross margins for this set of categories are above the company average so our biggest categories addressing attractive secular trends grew and produced above average margins.
Turning to expenses consistent with the first quarter, we reduced our expenses, most notably in sales and marketing which was down 21%.
As Bracken mentioned earlier, we remain committed to investing in product design and development to strengthen our category leadership, and we increased R&D spend by 3%.
Last quarter, we committed to reduce our annual operating expenses by $150 million versus last year and we are on track to meet that commitment by year end.
We will continue to focus on finding efficiencies throughout the organization as we align our spend with our sales.
We ended the quarter with a cash balance of $869 million.
September our shareholders approved our proposed dividend distribution, which when combined with our continued buyback program returned $276 million to shareholders in the quarter.
We are now halfway through the fiscal year and despite the headwinds we remain confident in our ability to meet the outlook, we announced last quarter.
As a reminder, that outlook calls for full year revenue in FY 'twenty three to be down 4% to 8% in constant currency.
The U S dollar continued to strengthen versus last quarter and currency now projects to be a roughly five point headwind to U S dollar growth.
Therefore, our outlook for full year revenue in U S dollars would be down 9% to 13%.
Our full year non-GAAP operating income outlook remains between $650 million and $750 million, despite the incremental currency pressures.
This pressure is expected to be offset by incremental efficiency gains throughout the organization and favorability in logistics rates.
Much like last quarter, our intent is to provide you with a range of reasonable outcomes, given our highly volatile given the highly volatile nature of the global economy.
We've made assumptions about a number of factors, including potentially protracted economic volatility and sustained revenue and profit pressure from them from the stronger U S. Dollar.
At the high end of our outlook.
We assume a relatively normal holiday cycle, while at the low end, we've assumed a holiday lift generally aligned with the worst in the last decade.
And while it continues to be challenging to forecast with a level of precision and certainty in line with pre pandemic business cycles.
We believe maintaining our forecast is prudent and reasonable.
The other night, it's time to open the call for your questions.
Alright, great. Thanks, Bracken. Thank you Nate for though thank you and thank you Nate.
For those interested in asking a question please raise.
Your virtual hands, we will start today's Q&A with Aussie a merchant from Citi.
Morning.
How are you guys doing.
And.
Surprise and <unk> best of luck and thank you for always that sharing your insights and providing clarity on callbacks et cetera. So a couple of questions that I've gotten.
S K.
Came out the macro conditions remain volatile and I know you guys talked about.
His analogy in the back half of this year can you give us any anecdotal evidence or qualitatively. How you guys are thinking about the back half of this year, especially in terms of the holiday season and.
Calendar <unk>, which is your fiscal <unk> and then another question on inventory if I may I think that declined if my numbers are correct that declined sequentially a hedge of a holiday season.
You can walk us through what were some of the dynamics there.
That would be great. Thank you.
Once you take both of those I think Nick talked a little bit about the first one and the second we can cover quickly sure yes, so im thinking as far as the back half of the year.
Like I said the outlook really represents kind of two <unk> or two <unk>.
Multiple scenarios that you can think about it I guess at the high end, Hey, it's a pretty normal holiday lift that we have.
We would see.
And then on the low end, we've assumed something that really aligns with kind of the worst sequential growth that we've seen over the last decade. So.
We're thinking about it.
Kind of two ways I think some of the.
Normally in the holiday right Youll see very strong performance from some of the consumer products and so maybe those will be a little bit more muted because consumer confidence has been a little bit weaker but you saw the performance in video.
Video collaboration again this quarter grew 7%.
And we're excited about some of the opportunities for us in <unk>. So.
Really thinking about it across the spectrum and we've got a very diversified portfolio. So.
That's kind of how I would answer your first question I guess on the second question, Yes, It came down sequentially.
We did build up some inventory because of all the supply constraints that have been out there.
Logistics disruptions some of those are starting to alleviate we're starting to see some some better performance from logistics providers as well as reduce cost that we think will benefit us in the second half of the year and so we'll be working down that inventory, we'll do it prudently.
It should come down further in fact in Q3.
Yes, I'll just add that we expected to bring inventory down in this quarter, even though it was going into our holiday quarter and we did so.
We're pretty much right on track.
Right.
Great. Thank you. Thank you.
Thanks Assia next question, we'll go to Paul Chung Jpmorgan, a local hey, Paul.
Thanks for taking my questions and maybe you will be missed very nice performance.
Thank you Scott on Opex flexibility provides us some cushion here on your operating profit outlook, which areas are you cutting back are there any trade offs on revenues as a result, and you mentioned some board structure changes et cetera.
And should we expect kind of a bounce back in Opex when kind of top line comes back or continued focus on efficiency here in the near term.
Let me jump in first night when you can you can measure.
Overall, maybe the maybe I'll answer what are we not coming back.
Growing our product development investments as you know and we're pulling back in different areas throughout the business, including marketing.
Maybe talk about the script, we pulled back pretty significantly really on the top of the funnel marketing that we feel like.
The other day and when the markets were generally softer top of funnel markets.
Marketing is not as effective whereas search engine optimization of things you would expect us to keep investing and we'll certainly keep investing and so that's really the kind of the headline go ahead Mike.
Yes.
Honestly agree with all that.
You recall, we talked in the past about as we were building as we were investing more and as the revenue growth was very strong in FY 'twenty, one and even FY 'twenty two.
We were conscious of the fact that we wanted to be investing in variable wave if possible and where it makes sense and so that has helped us as we've had to reduce expenses or we've taken action to reduce expenses here in the first half.
So youre seeing some of the benefits of that strategy and the execution that we talked about before.
I think even when you look at our marketing spend though we're really aligning it with sales.
And if you look back historically, we're kind of at levels right now that are consistent with the level of investment we had there before so we haven't cut back as Bracken said on all marketing, but we're just being very thoughtful about where it makes sense to invest now and I think if conditions change and we start to see more revenue growth and gross gross profit expansion you may see us increase those invest.
Once again.
And then just a follow up can you talk about the cadence of product releases.
I think you mentioned 20 years or so.
And then kind of your commitment to R&D, which has doubled since 2019 levels.
Where are you kind of change relative strength from new product lines like the Mitra.
<unk> crowd Mac line of keyboards and.
What products are kind of resonating the most with customers yes.
Yes, let me first of all in terms of the cadence, we usually do launched quite a few price in Q2 ahead of Q3.
And this was this was really a record.
Thank God I don't know, we try to go back and count, but we announced 20 new products. This quarter I mentioned that in the call. So I am Super excited about we are doing our innovation engine is just sort of firing on all cylinders. The other cool thing about it is a lot of those products are completely new new markets I mentioned in the script, a new addressable markets things like G cloud.
<unk> site.
Yes, what I'm excited about.
That's a good example, I mean I think this.
The ability to I think anybody who has been a video call lately and one of the remote participants and so to some extent with her back to the sort of a camera.
Feel really out of it and this really answers and the cool thing about it is you need our existing products to use it and so you have to you don't have to wait to buy you buy them now and this will just be a compliment when it comes out so it's.
It's a really cool product I am excited about the Max line of products. We have we already had a very high and it makes master excuse version of the springs into lower price points. So everybody can afford to to really have an alternative to Apple's experience, which is great.
And I can probably keep ganji clouds can be really interesting to see how it does I think we're going to just keep an eye on that category Netflix started.
Started one day and now look at it I think these cloud gaming.
These cloud gaming services are going to be really big over time and we're the first one that was really a mobile experiences at home. So it's super exciting across the board.
Great. Thanks, Thank you.
Thanks, Paul.
Next question will be from Alex Duval Goldman Sachs payouts.
Alex.
Hi, everyone and thanks, so much tonight for conversations.
A couple of quick ones firstly.
You saw a 7% decline organically constant currency in the quarter. So I'm wondering if you could just help us understand a bit more about how you get to minus 6% at the midpoint for the full year toward extension as historians comp effect, so product launches how should we be thinking about that and secondly related to this.
Video conferencing, you reference the box office dynamic.
Just wanted to to what extent, we should think about that benefiting from the chemo quarters, how you're thinking about that as well. Thank you.
Why don't I take the last one okay.
I think I think we're seeing at the very beginning of of really the re enablement of in office.
I think theres a lot of.
One of the most common question I talked to a lot of Ceos.
<unk> one of the most.
Questions is gosh, how is this going to work long term.
We're an interesting example.
We've redone and office, one Big office, we have in Switzerland.
Just changed offices in Cork. So we're just moving into it we're changing offices next year in Silicon Valley, all caused or at least the.
Accelerated.
What's happened during the pandemic with hybrid work, becoming the way we work.
So I think we're pretty representative maybe a little bit on the front of the curve of most companies. So I think most companies over the next few years are all going to be adjusting size.
Structure inside the office, the whole thing and that really bodes well for us. Because then you really got to rethink how many rigs we're going to have how many rooms are going to have a video how many workspaces joined need I'm surely going to upgrade those we're going to change the structure and size and the people at home, they really do need better or better stuff.
We see more of that.
And you can see what some of the headwinds are there and so we have to make.
Assumptions about how long, it's going to take for some of those cost pressures to reverse but theres. Some theres some strong margin power in this model.
Alright. Thank you. Thank you Adam.
Okay.
Our next question will be from your <unk> from UBS.
Learn.
Hi, Thanks for taking my questions.
And the first one would be please on your APAC operations quite important success factor in the quarter.
This cross exactly coming from is it category Crows is it share gains is it new regions.
Ken and put some light on this would be quite helpful. And the second question would be please correct me you mentioned they save a couple of changes in the organization.
And to be to be go to market strategy and also ambitious group and engineering can you give us some more detail what exactly you are doing here. Thanks.
Thanks, a lot.
Lately, we did go short end, but I guess, maybe I'll take the last one you take the first one yes.
So what are we doing what are we talking about.
This set of changes really started at the end of last fiscal year. The beginning of this one and we quietly put two sales forces together why do we do that because we really wanted to bring all of logitech to be to be customers. As one. So now we've got one organization, bringing one commercial organization, bringing all of logic was personal work.
Space for a room. The reason, we did that because I would.
I think I mentioned this in the last call, yes, we were aggressively selling and videoconferencing equipment, we're increasingly having people said Oh and before you leave could you. Please can we talk about mice and keyboards and.
And so we werent, we're underdeveloped in the <unk> market and our whole personal workspace or as we call. It <unk> personal workspace.
Mice and keyboards and things so so by changing the commercial alignment we have no one message to the customer one one idea of what is largely a good one one thing you can talk about that was the first step the second.
Last round of changes, we then changed the business group structure to adapt to that and that was part of the driver here. So we've <unk> organization that interfaces directly with that group.
Could you kind of a picture and a catcher now so we've got one team this should make us much stronger on our overall <unk> business. We did a couple of other things on top of that we centralized our software engineering for most of the business now and our hardware engineering for the first time, that's more efficient, but the more important thing is I think it's going to give us.
The ability to move step by step for the further and further and services.
Software enabled services and also to to leverage the fact that we have all the hardware sitting on one desk all the names of people buying things all the data that's coming in.
And the ability to get our products work.
Do more things together, so I am really really excited about the so changes to it.
A big new chapter for launched it.
Yes.
To your question about AP region.
Normally we talk a lot about China their China actually didn't have as strong a quarter as.
It had recently, but that was more than offset by really good performance in Australia and Korea.
So just like a lot of places where diversified even within region.
<unk>.
The strength that we saw other than gaming, which we saw really good performance across the region I would say bid in Korea and.
Australia, it's really kind of across the portfolio. The mice keyboard video collaboration all have very very strong quarters.
And May I ask why why was Australia and Korea was strong in the quarter.
Well again I think countries.
You got to look at prior year compares and I think the way that the world has been evolving has been different by country right. The pandemic had different timing and different places and reopening.
Transitions back into retail and so forth. So there's really just a number of factors I mean, I think we saw the market was a little bit stronger in those areas, we had some share gains.
Number of factors, but the portfolio I think with the new product introductions that we've talked about on this call I think we're seeing some of the benefits of that and those are investments that we kicked off of.
And have been increasing over the last several years.
Thanks, a lot sure.
A yarn.
Great. Our next question will be from Rob Sanders Deutsche Bank, Hey, Rob Malone.
Yes.
I just had a question regarding the upcoming selling season I was just wondering whats. Your priority is is it preserved profitability may be held on to elevate the inventory or will you look to clear the channel I mean, I noticed you haven't been too active on the promotional front, so far but I was wondering if that might change and I have a follow up thanks.
Yes, I'll jump in on that I wouldn't be surprised if it's a little more promotional in Q3, just because Q3 is always a little more promotional.
And so it would be too surprising but.
I think our real priority is we've got great innovation.
Super about the product lineup, we have in the portfolio, we have going into the Q3 and Q4 and beyond.
Holiday season, and beyond that so I think our priorities are not going to change too much.
We've really got what we need to sell and now we need to go sell it.
You want to add anything to that nature.
I guess I just had a thanks for that I just had a quick follow up just if you could just remind us I know you've taken a lot of share post previous downturns, because a lot of companies have kind of exited et cetera. I was just wondering like historically when have you taken to make sure is it basically as those companies kind of flame out because they.
And stop losing money or is it you look to kind of press your advantage and pressed the brand even at this stage I.
I think I think I'd characterize our share gains a little differently I think we've gained share because we've really innovated and we'd focus on brand building.
Look at what we've done inside of our gaming business. We've just consistently gained share every year. It wasn't didn't have much to do with honestly didn't have too much to do with competition is about us really.
Innovated, well and build the brand and built relationships with gamers of Influencers and brought that to market.
If you look at our if you go to Google search Google search trends in foundry and logic and just look over the last 10 years and Youll see how much how long thats been headed up into the right and by the way Vince Halo to all of Logitech too. So it's gone beyond that.
So I think general and its really not been about competitors claim you or something that very few competitors have left our businesses, it's really about us performance.
Yes, Rob I, just wanted to echo that.
<unk> been talking for a while I'm moving from.
Pushed to Paul.
And making investments in marketing, reducing reliance on promotion and.
Nothing maybe just turn on in one quarter, that's a long term journey and we accelerated that through the strength of our results during the pandemic and increased our investments and I think that what youre seeing and what you have.
I've seen consistently over the last several quarters has been the benefits of those investments and decisions we made directly absolutely.
Absolutely great points.
If we do see ourselves we proud ourselves on the back.
Thanks, Rob.
Next question is from Erik Woodring at Morgan Stanley .
Eric.
Good morning, guys. Thank you. Thank you for taking the question Nate you will be sadly missed I will give it a shameless plug to someone that maybe used to work for you that might be on a might be looking for a CFO .
[laughter] no but.
Hank Lovaza.
In all seriousness thanks Ross.
Can you help maybe I'll direct to it you one was just getting back to your comments on gross margins.
Because if you look at US historically sequentially you see pressure in the December quarter owning to the fact that it is a bit of a more promotional period, but then you talked about some of these more temporal headwinds inflation logistics and so I'm just wondering if theres any reason why that type of seasonality this quarter shouldnt exists or any maybe if you could walk us through.
Some of the puts and takes to at least help us think about gross margins.
British Summer and then I have a follow up I know that was related to jump in or.
While the while those headwinds are temporal theyre not that too broad.
<unk> yeah.
Okay.
Look really doesn't assume much change in gross margin from current levels Eric.
There's a lot of factors why Q3 gross margins might be up or down.
Category mix is another one attended historically you were talking to circle historically mobile speakers with a much bigger part of our portfolio. It's now 2% and that was one of our lower margin categories. When it was scale.
And so you did have some mix impact as we went into the consumer period as well as like you said, a little bit more promotions for black Friday, and those types of big events.
As our business.
Portfolio has shifted towards a little bit more of the business customers that.
Mixed effects will lessen a little bit, but yeah, typically I would still expect margins to come down a little bit in Q3.
But there's lots of big factors at play here in the back half as Bracken mentioned and he is absolutely right. We are not assuming a big significant swing into costs and seeing that favorability flow through I do believe that that will happen, but we're not predicting that to be super significant here in the second half.
And I would add I do think it will be if somebody ask a question I think it would be a little more promotional in Q3, just because we always are.
I think that's just the reality of the World we're in right now too.
And then maybe just as a follow up.
Year to date I guess your cash flow from operations is tracking below operating income. The guide is for those two eventually converge by year end, maybe just talk about some of the factors that give you confidence in the cash flow recovery in the back half of the year is that largely inventory or is there anything else that you would call out as a as a driver of that.
Improvement and then that's it for me. Thanks, guys got it yes, I think inventory working capital in general will be one of the big drivers Thats.
Basically your cash flow is going to be two big components is going to be your profit and your working capital I think in the back half of the year, you'll see some efficiency improvement in working capital.
In a quarter was a little bit backend loaded as customers where lot of our large customers. We are adjusting inventory levels early in the quarter. They started repurchase again in the back half Saar collections.
Was.
We didn't finish all the collections of all the sales this quarter. So we'll see some benefit from that in Q3, a gene is as great on a no problems there just a little backend loaded instead, we'll see higher collections in Q3.
Okay. Thanks, Eric.
Eric.
Our next question will be from Serge <unk> credits, let's say search low search the search.
Yes, good morning, gentlemen.
First question I have two or three.
You mentioned that you launched 20 new products.
And then wondering will this new products being margin accretive no impact or dilutive and secondly, even more important what's about availability and now are these products already on the shelf for Q3 or is it something for next fiscal year.
So first of all I would say.
Products, probably on average their margin.
They're neutral margin neutral.
We got some that are that are accretive and a few of them are dilutive.
Generally they are available.
A few that are coming later logic sites can come later, we announced early because.
It really is complementary.
By a room system.
And then did it all set up ready to go get used to it and then bring us in and drop it right into the middle of the table literally.
And it will improve the overall experience. So that's an example, where it's not available on the other hand, the things like G. Cloud are available now so so it's kind of a mixed bag.
But generally everything is available.
Probably to take again, she closes is available only to you as you mentioned.
In big volumes are only available, let's say nice fairly limited.
Looking for accretive to the gaming, yes, we're going to close you mentioned that gave me March is increasing yes.
To keep it pretty limited because limited production route to start we tried to do that with brand new categories. And then we can always turn the spigot on for Nishu.
Okay.
One thing that needs to you asked about margin, but also keep in mind. The ASP is in things like site is relative to the rest of our portfolio to ISP product Road racing wheels are high ASP product.
G cloud is a high ASP products. So it really thought at first of all across the board but.
Youre seeing again, it's not like we just flip the switch on this stuff we've been working on these things for a while there's a lot of software content and there are a lot of value.
So we're very good about that.
No. That's a good point, probably a year on the guidance you increased the currency impact from four to minus 5% and you said reported sales will be lower or decrease is higher but you left EBIT unchanged. So basically it's the guidance upgrade.
Through do you see as the guidance upgrade and what's the main factor for this guidance upgrade as you'd like so yeah.
Yes, I called out two things briefly in my prepared remarks, additional efficiencies that refining across the organization. So that could be in opex, but also be in Cogs keep in mind, we've got $3 billion plus of spend up in our cost of goods sold so there's a big pool of.
Spend there for me to look for efficiency with the teams.
And then also I think we're starting to see some of those spot rates on logistics.
Come down, especially on the ocean and so as we get into the back half really into the back half of the second half of the year into Q4, but see some favorability from that to help offset the currency question.
Okay. Tabasco. So then the last one restructuring charge minus $11 million and other income minus $25 million is all related to the new organization or kind of give some flavor here and should we expect these to continue in the next quarters.
The restructuring is related to the euro.
James Bracken went through the other item was.
The write down of an investment that we had on our books from years ago life size, if you remember.
The company that we used to own that we spun out.
And we wrote down the value of that this quarter noncash.
Non cash then.
Okay got it many thanks.
Thank you.
Thanks Serge.
Okay.
Great. Our next question is from Michael at Vontobel, Hey, Michael Hello, Michael Hello, Hi, Hi, Thanks for taking my question.
And thanks Nate.
So for all of the conversations and just one last for me on pricing strategy.
Said you've taken.
Some some pricing actions in the quarter already.
Two questions first one is how much leeway do you have with pricing given that consumers, especially in Europe are already quite squeezed.
So what's your.
Your view on that and then how much did those pricing actions actually offsets.
The other.
Sort of.
Headwinds that you had on gross margin.
I'll, let David answer the second the answer the first one you know how much leeway do we have I think that remains to be seen I think.
We've raised prices a couple times in the last year.
And they werent really small price increases either the last round I would say.
<unk> was really a response to the continued currency challenges and refocus that Europe and Japan, a couple of other places.
I think it remains to be seen I think it's.
We feel pretty good about it on the high end are more more higher end products on the low end, it's going to be competitive and we're not going to give opening share on the low end. So we'll make sure we stay competitive there. So we may moderate a little bit on low end, if we have to but we're holding the line for now we haven't seen competitors follow in most cases actually in the second round. So.
We always we always raise and then wait and if we have to we play hard ball.
And then the second part of your question Michael I mentioned, we had five points of headwinds I mentioned those gross margins were down less than five points year over year, we've got about a point of benefit year over year from pricing thus far.
To help offset some of those.
This cost pressures and currency.
Okay. Thanks, guys well done thank you Michael Thank you.
Amanda.
And all of Europe not from Luke.
Eric.
Goodbye.
On the street from all of you in New York around New York I'm hearing is that right is that right.
We'll get we'll get coffee about 45 minutes. After this call ends back okay. Yes. He just gave us the gauge.
Yeah, well you should have it before the call that you are really really good I think Hogan.
Listen thanks for the question I appreciate it Nate.
Nate will Miss you man really enjoyed the conversations.
Hopefully we can continue that.
In a different context.
Different concepts different settings. So I look forward to the call back we're not letting it go just yet.
Yes.
100% understood.
I guess my question.
Question is what's the how would you guys context like the visibility.
The guidance maintenance relatives.
So in a normally it feels like we're still kind of like at the front edge of macro making like a commercial impact in fact on commercial spend.
And certainly it seems like were.
But probably not.
Probably still in the first half of the game of interest rate increases and things like that so I guess I'll I'll.
Leaves the question, there, but would love to get how you would how you guys relate to.
Our conviction in the guidance maintenance if I can.
If I could jump in first and then I think we've got it.
A relatively wide range on the guidance right.
And I think meets when made introduce he talked about the range of outcomes. So I think this is this reflects the fact that there isn't a personal in this call who can.
Accurately predict what's going to happen over the next two quarters. So.
But within a range, we feel pretty good if you want to add to that Nate.
Yes, I'd just come back to diversification and on that I think it's really important.
In times of uncertainty.
Our suffocation Israeli your friend and I call I mentioned, those big four categories, 80% of the sales actually grew a little bit.
Excluding currency and Russia.
And so that's it's very important.
I think the.
Yes, so I'd, probably just say that I think diversification really helps as Bracken said, we've given a range.
Well, let me look it's helpful and it makes I totally get maintaining and you guys said that you hit the quarter and it sounds like that's tracking tracking to expectations right now so that all makes sense.
And can you remind us Nate.
What sort of when you lowered the guide previously what were the main drivers of that adjustment.
Yes.
A few things.
One was currency, we have not pushed through all of the impact of currency until last quarter and then the other was really just.
The increased volatility in what looked to be a sustained volatility in the macro climate.
Number of factors that we have to keep an eye on.
So I think it was really those two things I think.
All the way back to March beginning.
At AIG I think that the.
War had just begun.
And so.
There was a lot of uncertainty about what would happen there and obviously unfortunately.
That has persisted.
Yeah, I actually think you did your analyst day like 10 days before it started.
Something like that.
Yeah, it doesn't like that.
That's it for me guys I appreciate it okay I'll get so I think all of that.
Listen bracket bracket, Ashish coffee shops us Ian I'll see it I'm here for any of you in New York and close.
Im here Im.
I'm ready for coffee.
Got it.
Let's do it alright.
Thank you Amanda.
Thank you all okay, Bracken and Nate that looks to be a wrap on questions for this morning, alright, well thanks, everyone.
And we will see you next quarter.
Okay.
Okay.