Q2 2023 WD-40 Co Earnings Call
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Speaker 1: Ladies and gentlemen, thank you for standing by.
Speaker 1: Good day and welcome to the WD40 Company 2nd Quarter 2023 Earnings Conference Call.
Speaker 1: Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question-and-answer session.
Speaker 1: To register a question at any time during this call, please press star 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference, you need to reach an operator, please press star 1 on your telephone keypad.
Speaker 1: Please press star zero on your telephone keypad. I would now like to turn.
Speaker 1: I would now like to turn the presentation over to the host for today's call, Ms. Wendy Kelly, Vice President of Stakeholder and Investment Engagement.
Speaker 2: Please proceed.
Speaker 1: Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD40 Company's President and Chief Executive Officer Steve Bras and Vice President and Chief Financial Officer Sarah Heizer.
Speaker 1: In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending February 28th, 2023. These documents are available on our Investor Relations website at.
Speaker 1: Investor WD-40 company, T-coma. Replay and transcript of today's call will also be made available at that location shortly after this call.
Speaker 1: On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings, as well as our earnings presentations.
Speaker 1: As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Of course, actual results could differ materially.
Speaker 1: The company's expectations, beliefs, and projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished.
Speaker 1: Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, April 6th, 2020.
Speaker 1: The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events, or otherwise. With that, I now like to turn the call over to Steve. Thanks Wendy, and thanks to all of you for joining us this afternoon.
Speaker 3: Today, we begin by discussing our results for the second fiscal quarter of 2020. Additionally, we will provide you with an update on our must-win battles and the results from an internal diversity, equity, inclusion, and belonging survey you recently completed.
Speaker 3: Sarah will review some financial topics with you, including our updated guidance for FY23.
Speaker 3: As Wendy mentioned earlier, we have prepared a presentation covering our second quarter results and have posted it on our Investor website.
Speaker 3: We invite you to refer to that document for the duration of our call.
Speaker 3: Let's discuss our sales results today. We reported net sales of 130.2 million for the second quarter of fiscal year 2023, which was relatively constant compared to the same period of last year.
Speaker 3: There are several things obscuring top-line performance this quarter. Shell's volumes are down year over year as expected due to the severe disruptions caused by the price increases we've put into place over the last 12 months.
Speaker 3: We estimate that the disruptions caused by price increases impacted ourselves by about $15 million in the second quarter.
Speaker 3: Translation of our subsidiaries results into the US dollar had an unfavorable impact of about 5.5 million on our consolidated net sales in the second quarter.
Speaker 3: On a constant currency basis, net sales would have increased by 4% year-over-year.
Speaker 3: Also impacting our top-line results this quarter is our values-guarded decision to suspend sales of our products to our marketing distributed customers in Russia and Belarus, which negatively impacted our sales by just over 3 million.
Speaker 3: Now, let's take a closer look at the second quarter results in our trade blocks, starting with the Americas. The Americas, which include the United States, Latin America, and Canada, were up 15% in the second quarter to 62.9 million.
Speaker 3: This increase in sales is driven primarily by strong maintenance product sales in the United States, which increased 22% in the quarter.
Speaker 3: This was due to a tried vector of strong sales of DV40 multi-use product to V40 specialists and three-and-one, which all performed well in the quarter.
Speaker 3: The increased sales were driven by the favourable impact of price increases on revenues, as well as increased production capacity and improved availability as our supply chain continues to adapt.
Speaker 3: These increases were somewhat offset by lower demand which resulted in decreased sales volumes.
Speaker 3: Maintenance products sales in Canada increased by 12% in the second quarter, primarily due to the favorable impact of price increases, which were partially offset by unfavorable changes in foreign currency exchange rates and weaker economic conditions.
Speaker 3: Maintenance product sales in Latin America increased by 3% in the second quarter compared to last year, due to higher sales in Mexico.
Speaker 3: Maintenance product sales in Mexico increased by 21% in the second quarter due to increased distribution, successful promotional programs, and price increases, as well as the favorable impact of changes in foreign currency exchange rates.
Speaker 3: However, this growth in Mexico was significantly offset by decreased sales volumes in our Latin American marketing distributor markets, due to weaker economic conditions and lower levels of demand.
Speaker 3: In total, our Americas segment made up 48% of our global business in the second quarter. Over the long term, we anticipate sales within this segment will grow between 5% to 8% annually.
Speaker 3: As a reminder, the compound annual growth rates associated with our trade blocs reflect our long-term growth expectations and may not always align with shorter-term trends and results.
Speaker 3: Now, let's take a look at what happened in EMEA this quarter.
Speaker 3: thousand in maya which includes Europe the middle east africa and india were down 13 percent in the second quarter to 46.8 million
Speaker 3: Currency fluctuations significantly impacted ourselves. Results: so far, we may trade block D uring the quarter.
Speaker 3: Changes in foreign currency exchange rates had an unfavorable impact of nearly $5 million on net sales in the second quarter. On a constant currency basis, sales would have decreased by 4% compared to the second quarter of last year.
Speaker 3: The disruptions we've been experiencing - anyway, primarily due to the pricing actions we've taken over the last 12 months - coupled with our loss of sales in Russia and Belarus, have gotten us off to a rocky start.
Speaker 3: However, we're expecting a strong comeback - any major in the second half of the fiscal year.
Speaker 3: As you know, we sell into EMEA through a combination of direct operations as well as through marketing distributors.
Speaker 3: Sales are from direct markets, which accounted for 74% of the region. Sales in the second quarter declined by 2% during the quarter compared to last year.
Speaker 3: This decline was due to a lower level of customer orders and promotional programs as a result of pricing actions we took earlier this year, and was partially offset by the favorable impact of price increases.
Speaker 3: In addition, weaker market economic conditions have led to reduced footfall in some retail channels.
Speaker 3: Changes in foreign currency exchange rates have also had a negative impact on net sales for the direct markets in the second quarter.
Speaker 3: Sheld on our immay distributor markets, which accounted for 26% of the region. Sales in the second quarter decreased by 35% during the quarter compared to last year. More than half of this decline was due to our suspension of sales in Russia, which resulted in decreased sales of approximately 3.3 million compared to last year.
Speaker 3: The remaining decline was linked to the impact of changes in foreign currency exchange rates and lower sales volumes of maintenance products in most distributor markets, particularly in India and Turkey.
Speaker 3: In total, our EMEA segment made up 36% of our global business in the second quarter. Over the long term, international sales within this segment will grow between 8% - 11% annually.
Speaker 3: Now onto Asia Pacific. Thousands in Asia Pacific, which includes Australia, China, and other countries in the Asia region, were down 4% in the second quarter to 20.5 million.
Speaker 3: In Australia, sales were up 6% in the second quarter. This increase in sales was driven by strong sales of maintenance products, which were up 15% in the quarter. However, this was partially offset by lower sales of home care and leading products.
Speaker 3: Higham making increased product sales were due to the favorable impact of price increases and successful promotional programs. Changes in foreign currency exchange rates had an unfavorable impact on themselves in the second quarter.
Speaker 3: On a constant currency basis, sales in Australia would have increased by 10% compared to last year.
Speaker 3: In our Asia Pacific distributor market, sales were down 11% compared to last year. This was primarily due to lower sales of DIB 40 M products, driven by weaker market demand and economic conditions, as well as the timing of customer orders.
Speaker 3: We put a price increase through in December of 2022 and many of our distributors purchased products in advance of those price increases. This decrease in sales is partially offset by the positive impact of price increases.
Speaker 3: In China, sales were relatively constant compared to last year. The favorable impact of price increases we've implemented was completely offset by the unfavorable impact of changes in foreign currency exchange rates. On a constant currency basis, sales would have increased by 7% compared to last year.
Speaker 3: The total for our Asia Pacific segment B made up 16% of our global business in the second quarter. In the long term, we anticipate sales within this segment will grow between 10% to 13% annually. With regards to our prospects for the remainder of the fiscal year, we signaled to investors back in October that we expected revenue in the first six months of the fiscal year 2023.
Speaker 3: I'm happy to report that it's looking like the month of March, though not yet fully finalized from an accounting perspective, will be a new record sales month for the company.
Speaker 3: This includes a very strong recovery at Inimea. As we emerge from the price-related disruptions we've experienced, despite slower economic activity in some regions, we expect stronger top and bottom line growth for the remainder of the fiscal year.
Speaker 3: Now let's talk about our growth aspirations and must-win battles. Globally, we're targeting revenue growth in the mid to high single digits to deliver against our aspirational 2025 goal. The bulk of that growth is expected to come from sales of the W4D multi-use product through geographic expansion.
Speaker 3: Increased penetration and premiumization, and supported by our continued investment in digital commerce, these areas are encapsulated by what we refer to as UNMUS. Win battles unless, when battles are the primary areas of action.
Speaker 3: that will enable us to deliver against our revenue growth aspirations. These hyper-focused actions are the key drivers of revenue growth.
Speaker 3: Our largest growth opportunity in first must win battle is the geographic expansion of the blue and yellow cameras of the red top. Though consolidated sales of our flagship brand are down 1% in the second quarter and 7% year to date, we have a high level of confidence that the W40 Multi-Use product will return to solid growth this fiscal year.
Speaker 3: identified 20 priority markets which show the highest potential for growth and we will continue to prioritize investing in these priority markets to drive stronger growth into the future.
Speaker 3: Our second Muslim battle is to grow to be 40 more to use the product through premiumization.
Speaker 3: We began our premiumization journey in 2005, and we came up with a solution to the biggest problem our end users were having with our product, they kept losing the little red straw. Our SmartStraw delivery system solves that problem and as a result it delights our end users. In addition, premiumization creates opportunities for revenue growth and gross margin expansion.
Speaker 3: Sales of the 40 multi-use products year-to-date.
Speaker 3: Our smart STR next-generation delivery system is currently available in the Americas and is being rolled out globally this fiscal year. Smart F next-generation supports our objective to grow premium delivery system penetration to greater than 60% of our W 40 multiuse product sales by 2025.
Speaker 3: A third must-win battle is to grow the 40 Specialist. Sales of the 40 Specialist are up 5% in the second quarter and 13% year-to-date. The United States continues to see outstanding momentum with the 40 Specialist, reporting an increase of 39% year-to-date.
Speaker 3: We're pleased that WD40 Specialists is fully leveraging our most iconic asset to blue and yellow brand with a little red top. We recently conducted some end user research and learned that DIYers and tradesmen in the US, Germany and the UK who have used WD40 Specialists are significantly more likely to highly recommend our brand than those that have only used WD40 Multi-Use products.
Speaker 3: I shared with you earlier this year that you will see an increased focus in three key areas, which I call my strategic priorities during my tenure. The first of those areas is pivoting the company toward a more sustainable future. I'm excited to share with you today that we've launched a new WD40 specialist product developed with sustainability in mind. WD40 specialists degreaser and cleaner easy pods are a new degreasing formulation.
Speaker 3: Comprised of concentrated pods rather than the traditional liquid format, Easy pods have no harmful fumes and are non-abrasive and non-corrosive. They leave no residue and don't require a California Proposition 65 warning. This innovative new product is one of the first of its kind when paired with a reusable plastic bottle.
Speaker 3: are EasyPods™ Reduced Plastic Waste. In addition, shipping the small pods rather than larger liquid filled containers improves transportation and storage efficiency and costs. The product is currently available in the United States.
Speaker 3: Going forward, we expect specialists to be our vehicle for launching many more sustainable products in the future. With this in mind, we have recently added two new roles to the company: one in research and development, and another in supply chain. Both of these senior global functions will play a significant role in pivoting the company and its products towards a more sustainable future.
Speaker 3: Our final mission battle is focused on driving digital commerce. E-commerce sales were up over 18% in the second quarter and 34% year-to-date. This was driven primarily by strong growth in the US and China. We continue to believe we are well-positioned to benefit from the significant shift to online behaviors in the post-pandemic world.
Speaker 3: Digital commerce is not just about driving online sales, it's about driving awareness of our brands and teaching end users how to use them. We're focused on developing a data-driven marketing strategy that empowers us to engage directly with end users in meaningful ways online and expect e-commerce will be the fastest growing retail sales channel globally.
Speaker 3: For the duration of the fiscal year 2023, I'd like to share a quick update on our tribe with you. We call ourselves a tribe. At WD-40 Company, we define tribe as a community of people with shared values and a shared purpose. At WD-40 Company, we know our culture is our superbell.
Speaker 3: One of the things I'm most proud of is our stable, highly engaged, highly committed tribe of employees. We recently conducted a check-in with our tribe and our global employee engagement school continues to be industry leading at 94%. We benefit greatly from the discretionary effort that comes from that high level of engagement.
Speaker 3: In addition to regularly measuring employee engagement, we have begun to regularly measure diversity, equity, inclusion, and belonging. I'm happy to share with you that 84% of our team members believe our company actively promotes these values: diversity.
Speaker 3: 78% agree that W40 company is an equitable place to work, 89% believe our culture is an inclusive one, and 92% of our tribe mates experience a sense of belonging here.
Speaker 3: We believe that belonging is a psychological feeling of acceptance, connectedness, security, support, inclusion, and identity.
Speaker 3: Although these results are positive, our work is not yet done. We're exploring new ways to create an even more diverse, equitable and inclusive workplace where every tribe made experiences a sense of belonging. One of the lessons we've gained from this work is that belonging exists when diversity, equity and inclusion behaviours exist.
Speaker 3: This mindset must begin at the very top of the organization. And to achieve this, senior management and board level diversity are critical.
Speaker 3: We have made fabulous progress in this era, as reflected by the makeup of our Board of Directors and senior leadership team, which we refer to internally as a global strategic council.
Speaker 3: Our current board reflects the most diverse board composition in our company's history. In addition to gender and ethnic diversity, our board is comprised of diverse nationalities, cultural backgrounds and world views. We are equally proud that our Global Strategic Council currently has 8 female members out of 16 management members and 6 nationalities are represented.
Speaker 3: We believe diversity in leadership fuels diversity of thought, which leads to better strategic decision-making.
Speaker 3: Also supporting our tribe, and another one of my strategic priorities, is to leverage our capability as a global learning and teaching organization, and transform our company into a true global learning organization. We believe that learning is the foundation of our agility and sustainable growth into the future.
Speaker 3: In support of this initiative, we now have a global Director of Learning who is 100% focused on enabling us to learn faster and grow faster by coordinating increasingly consistent global learning programs.
Speaker 3: The level of global interaction of our tribe members around key aspects of strategic execution is increasing exponentially, and the mantra of learning faster to grow faster is permeating our language and actions. Now I'll turn the call over to Sarah, who will provide you with a financial update on business.
Speaker 4: Thanks, Steve. Thank you for that. An overview of our sales results.
Speaker 4: While our top-line results this quarter were lighter than we had expected, we continue to believe that most of our top-line growth this year will be weighted toward the second half of the year.
Speaker 4: Currency continues to be a headwind for us. On a constant currency basis, net sales would have increased 4% compared to the second quarter last year.
Speaker 4: Let's start with a discussion about our business model and the long-term targets we use to guide our business. Let's start with our business model.
Speaker 4: We target our gross margin to be at or above 55% of net sales.
Speaker 4: Our goal is to drive our cost of doing business, which is our total operating expenses excluding depreciation and amortization, towards 30% of net sales over time.
Speaker 4: Finally, we target EBITDA to be at 25% overtime. The model has been under pressure lately due to the inflationary environment we continue to operate in.
Speaker 4: The first phase of our margin restoration plan, which was driven by tactical price increases, is working.
Speaker 4: We saw 860 basis points of lifts due to price increases last quarter and 910 basis points this quarter.
Speaker 4: Last quarter, I shared with you that we believed we would continue to see sequential margin improvement coming into the second quarter.
Speaker 4: Our gross margin declined slightly from the first quarter by 60 basis points, which is a disappointment, but progress is seldom linear. And many factors impact gross margin changes quarter to quarter.
Speaker 4: We still believe our full year growth margin will be above 51%, but have narrowed the top end of the range down to 52%.
Speaker 4: We know we still have a lot of work to do to return our margins to our targeted levels. The good news is we are making fantastic progress on growth margins in both our Asia Pacific and EMEA trading blocs.
Speaker 4: Unfortunately, we are not seeing as much progress as we had expected in the Americas, where inventory levels have been the highest. It is taking longer to work through those higher-cost inventory levels than previously expected, as sales volumes increase and we continue to work our way through the inventory that remains on our balance sheet.
Speaker 4: Steve and I remain committed to restoring gross margin to our target of 55%.
Speaker 4: Let's take a closer look at the gross margin this quarter as compared to the second quarter of last year.
Speaker 4: In the second quarter, our grants margin was 50.8% compared to 50.4% last year.
Speaker 4: This represents an improvement of 40 basis points year over year.
Speaker 4: Price increases, which have been implemented across all markets and geographies, positively impacted our gross margin by 910 basis points this quarter.
Speaker 4: I continue to be very pleased with the positive impact our pricing actions have had on our gross margin.
Speaker 4: While changes in foreign currency exchange rates are a headwind to the business overall, it did positively impact gross margin by 90 basis points this quarter compared to the prior year.
Speaker 4: This impact is due to fluctuations in exchange rates for the euro against the pound sterling in our MEF segment.
Speaker 4: The euro strengthened against the pound sterling, resulting in a favorable foreign currency transaction impact.
Speaker 4: The positive impacts on the growth margin were mostly offset by changes in major input costs, which include specialty chemical and aerosol can costs.
Speaker 4: And these costs, when combined, negatively impacted our gross margin by 810 basis points. Higher costs associated with specialty chemical costs negatively impacted our margin by 410 basis points.
Speaker 4: And the remaining 400 basis points came from higher costs associated with aerosol cans. Material costs from both steel and tin plate were at historic highs when we sourced them.
Speaker 4: In addition, EMEA higher energy and labor costs continue to negatively impact the cost of aoall. The cangross margin was also negatively impacted by 90 basis points from higher filling fees paid to our third-party contract manufacturer, primarily in the Americas. We are beginning to see input costs stabilize.
Speaker 4: and we are hopeful that this trend will persist, but it continues to be a dynamic environment.
Speaker 4: We remain confident that our plans to rebuild growth margin, coupled with the advancement of our growth margin accretive must-win battles, will enable us to deliver on our long-term goals.
Speaker 4: It will still take some time, but we will continue to take the necessary actions to restore our growth margin to 55% or higher.
Speaker 4: That completes the gross margin discussion. Now, on to the 30, the cost of doing business in the second quarter: our cost of doing business was 33% compared to 30% last year, but it did improve from 36% in the first quarter as revenues improved and we continued to manage our expenses.
Speaker 4: The cost of doing business is primarily comprised of three areas, investments in the tribe, investments in brand building, and freight expense to get our products to our customers.
Speaker 4: This quarter, our cost of doing business increased by 3.3 million, or 8%, due to higher employee-related expenses and increased travel and meeting expenses compared to the prior year's second quarter.
Speaker 4: Although our cost of doing business increased, our cost of doing business with a percentage of sales was impacted more significantly due to the lack of revenue growth this quarter compared to the prior year's second quarter.
Speaker 4: This brings us to EBITDA. The last of the 55, 30 to 25 measured EBITDA was 19% of net sales this quarter, which is down from 21% compared to last year, but an improvement from 17% in the first quarter.
Speaker 4: EBITDA has been under pressure due to the current inflationary environment. Prior to fiscal year 2022, we had consistently delivered EBITDA of between 22-22%.
Speaker 4: My first priority is to get us back above 20%, as we continue to focus on rebuilding our gross margin and looking for sales volumes to recover after our price increases.
Speaker 4: Once we consistently return to our historic 20%-22% levels, we will then look to leverage the business over the long term toward our 25% aspirational target.
Speaker 4: That concludes the discussion on our business model. Now, let's discuss some items that fall below the EBITDA line.
Speaker 4: Net income for the second quarter was $16.5 million, versus $19.5 million in the prior year, reflecting a decrease of 15%.
Speaker 4: Changes in foreign currency exchange rates had an unfavorable impact on net income.
Speaker 4: On a constant currency basis, net income would have declined 10% compared to the second quarter of last year.
Speaker 4: Diluted earnings per common share for the quarter were $1.21 compared to $1.41 for the same period last year. Now a word on our capital allocation strategy.
Speaker 4: Our capital allocation strategy includes a comprehensive approach to balance investing in long-term growth and providing strong returns for our stockholders.
Speaker 4: In addition to investing for future growth, we also focus on returning capital to our stockholders.
Speaker 4: Historically, our business model has been asset-light, which has typically required low levels of capital investments, ranging between 1% and 2% of sales.
Speaker 4: As we have previously disclosed, in fiscal year 2023, we expect to invest about $9 million in capital projects.
Speaker 4: Excess capital generated by the business is then allocated to the highest return alternative.
Speaker 4: Annual dividends will continue to be targeted at greater than 50% of earnings.
Speaker 4: On March 21, our Board of Directors declared a quarterly cash dividend of 83 cents per share.
Speaker 4: I indicated in the last quarter that we might need to slow down our stock purchases under our current share buyback plan and utilize that cash to repay a portion of our current debt during the remainder of this fiscal year.
Speaker 4: During the 2nd quarter, we repurchased approximately 9,000 shares of our stock. At a total cost of approximately 1.6M dollars under the plan.
Speaker 4: Now let's chat about our inventory. Inventory levels continue to have our attention.
Speaker 4: For the duration of the pandemic, we have been intentionally building up certain raw materials, components, and finished goods, particularly in the United States, in order to be very agile and ensure adequate supply of our products.
Speaker 4: Disruptions experienced due to pandemic-related conditions required us to expand our aerosol pillular network. As a direct result of these choices, we have experienced increased capacity and flexibility in our supply chain.
Speaker 4: This has enabled us to better meet market demand for our products. We believe this was a good use of our working capital.
Speaker 4: With most of that disruption behind us, we believe inventory levels peaked in the first quarter of this year and are now heading in the right direction.
Speaker 4: Our inventory levels have gone from approximately $119 million at the end of the first quarter to $109 million at the end of the second quarter, which is a reduction of almost 10%.
Speaker 4: We anticipate our inventory levels will continue to decline for the rest of fiscal year two thousand and twenty-three. I do not believe that we will be at pre-Covid inventory levels anytime soon, as the environment today remains dynamic and requires us to carry higher levels of inventory than we have historically.
Speaker 4: So with that, let's turn to guidance. As Steve indicated earlier, we expect sales volume performance to improve in the second half of fiscal year 2023 as price-related disruptions abate.
Speaker 4: We expect strong sales in the remaining two quarters of fiscal year 2023. But the recovery of our sales volumes impacted by the disruptions caused by our pricing actions has been slower than we originally anticipated. And we no longer believe that we will fully recover those losses in the back half of this year.
Speaker 4: In addition, interest rates have continued to rise, which is negatively impacting our results.
Speaker 4: Accordingly, we have updated our fiscal year 2023 guidance. We expect, assuming foreign currency exchange rates remain close to current levels, net sales growth is projected to be between three and a half and seven and a half percent, with net sales between 535 and five hundred and sixty million.
Speaker 4: Gross margin for the full year is expected to be between fifty-one and 52%, and advertising and promotion investment is expected to be between 5% and a half percent of net sales. The provision for income tax is expected to be around 21%.
Speaker 4: Net income is projected to be between 64 and a half and 68 and a half million.
Speaker 4: And diluted earnings per share are expected to be between $4-$85, based on an estimated 13.6 million weighted average shares outstanding.
Speaker 4: Our projections for fiscal year 2023 reflect fluctuating foreign currency exchange rates. Without those currency headwinds, our sales growth projections would have been between 6.5 and 11.5% of net sales.
Speaker 4: We also want to remind everyone that there are dynamics outside our control that may impact our fiscal year 2023 results: unanticipated inflationary headwinds and other unforeseen events.
Speaker 4: This guidance does not include any future acquisitions or divestitures that complete the financial overview. Now back to your Steve in summary. What did you hear from O on this Co?
Speaker 3: You heard that foreign currency exchange headwinds continue to negatively impact sales results, and in constant currency, sales grew 4% in the second quarter.
Speaker 3: You heard that we've experienced solid sales of W40 Multi-Use product in many priority markets year to date. You heard that sales of W40 specialists were up 13% year to date.
Speaker 3: You heard that we continue to make outstanding progress in digital and e-commerce, with our e-commerce sales growing 34% year-to-date.
Speaker 3: You heard that 84% of our tribe members believe our company actively promotes and values diversity. 78% agree that our company is an equitable place to work. 89% believe our culture is an inclusive one, and 92% of our tribe members experience a sense of belonging here. You heard that although we continue to experience pressure on gross margin.
Speaker 3: we're making progress in our margin restoration plan and remain committed to restoring margins to our target of 55% plus. You heard that we continue to return capital to investors through regular dividends.
Speaker 3: You heard that it's looking like the month of March, though not yet fully finalized. An accounting perspective will be a new record sales month for the company.
Speaker 3: And you heard that for the remainder of the year, we expect strong top-end bottom-line growth. Shell's growth in constant currency is expected to be between 6% and 12%.
Speaker 3: In closing today, I'd like to share with you a quote from Buzz Aldrin.
Speaker 3: Keep in mind that progress is not always linear. It takes constant course correcting and often a lot of zig-zagging.
Speaker 1: Thank you for joining our call today. We would now be pleased to take your questions. Ladies and gentlemen, if you would like to register a question, please press star 1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment.
Speaker 1: If your question has been answered and you would like to withdraw your registration, please press the star 1 again.
Speaker 1: One moment please for the first question.
Speaker 1: Our first question comes from the line of Daniel Rizzo with Jeffries.
Speaker 1: question comes from the line of Daniel Rizzo with Jeffries. Please proceed with your question.
Speaker 5: Good afternoon, everyone. Thank you for taking my call, my questions. If we just think about inventory for a second, I guess how should we think about inventory turnover for, I guess, for 2023 and over the longer term? What's kind of the goal versus where we kind of are now?
Speaker 4: Hi, Daniel. Good to hear from you. This is Sarah. So inventory is starting to turn, which we're very pleased to see. I think we had anticipated it starting to turn this quarter, and we do expect it to continue to turn towards the back half of the year in the right direction.
Speaker 4: You know, we've always targeted close to, you know, around three months of inventory pre-COVID. The reality is I think we're well north of, it is dependent by region, so certain regions are closer to the three months. And in the Americas, we are well beyond the three months. I think it's, you know, it's six to nine months depending on...
Speaker 5: I guess, tougher logistically than the other regions. I don't know if it's just your, go ahead.
Speaker 4: Yeah, no, so most of it comes to just the supply chain recovery efforts that we put in place last year and the expansion of the filler network. So any time we're expanding that filler network, you want to make sure you have enough inventory on hand and with just the difficulty in getting the right components in place and making sure we have the right raw materials and components to...
Speaker 4: take advantage of line time when it was becoming available. We did intentionally build up that inventory to both support the Americas in the supply chain, in the supply chain recovery efforts last year. So that was intentional. Okay. And then it seems that almost all of the volume or the price hikes that caused some volume declines was in Europe .
Speaker 5: but the other reasons were kind of okay. Am I not thinking about that right? And if I am thinking about it right.
Speaker 5: Why is that I guess? Why would it take her there as opposed to the Americas or APEC?
Speaker 3: Yes, so hey Dan and Steve. So in terms of the volume versus price situation, so it has been improving. So we started the year with a kind of a loss of volume. If you look back to September , we were at like 23% volume loss overall and we've recovered to about 17% by the end of February .
Speaker 3: It's linked to the price increase timing of the execution of the price increases. So with America's having gone first in the third quarter of last fiscal year, they've been the first to drive improved volumes. So you can see that pretty clearly in the mix. These volumes have recovered quickest.
Speaker 3: And may has obviously got the loss of the Russian business still in there recall that the Russian business is about seven or eight percent Of you may have volume. So that's why you may have volumes look higher and then we did indicate in our comments that You know may or has been recovering and in March had a very very strong recovery. So we do see that turning around
Speaker 3: quite quickly now. All right, thank you very much.
Speaker 1: Thank you. Your next question comes from the line of Linda Baughton-Wiser.
Speaker 1: Please proceed with your question. Yes, hi. So another question I have on the volume versus price.
Speaker 6: I think you disclosed in the 10-2 last quarter what that was for the full quarter globally. Can you just give it to us for the full quarter globally what the breakdown volume versus price was? Are you addressable.
Speaker 2: So that's the total down there.
Speaker 3: Yes, Linda, so we did do have that in the 10Q when it comes out. So the increase, year-to-date increase in selling price has been $50 million. And then the total decrease in volume has been, so we've got $8 million from Russia, and all of the markets are $36 million.
Speaker 6: And then you obviously have $15 million of currency impact as well. Okay. And so maybe you could just give us like a better number. Like you said volume by the end of February was down 17%. But what does that look like in the US or in the Americas? Because I think you said last quarter US is down 7%.
Speaker 3: positive. We have volume growth in Asia-Pacific of around 6% year-to-date and it may have 28% but don't forget that Russia was 7 or 8% of that number.
Speaker 6: So, sorry, the US here today is down 12th percent of volume.
Speaker 3: Yes, 12%.
Speaker 6: Okay, so, um, I mean, again, like, I guess I can do the math, but if it was down 7%. In the lab in last quarter, the 1st quarter.
Speaker 6: It was down left now in the second quarter, or is that the case? No.
Speaker 3: No, I think you're distinguishing. You spoke about market share. So POS data is different. In the first quarter, we did speak to POS data. And so our POS data, which so those these numbers here reflect sales and overall volumes, right to the market. Our POS data represents a substantial chunk of our overall business.
Speaker 3: It's hard to track overall because we're active in so many different channels, right? And so our volume in terms of the latest read in terms of market share POS data in the US.
Speaker 3: Our category sales, I believe, were up like 17%, and volumes are down just into double digits. So that's the latest status in the US.
Speaker 3: Okay, and again, sorry, I'm supposed to say year-to-date or in the portal. Well, that is actually, those numbers I gave you on POS are actually the last three months.
Speaker 3: And again, sorry, I'm supposed to say year-to-date or in the quarter. Well that is actually, those numbers I gave you on POS are actually the last three months. Last three months. We have probably got to go under the
Speaker 7: Okay.
Speaker 7: Okay.
Speaker 6: So, you know, I think the previous analysts asked us to, but I'm still having a hard time understanding why if the Americas is recovering volume quicker.
Speaker 6: and your sales were actually strong.
Speaker 3: Why is the gross margin most disappointing in that region when it's recovering the quickest? That's what I'm having a hard time understanding. That's a fair question. So I'll start with that and maybe Sarah can answer it. I think we're still cycling through because of the high inventory levels we have in the Americas and that was done purposely for us to build up and be able to service demand.
Speaker 3: So we now got to a situation in America where we're at 99% fill rates on our core products and 98% on time in full delivery. So we're servicing almost fully all of our needs.
Speaker 3: But those inventories were purchased six to nine months ago, and so they purchased at those cost prices at that time. So it's taking longer for inventories to flush through. And also I think there's a certain element looking forward of the Americas driving volume, particularly the US.
Speaker 3: And so, you know, driving volume, getting back with promotions in store also, may have some margin implications. Okay. And then—
Speaker 3: driving volume, getting back with promotions in store also may have some margin implications. Okay. And then, so just longer term. Have you Initial Got it?
Speaker 6: You know, obviously you always historically have had promos come and go each period. But historically when you have taken pricing like this, have you ever given back or reversed?
Speaker 6: and the list prices.
Speaker 3: or do you always need to take the pricing? Yeah, go ahead. No, we've never. So I've been here 32 years. We've never gone down with pricing once we've gone up. What we tend to do is if the situation changes with commodities over time, then we may promote to the end user and give the end user extra value with something like an extra ounces promotion or something. So we have done that historically, yeah.
Speaker 6: Okay, thank you. And then, you know, I guess the pricing benefit and gross margin in the quarter was very close to what we had projected, but the impact of the higher petroleum-based input and tin can cost was more negative. So I'm just wondering, like, you know, I know it's hard for us to know what you're paying for these things, but, you know, oil has dropped.
Speaker 6: So why is it that that was still such a negative? And do you think that will be neutral to gross margin in third quarter, those inputs, or not until fourth quarter? Thanks. Hi Linda, it's Sarah. So it is, it is...
Speaker 4: Is it challenging to compare some of the decreases in the spot prices that we're seeing to exactly what we're seeing from what we're paying for our commodity pricing currently? We are seeing some benefits, but they're not as significant as what we're seeing in the spot pricing because of the offsets to labor and energy costs. They're kind of offsetting the benefits that we...
Speaker 4: it pick up as much as we had hoped during the quarter.
Speaker 6: Yeah, okay. And then, sorry to beat this volume issue to death, but you had said previously that for the year you had baked in kind of volume flat to down slightly. So what would be baked in right now to the guidance that you've given now for volume per year?
Speaker 3: of our overall volumes, but we have a half a year of that. I think we kind of see it as a little bit higher than kind of low single digits. It's probably going to be more toward the kind of low single, double digits to high single digits, but there's a lot of variables out there, right? So you know, you do have a lot of markets around the world where where footfall is a little lighter than we would like footfall in retail.
Speaker 6: Just on the interest expense, I mean it was kind of higher than we had modeled in the quarter. Do you have a guidance amount for the year that we can put in our model for that? Yeah, so we are, I'm happy to, let me just give me two seconds.
Speaker 4: I can pull that up. I would guide to a little bit north of $5 million, Linda.
Speaker 6: Okay, thank you very much. Thanks.
Speaker 1: Thank you. Your next question comes from the line of Rose Marie Morbelly with Scibelli Funds. Please proceed with your question.
Speaker 1: Thank you. Your next question comes from the line of Rose Marie Morbelly with Gabelli Funds. Please proceed with your question. Thank you. Thank you.
Speaker 8: I was wondering when you are talking about March being a record top line quarter, is that still mostly priced or are you beginning to see some volume in the March quarter, I mean in March months? Does it however which for most of the BLE top line together Amazon!!!! March!
Speaker 3: Yes, so we're seeing again without results being fully final and so this is directional we're seeing a big improvement in volumes and that's particularly been noticeable in Europe and so you know Europe went through the same kind of disruption that the US did they're just a quarter behind the Americas so the recovery in Europe is really starting to happen now as we emerge from
Speaker 3: kind of six months or so post price increases. We have much greater promotional activity in market. And so yeah, in particular in Europe , you're seeing a strong volume recovery. Okay, thanks. And then when we look at inflation, you touched on the higher cost of labor and the higher cost of TANs.
Speaker 8: Even though some of your raw materials are coming down. Can you put a number on the inflation? Them in the inflation increase that you are seeing and do you have enough price to cover it or do you need to? Do raise prices some more? So if we're obviously the can is made
Speaker 4: slightly down. So while the tin plate spot price is coming down, the cost to convert that into our physical can is higher when you compare it to prior year. So there's some offsets that are happening there. As far as the specialty chemicals, I mean, what we're buying at today versus what we were buying at around this time last year.
Speaker 4: those are going to be around the high single digits, maybe low double digits, depending on the region. So we are seeing some benefit of what we're actually buying there. But again, then just last week, those prices started to go back up. So those can be pretty volatile month to month, depending on what's happening out there. So those are just that maybe helps give some.
Speaker 4: some ranges. It is very different depending on kind of the makeup of, you know, the different components of the can. We're seeing differences between those buckets.
Speaker 8: Okay, so you said that if your overall costs come down, okay, you may give an extra ounce per can or something like that. You will not reduce pricing. But if some of those costs are going up and we know that labor is going up, we will be
Speaker 8: I am not too sure what is happening with freight, but probably nothing terribly positive. Do you need to raise prices for more and therefore could we see a second increase in the price of the car? I'm not sure. I think that's a good question.
Speaker 8: rate but probably nothing terribly positive. Do you need to raise prices some more and therefore could we see a second...
Speaker 3: a second bout of volume decline because of that? So in terms of overall price increases, we believe we're through most of the significant price increases and so for the rest of this fiscal year, it's about driving the volume now that we have the higher gross margin. So that's kind of the balance that we need to strike.
Speaker 3: in places like Latin America, but it's not over the material and the overall business. And it's about now, like I say, driving back those volumes in store after all of this disruption we faced last six months.
Speaker 8: Okay, and lastly, if I may, Steve, you have mentioned weak economic environment, weak demand and so on. Based on what you see out there, are we already in a recession? And as one CEO mentioned this morning, the economist will mention in October .
Speaker 3: track record at constant currency for multi-purpose maintenance for us.
Speaker 3: And if you recall that we showed growth every single year apart from 2020, we were yet a small decline. And so I think whatever happens out there in the economy, we are a global business and different things are happening in different economies at different times. And whatever happens, we tend to stand up better than most and we are, we're not recession proof, but we are.
Speaker 3: very resilient business. And so we expect the forecast we've given for the remainder of the year involves strong growth in the back half. We believe they have the programs in there to drive that volume and we see better times ahead over the next couple of quarters.
Speaker 3: business and so we expect the forecast we've given for the remainder of the year involves strong growth in the back half. We believe they have the programs in there to drive that volume and we see better times ahead of the next couple of quarters.
Speaker 1: Thank you. Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for participation on today's conference call and ask that you please disconnect your line.