Q2 2025 WD-40 Co Earnings Call

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Speaker Change: Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Second Quarter fiscal year 2025 earnings conference call. Today's call is being recorded.

Speaker Change: 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. To register a question at any time during this call, please press star one on your telephone keypad.

Speaker Change: Please make sure that your mute function is turned off to allow your signal to reach our equipment.

Speaker Change: Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-40 company's president and chief executive officers Steve Brass and vice president and chief financial officer Sara Hyzer.

Speaker Change: In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings pet release, and form 10Q for the period ending February 28, 2025.

Speaker Change: These documents will be made available on our Investor Relations website at investor.wd-40-company.com A replay in transcript at today's call will also be made available shortly after this call.

On today's call, we will discuss certain non-GAAP measures .

Speaker Change: The descriptions and reconciliations of these non-GAT measures are available in our STC Island, as well as the earnings documents posted on our investor relations website.

Speaker Change: As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance.

Speaker Change: Actual results could differ materially. The company's expectations, believe some projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in a SEC filing for further discussion.

Speaker Change: 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

Speaker Change: The company disclaims any duty or obligation to update any forward-looking information as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Steve.

Thanks Wendy, and thank you all for joining us today.

Steve Brass: Today I'll start the no review of our styles results for the second fiscal quarter of 2025. I'll also provide updates and I must win battles and key strategic enablers.

Steve Brass: After that, Sara will go over our second quarter results in more detail, provide a brief update on the anticipated divestiture of our home care and cleaning business, review our 55, 30, 25 business model, and share an updated outlook for fiscal year 2025.

or then open the floor to your questions.

Steve Brass: Today we reported net sale of 146.1 million for the second quarter, which was an increase of 5% from the second quarter of last fiscal year.

Steve Brass: Change in foreign currency exchange rates have been a bit of a headwind for us this quarter. Adjusting for estimated translation impact of foreign currency, net sales would have been 150.9 million, reflecting an increase of 9% compared to prior year fiscal quarter.

Steve Brass: A target sales growth for core maintenance products remained in the mid to high single digits. In the second quarter, we achieved 139.3 million in net sales for these products, a 6% increase despite currency headwinds.

His performance aligns with our long-term growth targets.

Steve Brass: Much of this growth was driven by strong volume performance. We experienced double-digit volume growth, both in the second quarter and year to date, with particularly strong volume growth in

Steve Brass: Now let's talk about second-course sales results in dollars by Segment, starting with the America's.

Steve Brass: A Justing for Estimated Translation Impact of Foreign Currency, Net South and the Americas would have increased by 5% compared to prior year to school quarter.

Steve Brass: 1000 maintenance products increased 4% in the second quarter to 62.4 million compared to the same period last year

Steve Brass: The book of this growth was driven by higher sales volume of W-40 multi use product in Latin America, which increased 47% compared to prior year quarter.

Steve Brass: A newest direct market is celebrating its one year anniversary this quarter and it continues to perform fully in line with our expectations.

Steve Brass: In addition, thousands of other Latin American markets increased 1.3 million, QTA improved economic conditions in certain regions, as well as higher level of brand building activity and expanded distribution.

Steve Brass: I-1000 Latin America will partially offset by a lot of sales of the B-40 multi use product in the United States, which decreased by $2.7 million compared to the prior year quarter due to the timing of customer orders.

Steve Brass: I'm happy to share that many of those customer orders have already shifted into March on contributing to a strong start for seeing in the US were offered for school quarter.

Steve Brass: and the Americas south of the WD-40 specialist increased 9% compared to the prior year, primarily due to outstanding distribution in the United States.

Steve Brass: Broken Maintenance Products has partially upset by a 6% decline in home care and cleaning products. The stroke has primarily due to reduce distribution for these brands as we shift our focus to our more profitable maintenance products in line with our 4x4 strategic framework.

Steve Brass: In total, our America's segment made up 45% of our global business in the second quarter.

Steve Brass: Now let's take a look at ourselves now, which includes Europe and the Middle East and Africa.

Steve Brass: Local sales 9 Mayer increased 10% in the second quarter to 59.6 million compared to the same period last year. Adjusting for estimated translation in back to foreign currency, net sales 9 Mayer would have increased by 15% compared to prior year to school quarter.

Steve Brass: Charles increased most significantly in Italy, France and the Benelox regions, which were up 28%, 13% and 27% respectively.

Steve Brass: In IMAA, most regions have seen continued volume growth momentum, following a temporary decline in volumes associated price increases, we implemented over two years ago.

Steve Brass: While much of this volume recovery occurred in fiscal year 24, the momentum in sales volumes has continued into fiscal year 25, leading to higher sales.

Steve Brass: Shows of WD-40 Specialist increased 12% compared to prior year for school quarter, primarily due to higher sales volume due to increased distribution and stronger levels of demand in various direct markets, most significantly in the dark, then looks and idea regions.

Steve Brass: Growth in the maintenance products as pass shops said by a 32% or $715,000 decline in home-caron

Steve Brass: This is primarily due to reduced promotion efforts for these brands, as we shift our focus to our more profitable maintenance products in line with our 4x4 strategic framework.

Steve Brass: In total, RMA statement made up 41 per cent of our global business in 2nd quarter.

Steve Brass: Now on to Asia Pacific, Charles and Asia Pacific, which includes Australia, China and other countries in the Asia region, decreased 1% in the second quarter to 21 million compared to the same period last year.

Steve Brass: Adjusting for estimated cancellation, impact of foreign currency, net sales measure for city could have increased by 1% compared to prior year fiscal quarter.

Steve Brass: Child and Maintenance products decreased 1% in the second quarter to 18.9 million compared to the same period last year.

Steve Brass: This decline was driven primarily by lower sales with WD-40 Morbelli's product in our Asia-Distributed Markets, where sales decreased 8% compared to the prior year quarter due to the timing of customer orders.

Speaker Change: Charles Volume in Art Asia distributes a market to decline due to in-market knock-on-effects associated with changes in foreign currency exchange rates.

Speaker Change: Since we sell to these distributors in the US dollar, a stronger dollar makes our products more expensive to buy in market. As a result, our marketing distributor partners may raise prices in the market, leading to temporary market disruption.

Speaker Change: In March, we began to see recovery in our Asia Pacific distributor markets and anticipate a strong second half of this career 25.

Speaker Change: So a thousand a range of distributed markets were partially upset by higher sales of the WD-40 multi-use product in China, which increased 5% due to the increased sales volume from successful brand building and marketing activities as well as expanded distribution.

Speaker Change: In Australia, sales were down 5% in the second quarter, primarily due to lower sales of home care and cleaning products in the region, which decreased 7% due to the timing of

Speaker Change: In Asia Pacific, sales of WD-40 Specialists were up 10% in the second quarter due to higher sales volume from successful promotions and marketing efforts in our Asia Distributed Markets along with expanded distribution in China.

Speaker Change: In total, our age of the civic segment made up 14% of our global business in the second quarter.

Speaker Change: Now let's take a look at Amos from Battles. Amos from Battles focus on maintenance product revenue growth and improved profitability.

Speaker Change: Starting with Muscoon Battle No. 1, Leisure Graphic Expansion, the yet-a-day global sales of the recording of the use product were 232 million, representing growth of 8% compared to the same period last year.

Speaker Change: We experienced 16% growth of our signature brand in Omaea and 7% growth in the Americas. This growth has partially upset by a 4% sales decline in Asia Pacific.

Speaker Change: Over the past five years, we've successfully transitioned to markets, Mexico and Brazil to a direct model, gaining valuable insights and driving strong growth. However, going direct is not the only way to accelerate top line growth.

Speaker Change: We're also exploring alternative go-to-market strategies to improve efficiency. We've started grouping our mayor markets into strategic regional hubs with centralised operations and business functions.

Speaker Change: These hubs manage sales, distribution and marketing can multiple nearby markets, helping us reduce cost, accelerate rate of execution and better adapt to regional needs.

Speaker Change: In the Asia-Pacific region, we're adopting hybrid models and some markets to accelerate learning and growth. We've identified Indonesia, Vietnam and Japan as tough market opportunities within our Asia-distributed network. Experiences shown having boots on the ground benefits both our company and our distributed partners.

Speaker Change: Currently, we have dedicated WD-40 Company personnel, working alongside our Indonesian and Vietnamese distributors, and we're excited to announce the hiring of our first dedicated personnel in Japan, who will work closely with our Japanese distributor.

Speaker Change: We're confident that the focus and expertise these personnel will bring to their respective markets will create a significant unlock and contribute further to our success.

Next is Muslim Battle No. 2, Accelerating Primimization.

Speaker Change: A second Muslim battle is to accelerate sales of premium formats of the WD-40 multi-use product.

Speaker Change: For us, premiumisation is a major contributor to achieving more profitable growth, and our premiumised products continually leave our end users with positive lasting memories.

Speaker Change: Year-to-date sales at WD-40 Smart Store, Neary Reach, when combined, were up 11% compared to the prior year period. On a go-forward basis, we'll be targeting a compound annual growth rate for net sales of premiumized products of greater than 10 percent.

A third must be in battle as the drive to be for the specialists growth.

Speaker Change: Year to date, thousand WD-40 specialist products were 38 million of 12% compared to the same period last year.

Speaker Change: We continue to see growth of W40 specialist products across all three trade blocs with particularly strong growth in IMAEA and the Americas and where sales grew 14% and 12%.

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Speaker Change: As we continue to embrace our new mantra, few things, many places, bigger impact, we'll review our portfolio to ensure we focus our resources on the products with the greatest growth potential, as well as those new or existing that support our sustainability agenda.

Speaker Change: On a go-forward basis, we'll be targeting the company on your growth rate for net sales of the equally specialist of greater than 15% in reported currency.

Speaker Change: A final Muslim battle number four is the turbocharged digital commerce, the view digital commerce is an accelerator for all our other Muslim battles.

Speaker Change: The common sales are up 9% here to date. The digital channel is so much more than just the sales platform into a powerful tool for building brand awareness and educating and users about our products.

Speaker Change: One example is our training the trades program which offers technical training and skill development to aspiring technicians and trades people worldwide.

Speaker Change: Over the past seven years have expanded from training approximately 6,000 trades people in one country to facilitating 200,000 completed trainings each year across more than 20 countries to probe focus educational content reaching millions more.

Speaker Change: In this video, 25, we integrate more than 15 million online impressions and distribute more than 175,000 product samples to skilled trade professionals effectively putting many hands around the world.

Speaker Change: The digital channel has provided us with a tremendous opportunity to train more future traits people globally faster.

Speaker Change: Now let's move to the second element of our 4x4 strategic framework, our strategic enablers, which emphasize Operation Excellence. Today I'll provide an update on strategic enablers, 1 and 3.

Speaker Change: A WD-40 company we believe our greatest asset cannot be found on a balance sheet but rather resides within our talented global team. Therefore it makes sense that our first strategic initiative is to ensure a people first mindset.

Speaker Change: For over 20 years we've measured employee engagement every two years, not just to track progress but to drive improvements.

Speaker Change: However in today's volatile and certain complex and ambiguous times, we recognize the need to develop more frequent and effective ways to listen to our employees. This allows us to gather real-time feedback, enhance our culture, and shift from employee engagement to true employee inspiration.

Speaker Change: Once again we measured employee engagement, but I'm extremely proud that we've been able to increase our employee engagement index score to 94%.

Speaker Change: In addition, 94% of our employees agree that they understand the strategy for achieving W equally companies, future goals and ambition.

Speaker Change: I want to take a moment to say thank you to all of our employees for their dedication, hard work and passion It's because of you that our company can achieve great things [inaudible]

Speaker Change: Moving on to strategic anadeline on the 3 Achieve Operational Excellence in Supply Chain.

Speaker Change: Through this strategic enable, we're advancing our global supply chain strategy to both drive economic value and support our sustainability agenda. The fiscal year, we strengthen global partnerships, key suppliers, leading to improved efficiencies, supply chain optimization, and tangible cost savings.

Speaker Change: Based on what we know today, we believe these cost savings will largely offset the financial impact of any potential tariffs for the remainder of this fiscal year.

Speaker Change: Generally speaking, we expect any potential tariffs from what we know today to have a minimal global impact on our business, thanks to our highly diversified supply chain.

Speaker Change: By sourcing raw materials and manufacturing products close to our customers and end users, the game both economic and environmental advantages are also naturally mitigating most of the impact

Speaker Change: However, given the dynamic nature of the environment, predicting exact outcomes is challenging and we do have markets within the Americas, especially Mexico and Canada, representing around 6% of our global business, that may be impacted more significantly.

Speaker Change: As a precaution, we've taken steps to build inventory in certain markets to mitigate potential tariff impacts in the short term.

Speaker Change: Beyond FY25, we do expect to see higher inflation like most businesses.

Speaker Change: and we will likely need to modestly adjust prices in certain markets to offset that impact.

With that, I'm now turn the call over to Sara.

Sarah Hyzer: Thanks, Steve. Today I will share a brief update on the anticipated divestiture of our home care and cleaning business in the Americas and the UK. Provide insight into our business model and review some highlights from our second court of results.

Sarah Hyzer: I will also share an updated outlook for fiscal year 2025.

Sarah Hyzer: Last quarter we met all the criteria to classify the assets we intend to sell as held for sale on our balance sheet, indicating progress on this journey.

Sarah Hyzer: Well, I do not have a detailed update for you today on the anticipated divestiture. I can share with you that the investment bank we have engaged continues to have discussions with multiple potential suitors on our behalf.

Sarah Hyzer: Well, there are no certainties on closing a deal with potential buyers and going to the market. Our expectation is that we will likely complete the legislature of these brands over the coming months.

Sarah Hyzer: We will provide further updates on the divestorship process as appropriate.

Sarah Hyzer: Our 55-30 25 business model continues to be a long-term beacon that we will move toward and align with over time.

Sarah Hyzer: In the short to midterm, we continue to think about each critical component of the model in a range.

Sarah Hyzer: Let's start with a look at our second quarter gross margin performance.

Sarah Hyzer: We target a range of 50 to 55% for Gross Margin, and we have made significant progress improving in our Gross Margin over the last several quarters.

Sarah Hyzer: In the second quarter, our gross margin was 54.6% up from 52.4% last year. This represents an improvement of 220 basis points compared to the second quarter of last year.

Sarah Hyzer: Rosemarie benefitted 110 basis points from lower cost of our cans and 90 basis points from lower cost associated with specialty chemicals used in the formulation of our products.

Sarah Hyzer: We are also happy to share with you that gross margin improved in both IMEA and the America's fourth quarter, compared to the second quarter of last year.

Within IMAA, Gross Margin improved 440 basis points to 58.1%.

Sarah Hyzer: The Americas improved their gross margin by 70 basis points to 50.1%.

Sarah Hyzer: An Asia-Pacific gross margins for named study at 58.4%, which was a slight decline of 10 basis points.

Sarah Hyzer: As a reminder, Gross Margin Recovery has been a central focus for senior leadership who are incentivized to recover Gross Margin to 55% and beyond.

Sarah Hyzer: Year-to-date, our gross margin is 54.7% up from 53.1% last year.

Sarah Hyzer: Excluding the impact of the home care and cleaning businesses we plan to divest, our gross margin is 55.2%, positioning us to exceed 55% by the end of fiscal year 2025.

Sarah Hyzer: In fact, we currently believe we will achieve gross margin of between 55 and 56% in fiscal year 2025, one year earlier than previously projected.

Sarah Hyzer: There are things that could knock us off course, and we continue to carefully observe the cost landscape, impact of tariffs, timing of execution of our supply chain cost initiatives, and our success and diversity of our assets held for sale.

Sarah Hyzer: However, we are very happy with the significant improvements we have seen to growth margin over the last several quarters and we believe we will be above our target of 55% for the fiscal year.

Sarah Hyzer: Cost of doing business is primarily comprised of three areas, investments in our employees, investments in building our brand globally, and trade expense to get our products to our customers.

Sarah Hyzer: Cost of doing business as a percentage of net sales is how we measure how efficient we are at operating our business

Sarah Hyzer: We target a range of 30 to 35% of the percentage of net sales for our cost of doing business.

Sarah Hyzer: This quarter are passed to doing business as a percentage of that sale is just 38% compared to 36% in the same period last year.

Sarah Hyzer: and Dollar Terms are cost of doing business increased 4.7 million or 9 percent, primarily due to higher employee related expenses, including higher accrued incentive compensation and stock-based compensation expense.

Sarah Hyzer: In addition, investments made in brand building activities increased period over period.

Sarah Hyzer: As a percentage of sales, our AMP investment was 5.1%, compared to 4.8% in the second quarter of the prior year.

Sarah Hyzer: Our AMP investment is currently tracking below our full year guidance of 6% due to the timing of promotional programs.

Sarah Hyzer: We expect to see improvements in our cost of doing business metric over time as sales grow, which is the most important factor in managing our cost of doing business towards our long-term target of 30 to 35 percent.

Turning now to adjusted EBITDA.

Sarah Hyzer: We believe looking at adjusted EBITDA as a percentage of sales is beneficial to measure our profitability and to assess operational efficiency.

Sarah Hyzer: Our 25% target for adjusted EBITA margin is a long-term aspiration. However, we continue to believe we can live adjusted EBITA margin back to our mid-term target range of 20 to 22%.

Sarah Hyzer: and the second quarter are adjusted even a margin improved slightly to 18% compared to 17% in the same period of last year.

Sarah Hyzer: We believe looking at adjusted EBITDA and dollar terms can also be useful for assessing absolute performance.

Sarah Hyzer: In the second quarter, our adjusted EVIDA was 25.8 million, up 10% from prior year.

Sarah Hyzer: As we've mentioned previously, as we successfully divest the brands that are held for sale, we will need some time to digest the impacts.

Sarah Hyzer: Although these home care and cleaning brands produce a lower gross margin than our maintenance products, there is a lower level of operating expenses associated with these brands.

Sarah Hyzer: Primarily because no employees or resources are fully dedicated to them. If we successfully divest deep brands, we will lose approximately 23 million in annual revenue, but with little associated operating expenses.

Sarah Hyzer: As resolved, our cost of doing business and adjusted EBITM metrics will see a temporary setback on a percentage basis.

Sarah Hyzer: However, selling these brands will position us as a higher growth, higher growth margin company, while also freeing up capacity for employees to focus on higher priority projects the law line with our strategic framework.

Sarah Hyzer: Now let's discuss operating income and EPS, as well as a non-cash tax event that impacted our reported results.

Sarah Hyzer: Operating income improved to 23.3 million in the second quarter, an increase of 11% over the prior quarter. Deluted earnings per common share for the quarter were $2.19 compared to a $1.14 for the second quarter last year.

Sarah Hyzer: This quarter, we recorded a non-cash event that materially impacted our net income and EPS. In fiscal year 2019, we took an uncertain tax position related to the tax cut and jobs act.

Sarah Hyzer: Specifically for calculating the one-time toll tax on unremated foreign earnings.

This rebalted in a reduction in earnings in 2019.

Sarah Hyzer: With the recent expiration of the Federal Statute in December , the company released the unrecognized tax benefit associated with this mandatory, one-time toll tax.

Sarah Hyzer: The release of this tax benefit resulted in a favorable income tax adjustment of $11.9 million

Sarah Hyzer: Given the significance of this tax benefit which resulted in a favorable impact of 87 cents for the quarter, we have backed this non-cash event out of EPS as a non-GAAP adjustment.

Sarah Hyzer: Deluted earnings per common share on a non-GAAP adjusted basis for $1.32 in the second quarter compared to a $1.14 last year, reflecting an increase of 16 percent.

are deluded EPS for Flax 13.6 million weighted average shares outstanding.

Now let's look at our capital allocation strategy.

Sarah Hyzer: maintaining a disciplined and balanced capital allocation approach remains a priority for us.

Sarah Hyzer: For the foreseeable future, we expect maintenance caps of between 1 and 2% of sales for fiscal year, which is in line with our asset-like strategy.

Sarah Hyzer: We continue to return capital to our stockholders through regular dividends and buybacks. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings.

Sarah Hyzer: On March 18, our Board of Directors approved a quarterly cash dividend of 94 cents per share.

Sarah Hyzer: During the second quarter, we repurchased approximately 12,500 shares of our stock at a total cost of approximately $3.1 million under our current share repurchase plan.

Sarah Hyzer: We will continue to be active in the market and expect to repurchase at least enough shares to offset those issues for equity compensation.

Sarah Hyzer: Our objective is to return cash to investors in the most accretive manner.

Sarah Hyzer: So let's turn to FY25 guidance, which we have made revisions to reflect our current view of the business.

Sarah Hyzer: As a reminder, we issued this year's guidance on a pro forma basis, excluding the financial impact of the home care and cleaning brands we have classified as access help for sale.

Sarah Hyzer: While the exact timing of the transaction remains uncertain, we will believe this approach will provide investors with clarity on the direction of the core business and help minimize the noise surrounding the transaction.

Sarah Hyzer: In addition, this guidance excludes the release of a non-cash on time on certain tax position that generated a favorable income tax adjustment.

Sarah Hyzer: I encourage investors to review our second quarter fiscal year 2025 earnings presentation, which includes a pro form of you.

Our updated guidance for fiscal year 2025 is as follows.

Sarah Hyzer: net sales growth from the pro forma 2024 results continues to be projected to be between 6 and 11 percent with net sales between 600 and 630 million after adjusting for translation impacts of foreign currency.

Sarah Hyzer: Rosemarie for the full fiscal year has been increased and is now expected to be between 55 to 56 percent.

Sarah Hyzer: Advertising and Promotion Investment continues to be projected to be a rabbed 6% of net sales.

Sarah Hyzer: Operating income continues to be projected to be between $95 and $100 million million dollars.

Sarah Hyzer: representing growth of between 6-12% over the pro forma 2024 results. While we are raising our guidance from growth margin, our guidance for operating in some remains unchanged due to the impacts of foreign currency exchange headwinds.

Sarah Hyzer: The provision for income tax is now expected to be around 22.5%, which is driving it in place to non-GAAP diluted earnings per share, which is now expected to be between 5.25 and 5.55.

Sarah Hyzer: non-GAAP EPS is based on an estimated 13.5 million rated average share of outstanding.

Sarah Hyzer: This range represents growth of between 11 and 17% over the pro forma 2024 results.

Sarah Hyzer: This guidance assumes no major changes to the current economic environment, unanticipated inflationary headwinds, foreign currency exchange fluctuations, changes in trade tariffs and other unforeseen events make further affect the company's financial results.

Sarah Hyzer: In the event, we are unsuccessful in divesting the ASAP currently held for sales. Our guidance would be positively impacted by approximately 23 million in net sales, 6 million in operating income and 33 cents and diluted EPS on a full-year basis.

Speaker Change: That completes the financial overview. Now I would like to turn the call back to Steve.

Steve Brass: Thank you, Sara. In summary, what did you hear from us on this call? You heard that we experienced double-digit volume growth, both in the second quarter and the year-to-date, with particularly strong volume growth in our mayor.

Steve Brass: You heard that after adjusting for estimated translation impact of foreign currency, net sales would have increased 9% compared to prior year fiscal quarter.

Steve Brass: You heard the tales of our maintenance products were of 6% in the second quarter, despite currency headwinds and at this performance alliance with our long-term growth target.

Steve Brass: You heard the sales of WD-40 multi-use product for a paid percentage to date.

Steve Brass: You heard the sounds of WD-40 specialists group 12% here to date.

Steve Brass: You heard that we've been able to increase our employee engagement score to 94 percent?

Steve Brass: You heard that we strengthen global partnerships with key suppliers, leading to improved efficiencies, supply and optimization, and based on what we know today, we believe these cost savings will largely affect the financial impact of any potential Paris for the remainder of this fiscal year.

Steve Brass: You heard that we've made improvements to gross margin over the last several quarters and that we believe will be above our target of 55% by the end of the school year 2025.

Steve Brass: And you heard that we made an offer of revision to our full fiscal year 25 gross margin EPS guidance.

Steve Brass: Thank you for joining our call today. Would now be pleased to answer your questions.

Speaker Change: Ladies and gentlemen, if you would like to register a question, please press star one on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If your question has been answered and you would like to withdraw your registration, press star one a second time. Our first question will come from the line of Daniel Rizzo with Jeffries. Please go ahead.

Daniel Rizzo: Good morning everyone, thank you for taking my questions. If we can start with just with tariffs, I understand you're making some adjustments, but I was wondering how much you ship across borders if you...

Daniel Rizzo: If you produce or produce and sell locally or how much tariffs will have an impact, both the tariffs that's being proposed by the US and I guess the retaliatory tariffs from China just, just any color you can provide on the ongoing volatile environment.

Speaker Change: Sure. Hey, Daniel Steve. So, you know, we are centralized supply chain and so the tariff risk is somewhat mitigated by that. Of course, we're not fully immune so

Speaker Change: In the United States, as you perhaps know, you know, we manufacture for the US mostly in the US. There are, you know, small elements of components that are brought in, but the vast kind of element of the supply chain in the US is.

Reasonably, and Carrie Simunov, of the course there are...

Speaker Change: costs such as, you know, and steel tariffs that will work their way through.

Speaker Change: as we go through but they're being offset also by other costs and so this decentralized nature of our supply chain

Speaker Change: Helts a lot. We've got a lot of supply chain optimization measures happening.

Speaker Change: this fiscal year, and we currently believe as of today, what we see today, what we know today, that our supply chain optimization and cost saving measures will largely offset any impact of tariffs for the remainder of this fiscal year.

Speaker Change: Beyond this fiscal year, we will look at our forward cost space and we kind of indicated that we will look at small or moderate inflationary plus type increases. You know, as we experience potential inflation going forward.

Speaker Change: Okay, so China announced retaliatory tariffs, it's very early, but they also announced or alluded to maybe restricting sales within the country and just doing other things that are just the kind of as retaliation against the US. I was wondering if that affects you guys at all, that they're restricting your product, there's restricting what you can do or there's any signs of any potential emerging headwinds from that.

Speaker Change: So as of today, we see no risk there, so we manufacture in China for China and as you perhaps know we export from China to the Asian markets as well as manufacturing in Australia and we're ramping up manufacturing also in another Asian market.

Speaker Change: And so within China at the moment we are kind of seen as a local brand in many.

Speaker Change: many places we operate around the world and so as of today we don't see any material risk to our operations in China because of our local life supply chain.

Speaker Change: And the fact that we have Chinese nationals fully operating our Chinese business, we are seen very much as kind of a local business in many places around the world.

Speaker Change: Okay, and thank you for that. And then you mentioned optimizing your supply chain. I was wondering if that means you're going from from from dual sourcing the sole sourcing or vice versa, if or just just a little bit of color on that. If it means you're going to more sources to make it less.

Speaker Change: More cost-effective maybe, and a little more stable, or if you're going to one source to make it more optimized, or how you think about it.

Speaker Change: So, it's a combination of all those things. So, the next result is that we have a better, more diversified geographic footprint to our supply chain, which is serving the major areas of growth in the business.

Speaker Change: While it's also extracting, so you may be aware that we did invest in a global supply chain leadership position a couple of years ago and we're starting to bear the fruit in terms of the high quality analysis that's led to global cost savings and leveraging kind of our global partnerships.

Speaker Change: and so it's a combination of lots of things that's leading to a much more kind of de-risk, localized supply chain but also driving cost savings for us.

Speaker Change: Does it take a while to kind of qualify a supplier? I mean, is it a multi-year process? Is it a multi-month process or how does it work and how easy to shift?

Speaker Change: Yeah, there's a time lag, right? So bringing on for example a new aerosol filler takes takes more than more than a year looking 18 months to two years to probably see that through. But we're well in the process. We have multiple moves around the world, but that's already happening and we're diversifying to the diversifying our supply chain.

Speaker Change: whilst also optimizing for the global nature of our business in many areas.

Speaker Change: Okay. And just two more questions. One, so your gross margins are going high, are expected to be a little bit better than expected, but the operating income is is the same. So I assume that's from SG&A or it appears to be from SG&A, and I guess I don't want to make sure that's just coming from higher expected compensation expenses for the rest of the year, or for something else that's keeping those SG&A expenses elevated through the end of the year. [inaudible]

Daniel Rizzo: Hey Daniel, I can take that one. So the guidance, the SGNA cost for the year.

Speaker Change: are substantially as expected when we look out both in the first half and the back half of the year. The reason the operating income is not shifting with the increase in our margin is strictly from the impact of the foreign currency. So when you look at...

Speaker Change: The Air Conditioner just went on in here. So the impact of foreign currency for the first half of the year has been a headwind and when we look at that for the full year, depending on which market you're looking at, the impact of that is now masking, you know, the growth margin is masking the headwind of the foreign currency. So our operating income is expected to be in line with the initial expectations that we had at the beginning of the year. The Air Conditioner just went on in the beginning of the year. The Air Conditioner just went on in the beginning of the year.

Speaker Change: But FX has fallen recently though, so could that provide some upside that's not currently being expected?

Speaker Change: potentially when we look at the the couple of the the biggest market that for us is the Euro and I would agree that the Euro is trended up in the last month when we when we put guidance together we obviously are looking at more recent rates.

Speaker Change: It's not really that easy, just because of the dynamics of the costs over in Europe , so we don't necessarily have a rule of thumb that we guide to on that.

Thank you very much.

Speaker Change: Thank you, extend gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask let you please disconnect your lines.

Speaker Change: Unknown Executive, Wendy Kelley, Steven Brass, Unknown Executive, Wendy Kelley, Steven