Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-forty Company's 2nd Quarter Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen only mode. Telephone keypad.
Please make sure your mute function is turned off to allow your signal to reach our equipment. Call. I would now like to turn the presentation over to your host today, Ms. Wendy Kelly, Director of Investor Relations and Corporate Communications. Please proceed.
Quarter. Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-forty Company's Chairman and Chief Executive Officer, Gary Ridge Vice President and Chief Financial Officer, Jay Remboldt and President and Chief Operating Officer, Steve Brass. In addition to the financial information presented on today's call, quarter.
We encourage investors to review our earnings presentation, earnings press release and Form 10 Q for the period ending February 28, 2021. These documents are available on our Investor Relations website at investor. Wd40company.com.
2nd question. A replay and transcript
of today's call will also be made available at that location shortly after this call. On today's call, we will discuss certain non GAAP presentation. As a reminder, today's call includes forward looking statements about our expectations for the company's future performance. Quarter. The company's expectations, beliefs and projections are quarter.
Please refer to the risk factors detailed in our SEC filings quarter 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 8, 2021. Quarter. The company disclaims any duty or obligation to update any forward looking information whether as a result of new information, future events or otherwise.
Quarter. With that, I'd now like to turn the call over to Gary.
Thank you, Wendy. Good day, and thanks for joining us for today's conference call. Quarter. Our tribe continues to work together through the challenges and opportunities associated with the COVID-nineteen pandemic. Quarter.
We continue to experience very high demand for our maintenance products due to the renovation trends associated with the pandemic quarter or what we call isolation renovation. As a result, today we reported net sales of $111,900,000 for the 2nd quarter of fiscal year 2021, up 12% compared to the Q2 of last year. Translation of our foreign subsidiaries results from their functional currencies to the U. S. Dollar had a favorable impact on sales in the 2nd quarter.
On a constant currency basis, sales would have been $109,200,000 quarter, up 9% compared to the Q2 of last year. Net income for the Q2 was $17,200,000 compared $14,300,000 last year. Diluted earnings per share for the Q2 was $1.24 quarter compared to $1.04 for the same period last year. I do want to caution investors that quarter. Due to the uncertainty the health crisis continues to present, it is very difficult for us to estimate how our business will be impacted by the quarter.
We offer a variety of maintenance products that have
quarter. We've seen a very
high demand due to renovation trends associated with the pandemic. However, the pandemic quarter. Has also caused some disruptions and constraints to our supply chain, primarily in the United States. Steve will share these puts and takes quarter.
Thank you. Thank you.
Thank you. Thank you. Thank you. Thank you. Thank you.
Thank you. Thank you. Thank you. Our next quarter. As you know, our growth aspirations are to drive consolidated net sales to approximately $700,000,000 and to do so while following quarter.
Our 50 Fivethirtytwenty five business model. Strategic initiative number 1 is to grow WD-forty multiuse product. Quarter. Our goal under this initiative is to make the blue and yellow can with a little red top available to more people in more places quarter. In the Q2, sales of WD-forty Multi Use Product were 86 $400,000 up 14% compared to last year.
This increase was driven primarily by increased quarter sales in EMEA and Asia Pacific, which increased 22% and 34%, respectively. Quarter. The increase in WD-forty Multi Use Product Sales in EMEA was driven primarily by increased end user demand linked to isolation innovation trends throughout the trading block. In Asia Pacific, we experienced significantly improved market conditions in China quarter compared to the Q2 of last year. You will recall our China market was materially impacted during the Q2 of fiscal 2020 quarter.
Due to the COVID-nineteen outbreak in the country, our long term growth aspirations for this strategic initiative is to grow WD-forty Multi Use Product to Approximately 530,000,000 over the long term. Strategic initiative number 2 is to grow the WD-forty Specialist product line. In the 2nd quarter, sales of WD-forty Specialist increased 4% globally to $9,200,000 compared to the Q2 of last year. Quarter. This growth was driven by strong e commerce sales as well as increased demand linked to renovation trends associated with the pandemic.
Quarter. These trends led to increased sales in EMEA and Asia Pacific of 30% and 102% quarter. Respectively, but were partially offset by a 36% sales decline in the Americas linked quarter. Highly to the pandemic related supply chain disruptions in the United States. End user demand for WD-forty Specialist product quarter.
We remain exceptionally high in all three trading blocks. Therefore, we are optimistic about the long term opportunities for 3D-forty Specialist and believe we can grow the product line to approximately $100,000,000 in revenue over the long term. Strategic initiative number 3 is to broaden product and revenue base. Strategic initiative number 3 includes 3 in 1 WD-forty by GT85-1000 and 1 Spot Shot, Solvol, Lava and Novak. Global sales quarter.
The products included under this initiative were $13,700,000 in the 2nd quarter, up 7% compared to last year. Global sales of WD-forty bike remained particularly strong in the 2nd quarter, up nearly 34% compared to last year quarter. As people are buying, fixing and riding bicycles more often due to the pandemic, we believe we are on track to reach a combined revenue for these product of approximately $70,000,000 over the longer term. Strategic initiative number 4 is attract, develop and retain outstanding tribe members. Our goal quarter.
Under this initiative is to attract, develop and retain talented tribe members and to grow our tribe member engagement to greater than 95%. Quarter. We had last measured tribe member engagement levels immediately before the pandemic began. At that time, our overall global quarter. Our engagement score was 93%.
I am not sure we would have thrived during the pandemic had we had not entered it with a highly engaged workforce. Quarter. As we approached the 1 year anniversary of the pandemic, we decided to conduct a brief tribal check-in to measure the engagement level of our tribe, quarter. I'm happy to share with you that the results quarter. From that survey, we're very positive and we have been able to maintain our employee engagement levels.
In addition, we've learned from the survey quarter. Our successfully navigated a very turbulent year and we are emerging from its stronger and a more intact tribe than ever before. I call. I want to take a moment to thank the tribe for their hard work and for their dedication during these challenging times. Quarter.
You have reinforced something to me that I have already knew, purpose driven passionate people guided by values create amazing outcomes. Strategic initiative number 5 is operational excellence. Our goal under this initiative is best summarized by one of our core values here at WD-forty quarter. Our commitment to operational excellence continues to be an enormous asset quarter as we continue to navigate the challenges associated with the pandemic. Using our fifty five-thirty-twenty five business model as a framework, we measure ourselves against quarter results against its operational excellence initiative.
That's it for my update. I will now pass the call to Steve, who will share an overview of our sales results with you and discuss some other developments.
Thanks, Gary, and good afternoon. When we last spoke, quarter. I shared with you that despite the many disruptions caused to our business by the pandemic, we were experiencing increasing demand for our products due to a change in end user behavior quarter. Caused by the isolation renovation phenomenon. Today, I'm happy to share with you that those trends continued throughout the duration of the second quarter.
Quarter. And today, we are reporting total global sales growth of 12% for the quarter. However, we also encountered some challenges in the Americas related to keeping up with end user demand quarter. Like many consumer goods companies, we are experiencing significant disruptions and constraints within our supply chain in certain geographies. Quarter.
In the United States, some of our third party manufacturers have been experiencing increased absenteeism and labor shortages, quarter. Which have resulted in slower line speeds, capacity constraints and increased competition for line capacity within the aerosol industry. Quarter. In addition, we've been managing raw material shortages and transportation bottlenecks, which have impacted our ability to deliver products and meet some of our normal levels service with our customers in some markets. These challenges have mostly impacted our Americas trade block and have resulted in lower sales for the United quarter.
Jay will talk in more detail about the gross margin impact in a moment. Quarter. Let's take a closer look at what's happening in our trade blocks, starting with the Americas. Net sales in the Americas, which include the United States, Latin America and Canada,
quarter. We're down 1% in the 2nd quarter to
$46,200,000 Sales of maintenance products decreased 3% in the Americas quarter. Due to decreased sales of WD-forty Specialist and WD-forty Multi Use Product in the U. S, which declined 42% and 5%, respectively. Quarter. The sales declines were related to the supply chain constraints and disruptions I mentioned a moment ago.
In addition, sales in the U. S. Were also negatively impacted quarter by the severe winter storms that took place during the Q2. There is a supply chain recovery plan underway, which includes adding more ships to third party manufacturers, quarter. Bringing onboard new third party manufacturers and expanding our launch of next generation smart straw into the U.
S, quarter, which is scheduled to be on store shelves during the Q4 of this fiscal year. We believe these issues will begin to resolve half of our fiscal year twenty twenty one, but we expect continued volatility along the way due to the supply chain impacts of COVID-nineteen. Now the good news. Partially offsetting these declines is a 16% increase in maintenance product sales in Canada and quarter and a 28% increase in Latin America. In Canada, the sales increase was driven by the isolation renovation phenomenon quarter and increased sales through the e commerce channel during the pandemic.
Canada is also benefiting from the successful introduction quarter. In Latin America, we saw increased sales during the Q2, quarter. Primarily due to strong sales in our newest direct market of Mexico. While we anticipate the continued successful build of our direct customer base in Mexico, quarter. We expect there may be a bit of volatility along the way as we continue to develop this exciting new direct market.
Quarter. In addition, in our other Latin American markets, we saw increased end user demand due to decreased COVID-nineteen restrictions in the region. Sales of our home care and cleaning products in the Americas increased 10% in the Q2 compared to the prior year, quarter largely due to higher sales of 2,000 flushes, which increased 27%. We have experienced a significant increase in sales of many of our home care cleaning products in the United States and Canada due to increased demand because of the pandemic. However, we continue to consider our home care and cleaning products, except for those listed as strategic brands as Harvest Brands continue to generate meaningful contributions and cash flows, but are generally expected to become a smaller part quarter.
In total, our Americas segment made up 41% of our global business in the Q2. Over the long term, we anticipate sales within this segment will grow between 2% to 5% annually. Now on to EMEA. Net sales in EMEA, which includes Europe, the Middle East, Africa and India, quarter. We're up 19% in the 2nd quarter to $49,800,000 This represents an important milestone for our EMEA segment.
Quarter. For the Q2 in a row, EMEA was our largest trading block in terms of net sales. Changes in foreign currency quarter. Exchange rates had a favorable impact on sales for the EMEA segment from period to period. On a constant currency basis, sales would have increased by 15% quarter compared to last year.
Sales of maintenance products increased by 22% in EMEA due to increased sales in both our EMEA Direct and our EMEA distributor markets, which increased 17% and 35%, respectively. In our EMEA direct markets, we experienced a 14% quarter. And the quarter due to the isolation renovation phenomenon and increased sales through the e commerce channel during the pandemic. In the second quarter, net sales in our EMEA direct markets quarter. In our EMEA distributor markets, we experienced a 36% increase in sales of WD-forty multi product and a 19% increase in WD-forty Specialist sales, primarily due to improved economic conditions because of reductions in COVID-nineteen 19 Related Movement Restrictions.
We saw particularly strong sales of WD-forty Multi Use Product in India, the Middle East and Northern Europe areas, quarter where we are experiencing strong recoveries. In the 2nd quarter, net sales in our EMEA distributor markets accounted for 33% of quarter. In total, our EMEA segment made up 45% of our global business in the 2nd quarter. Over the long term, we anticipate quarter. Sales in this segment will grow between 8% to 11% annually.
Now on to Asia Pacific. Quarter. Net sales in Asia Pacific, which includes Australia, China and other countries in the Asia region, were up 39% in the Q2 to 15,900,000 quarter. Changes in foreign currency exchange rates had a favorable impact on net sales for the Asia Pacific segment from period to period. Quarter.
On a constant currency basis, sales would have increased by 32% compared to last year. Sales of maintenance products quarter. Increased by 40% in Asia Pacific due to increased sales in China and Australia, which increased 2 quarter. Quarter. In China, net sales were $4,700,000 in the 2nd quarter, up 2 27% compared to last year, primarily due to improved market quarter.
In the Q2 of last fiscal year, the COVID-nineteen outbreak was in its earlier stages and sales declined 70% during the quarter quarter compared to the prior year due to the health crisis. With no comparable event occurring this year, our China market is doing well. We are seeing accelerating growth quarter. However, it's important to remind investors that though we remain optimistic about long term quarter. We expect some lumpiness in the coming quarters.
In the Q3 of fiscal 2020, COVID-nineteen lockdown measures quarter. We reduced considerably in China, and as a result, sales were very strong as they began to resume normal operations and were able to ship some sizable orders that has been delayed quarter. Since there will be no comparable event occurring this fiscal year, our Q3 sales for China this year may be lower than last year. Quarter. Overall, we expect strong sales growth for China for the full fiscal year.
In Australia, net sales were $5,300,000 in the 2nd quarter, quarter. Up 39% compared to last year, driven by increased demand for both our maintenance and home care and cleaning products. Quarter. The overall sales of WD-forty Multi Use Product and WD-forty Specialist were also up 37% 92%, respectively, due to the isolation quarter. Sales of our home care and cleaning products were up 32% due to both the increased demand we've seen for these products during the COVID-nineteen pandemic and the good market traction we've continued to gain for our home care and cleaning products in Australia.
In our Asia distributor markets, net quarter sales of $6,000,000 in the 2nd quarter, down 4% compared to last year, attributable to the shift in the timing of customer orders quarter as well as delayed shipment of certain customer orders in the Q2 of this year linked to the worldwide shipping container shortages. Quarter. These container shortages have most heavily impacted the Asian market, which has been unable to retrieve empty containers in North America and Europe. Quarter. In addition, our Asia distributor markets have been a bit slower to recover from the pandemic with some countries recovering faster than others.
Quarter. Our marketing distributors are continuing to normalize their inventory levels, which has also impacted sales results in the 2nd quarter. In quarter. In total, our Asia Pacific segment made up 14% of our global business in the 2nd quarter. Over the long term, we anticipate sales within this segment quarter.
We'll grow between 10% to 13% annually. As we set our sights on emerging from the pandemic and seek to execute and deliver against our anticipated quarter. We are increasing our focus on our key drivers of revenue growth, which we call our must win battles. Quarter. Our largest growth opportunity in First Must Win Battle is the geographic expansion of the blue and yellow cam with a little red top.
Significant growth opportunities exist within this must win battle. Quarter. Nearly all our top markets under this Muslim battle are delivering growth in FY 'twenty one. Year to date sales of WD-forty Multi Use Product $180,600,000 up 19% compared to last year. We continue to look at ways to further accelerate the growth in our identified markets.
Gross margin expansion. Year to date, sales of WD-forty Smart Straw and EZ Reach, when combined, were $82,800,000 representing nearly 46% quarter. Despite the supply chain constraints we have been experiencing in some geographies, quarter. We've been able to bring on new third party manufacturers in order to accelerate our launch of next generation Smart Straw. This acceleration is quarter.
We are now expected to create incremental capacity around the globe, which will enable us to continue to convert end users from classic can to smart straw. Quarter. As we continue to roll out next generation Smart Straw, our objective is to grow Smart Straw global penetration to greater than 60 quarter. Our 3rd must win battle is to grow WD-forty Specialist. The product line has been a tremendous success for us since its launch 10 years ago.
Quarter. It has enabled us to deliver solutions that span end user needs and to remove competitors from store shelves around the world. It has also become increasingly clear to us that e commerce and quarter. Our critical channels for the success of WD-forty Specialist. We believe the refreshed packaging we launched last year We'll accelerate awareness and improve findability in store and online and is expected to accelerate sales of WD-forty Specialist.
Quarter. Year to date, sales of WD-forty Specialist were $20,700,000 up 20% compared to last year. Quarter. Our final must win battle is focused on driving digital commerce. Our ambition for this battle is to engage with end users at scale and create positive lasting memories online, quarter.
Making it easy for end users to educate themselves and find and purchase our brands. We see a world where e commerce will be one of the largest sales channels for our company and a world where most purchases are influenced at some point on the path to purchase by a digital touch point. Quarter. In the first half of fiscal year twenty twenty one, global e commerce sales grew by over 61%, with strong sales growth across all three trading blocks. Quarter.
This is a testament to just how much our Tribe's Digital IQ has grown. We believe we are well positioned to benefit from the significant shift to online behaviors quarter. Now a word on what the short and long term future looks like. We believe there is a tailwind coming out of COVID. Quarter.
Over the long term, we are optimistic that many of the new end users who have interacted with our products during the pandemic will become permanent users of our maintenance and home care solutions. Quarter. People have developed new habits and hobbies, and we believe at least a portion of them will stick. Moreover, we're seeing a new generation of DIYers who have tried home improvement quarter for the very first time during the pandemic. We've also helped to educate both new and existing end users on how to improve their homes, maintain their bikes Our Eden now to take care of their new RV.
In addition, in some cultures where there was a long standing do it for me preference, quarter. We are seeing a new mindset emerge. COVID has created an environment in which people have not wanted to invite professionals into their homes. Quarter. Therefore, to fix something in the home, one must do it themselves.
We believe this trend has created a DIY tipping point in many markets quarter. It remains to be seen that this training will continue in a post COVID world, but we are optimistic that many of these new end users will become brand loyalists. Quarter. Over the short term, keeping up with demand in a COVID environment continues to be a challenge. We are managing through the market constraints quarter.
We believe these issues will be mostly resolved in the second half of our fiscal year quarter 2020 1, but expect continued volatility along the way due to the impacts of COVID-nineteen. Despite these uncertainties and risks, quarter. We remain cautiously optimistic about fiscal year 2021. We've increased our revenue expectations and believe current market quarter. The 1,000,000.
This upward revision is driven primarily by favorable changes in foreign currency exchange rates. Now I'll turn the call over to Jay, quarter who will provide you a financial update on the business.
Thanks, Steve. Let's start with a discussion about our 50five-thirty-twenty 5 business model, quarter. The long term targets we use to guide our business. As you may recall, the 55 represents gross margin, quarter, which we target to be at 55 percent of net sales. The 30 represents our cost of doing business, quarter, which is our total operating expenses excluding depreciation and amortization.
Our goal is to drive our cost of doing business over time quarter. And finally, the 25% represents our long term target for EBITDA. First, the 55% are our gross margin. Quarter. In the Q2, our gross margin was 55.4% compared to 53.6% last year.
Quarter. This represents an improvement of 180 basis points year over year. Changes in major input costs, quarter. Which include petroleum based specialty chemicals and aerosol cans positively impacted our gross margin by 210 basis points. Quarter.
Petroleum Based Specialty Chemicals positively impacted our gross margin by 160 basis points quarter. And the remaining fifty basis points came from lower costs associated with aerosol cans. Although the price of crude oil quarter. As recently increased compared to the prices seen in early calendar 2020, the average cost of quarter. The company's 2nd quarter was lower during the Q2 of fiscal 2021 compared to the prior fiscal year's quarter.
Quarter. In addition, we achieved favorability in the cost of aerosol cans due to higher than anticipated purchase volumes, quarter. Especially in our EMEA segment, also positively impacting our gross margin were sales price increases, quarter, which impacted our gross margin by 20 basis points in the 2nd quarter. And finally, additional miscellaneous costs, favorable sales mix changes quarter. And changes in foreign currency exchange rates when combined positively impacted our gross margin by 40 basis points.
Quarter. These positive impacts to gross margin were partially offset by the negative effects of higher warehousing and inbound freight costs in the Americas and in EMEA, which negatively impacted our gross margin by 60 basis points. Quarter. The unfavorable impacts were primarily due to increased freight and warehousing expense due to the high demand quarter. And labor shortages and distribution networks primarily related to the pandemic.
Finally, higher discount charges negatively impacted our gross margin by 30 basis points. Now let's talk about gross margin expectations a bit. We'll start with the major input costs, which include quarter. Crude oil is one of the primary feedstocks of our petroleum based specialty chemicals. As we mentioned a moment ago, the price of crude oil is higher this year than it was a year ago.
And as we've shared with you in the past, it takes considerable time, quarter. Approximately 90 to 120 days for the changing commodity prices to impact our cost of goods. Quarter. Though the lower crude oil prices have been a net positive to gross margin in recent quarters, if the cost of crude remains at its current levels, quarter. We will most likely see pressure on gross margin in the future.
We believe there will be increased pressure on gross margin in the second half of twenty twenty one, quarter. Driven by the recent increase in the cost of oil as well as additional costs associated quarter. With the disruptions within our supply chain that Steve discussed earlier, the supply chain disruptions quarter. Related to the pandemic have led to higher filling fees with our 3rd party manufacturers and increased component and petroleum based quarter. And because demand is high for consumer goods, the cost of transportation has also increased.
Quarter. With that being said, I'd like to remind investors that our long term gross margin is not contingent upon any of these factors. Quarter. And though we may see some volatility in the short to mid term, we'll continue to be focused and deliberate quarter. In managing our business, so that we can maintain gross margin at or above the 55% over the long term.
Quarter. Now I'll address the 30 or our cost of doing business. In the Q2, our cost of doing business was approximately 30 6% of net sales compared to 34% last year. SG and A expense increased by $5,600,000 quarter compared to the Q2 of last year, primarily due to higher employee related costs associated with incentive compensation accruals. Quarter.
For the Q2, 80% of our cost of doing business came from 3 areas: people costs quarter or the investments we make in our tribe. The investments we make in marketing, advertising and promotion. Quarter. As a percentage of sales, our A and P investment was 4.9% in the second quarter. And finally the freight costs to get our products to our customers.
That brings us to the EBITDA, quarter. The last of our 50 five-thirty-twenty five measures, EBITDA was 20% of net sales for the 2nd quarter, quarter. Unchanged from the comparable period last year. And that completes our discussion of our business model metrics. Quarter.
Now let's discuss some of the items that fall below the EBITDA line. The provision from income taxes quarter was 15% in the 2nd quarter compared to 17.6% last year. The decrease in our effective income tax rate was primarily due to an increase in excess tax benefits from the settlements of stock based quarter awards along with the release of liabilities related to uncertain tax positions. We expect that our effective tax rate quarter. Approximately 17% to 18% for the full fiscal 2021 compared to an effective tax rate of 19.6% fiscal year 2020.
Now, a word about our balance sheet and our capital allocation strategy. The company's financial condition and liquidity quarter. We remain vigilant in managing our cash and liquidity during these unprecedented times. Quarter. Our capital allocation strategy includes a comprehensive approach to balance investing in long term growth, quarter.
While providing strong returns to our shareholders, we continue to return capital to our shareholders through regular dividends. On March 16, quarter. Our Board of Directors approved a quarterly cash dividend of $0.72 per share, reflecting an increase of greater than 7% over the previous quarter's dividend. The quarterly dividend is payable April 30, 2021 quarter to stockholders of record at the close of business on April 16, 2021. In fiscal 2021, we will invest approximately $20,000,000 in capital projects, majority of which will be used to complete the procurement of our proprietary machinery and equipment, quarter, which we are using to manufacture our next generation Smart Straw delivery system.
So with that, let's turn to fiscal year 2021 guidance. Quarter. As a result of the continued uncertainty regarding the pandemic's near term impact on our business, we will not be issuing comprehensive financial guidance for fiscal 2021 at this time. As Steve shared with you earlier, we've increased our revenue expectations for the full fiscal year quarter and believe that total net sales will likely be in the range of $445,000,000 to $475,000,000 quarter. This upward revision to net sales is primarily driven by favorable changes in foreign currency exchange rates.
Quarter. That completes the financial overview. Now I'll turn it back to Gary.
Thanks, Jay. Quarter. In summary, what did you hear from us on this call? You heard that sales of WD-forty Multi Use Product were up 14% quarter. You heard that sales of WD-forty Specialists were up 4% in the 2nd quarter.
Quarter. You heard that sales of WD-forty Bike were up 34% in the 2nd quarter due to strong demand around the world. Quarter. Our results grew by over 61% in the 3rd half of fiscal twenty twenty one with strong performance across all three trading blocks.
Quarter. You heard that our
Board of Directors increased our dividend by more than 7% last month. You heard that we are experiencing quarter. We're seeing disruptions and constraints within our supply chain in the Americas and these headwinds are impacting our ability to entirely meet quarter. The increase in user demand in the U. S.
Market. You heard that disruptions within our supply chain and increased commodity costs quarter. Will most likely result in some pressure to our gross margin in the second half of fiscal twenty twenty one. Quarter. You heard that despite of these uncertainties, we remain cautiously optimistic about fiscal 2021 and believe our current market conditions quarter.
Suggest for the full fiscal year, total net sales are likely to range between 445,000,000 475,000,000 And this upward revision is driven primarily by favorable changes to foreign currency exchange rates. Quarter. And you heard that while we are not issuing comprehensive guidance, we remain confident that our long term revenue growth aspirations remain a realistic future opportunity. In closing today, I'd like to share with you a quote from Winston Churchill, Kites rise highest
2nd question and answer session. Withdrawal registration. And our first question comes from the line of Linda Bolton Weiser with D. A. Davidson.
Please go ahead with your question.
So can you question. Perhaps quantify in any way the impact of the supply chain disruptions and did you say that affected both the Americas and Asia? Is there question.
Sure. Thanks. I will. The major impact was in the United States. In the U.
S, We would estimate that we shipped roughly 50% of the volume of specialists and 85% of the volume of our MUP product against our demand signals. Now those estimates are probably wrong and Roughly right. But more important is that the end user demand based on point of sale remains high. So the major impact is on the U. S.
Market. Quarter. In Asia Pacific, the impact was only in the marketing distributor markets and it was quarter. Primarily due to our inability to ship because of shortage of containers. We don't have a supply chain issue in Asia Pacific or in the MD markets.
It's a container shortage issue. Quarter. And we haven't actually quantified that completely, but it was enough to quarter. Ensure that we didn't grow as we wanted to in that in the quarter.
Okay. And then just maybe you said this, but I didn't catch it. But did you say that these issues would be all cleared up kind of In the Q3 or more in the Q4?
We're working through them. And currently, We are working to with a recovery plan and we should be through this completely by the end of the 4th quarter, But it will be a ramp up completion, but things are improving. And we hope quarter. To see better results around supply against demand signals as we move further through the year. Again, it is Totally or primarily isolated to the United States and the biggest impact is in the United update on our specialist product line and then to a lesser extent on to our MUP line.
Okay. And then, I guess, sort of maybe you can Mary, that idea with the comment from Jay that the gross margin would kind of still be impacted Is that kind of like a gradual improvement there? Or is there some kind of disconnect between the revenue impact and the gross margin impact?
I'll let Jay talk about that.
Thanks, Gary. Yes. Call. Thank you, Gary. We see that we could have some deterioration somewhere between 200 basis points to 300 basis points from where we are today as we go through the 3rd and 4th quarter.
It would be kind of a and it really depends on how the timing of our Of the plan that we have in place, should we see delays in the plan that might slow some of the recovery down. But we would expect to feel the impact Potentially through the end of the year.
Okay. And then, did I catch you saying that the new Smart Straw would launch in the Americas in the 4th fiscal quarter? Is that what you quarter. And is that what the original plan was or is that delayed a little bit?
Sure, Linda. What we've been able to do in the recovery plan because part of quarter. The volume increase in specialist has really put a strain on our production of the specialist delivery system, the 1.0. A good thing happened is we were able to commission some of the new machinery for the 1.5 And that's going into production during May. So you'll see that come into the market after May, probably June period, which means we have enough of the 1.0 delivery system to continue to fuel the growth in other markets around the world.
So it's coming in earlier. 1 of the machinery is coming in earlier And that's going to allow us to meet the overall demand for Smart Straw.
Okay. Quarter. And then finally, just a question about your marketing plans, your marketing spending plans. If you're experiencing these quarter. Sort of shortages, a little bit here.
Has that caused you to change like should you pull back on marketing While you're having shortages in certain areas, are you still kind of going to spend, as per your plan?
We're going to invest as per plan because a major part of our investment is really around growing the must win battle number 1 in a lot of markets Around the World. So we don't have one of those turn the tap off, turn the tap on kind of marketing programs. So no, we would expect that we would continue to drive it forward.
And our next question comes from Daniel Rizzo with Jefferies. Please proceed with your question.
Hi, everyone. Thank you for taking my question. Hi, Jeff. Quarter. Relating to the supply constraint issues that we kind of talked about.
I was just wondering why it's becoming an issue or was an issue in this quarter and not in the past? Have We've gotten to a point where it's just kind of a I don't know, it's just overwhelmed finally some of your suppliers and that wasn't an issue in the past. I I don't know. I mean, as we kind of come out of the pandemic, I thought this could have been an issue 1 to 2 quarters ago. And 2, Could it become an issue in Europe, which seems to be unscathed at this point?
The first part of the question is these Supply chain pressures have been on us ever since the start of the pandemic. And what has happened is that As demand started to increase and the pressures became greater, the gap became wider. Quarter. And at the same time, we've had increased demand around aerosol fill line demand around the U. S.
So this thing has been bubbling. We've talked about it a little bit in the past. Quarter. And we're taking the steps to get back to where we need to be. The good news is when we come out of this completely, The steps that we're taking now will give us enough upside production to carry us through.
In Europe, we don't see the issue there Because there are it's a more diversified supply chain. And so we don't see them. We have had some, But they're not as obvious as they are here in the United States.
Okay. Thank you for the color. And then question. You mentioned about introducing additional third party manufacturers to kind of alleviate the issue. I was wondering if that's kind of a long process quarter.
How that works? And again, a two part question. Some of the sales you've had here in this quarter, Are they lost or are they just delayed?
The first part of your question, it depends. In one case, we were able to in one of our manufacturing plant partner plants bring on the 2nd shift. That took about 2 months to actually bring that into play. By the time we were able to bring the 2nd shift into play because labor shortages have been Evident across the markets, lines have slowed down because of distancing. There's been a whole lot of things quarter.
And then if we're bringing on a completely new supplier, we still need to go through our mandatory Safety, quality and R and D testing at a plant before we commission it And spin it to be able to manufacture our product. That takes anything from 30 to 60 days. So that has been some of the delay. But the new plants that we one of the new plants that we brought on is up and running now and we're now You're bringing new product in behind it. So there is a delay mainly caused by quality, research and development clearance, regulatory clearance, etcetera.
Okay. Last question. I was just looking at the cash flow statement. It seems like working capital has quarter. Recently, I don't know if this is just kind of the lumpiness or if something's changed where it should be, I don't know, The numbers should be improved just as we kind of model going for the next couple of years or so.
I'll ask Jay to answer that.
Quarter. Yes. I think that the one thing that we have noticed is that we've had a lot lower levels of inventory quarter than we would have certainly had in the past. And it really is reflective of some of the supply chain problems that are being discussed. So we would much rather have More inventory and have that investment in our working capital than the situation We found ourselves in.
So yes, so some of that should come back and normalize.
All right. Thank you very much guys.
Thanks, Daniel.
And our next question comes from Rosemarie Morbelli with G. Research. Please proceed with your question.
Thank you. Good afternoon everyone.
Hello Rosemarie.
You mentioned the supply issue quarter. And I was wondering if that is solely because of the deep freeze in Texas quarter. And the strong demand or if there is some impact from the ship jamming in the middle of the Suez Canal quarter. And whether we will see that impact in the next few quarters in terms of containers shortages in Asia.
We don't see any evidence at this time that we're having any material impact From the delay that happened in the Suez Canal, the container issue has been one that has been Around us ever since COVID started. So yes, I think there will be some shortage of containers continuing. It's a periodic thing and it goes away. The supply chain, yes, there was impact from Texas. There was some but really the majority of the impact has been the increased quarter.
Demand on aerosol fill line time and the slowing of those lines quarter. Due to labor restrictions caused by COVID, that's been the main those are the main impacts.
All right. Thanks. And looking at the gross margin, I understand that the supply may be an impact, but isn't the largest impact coming from the inflation on your raw material side.
Jay? Yes, there will be the cost of oil will be also impacting that and have a fairly significant impact. We've got other costs. We're seeing other component cost increases as well. So yes, it's a combination of both the impacts from these supply chain disruptions As well as from input costs.
Okay. And then lastly, if I may, question. When you get a new third party manufacturing manufacturer online, quarter. Are they doing it at a similar cost basis or is it at a higher cost than your existing relationships.
It depends on what they're filling. If we're bringing on Most of the supply chain impact has been on specialists in the United States. And specialists The runs of specialist product are shorter runs. So already the fill fees are higher. So yes, there are Depending on what the SKU is, there could be a slight increase in our fill fees.
On the other side, where we have high quarter. Speed lines around MUP. If we have to move some of our MUP production from some of the higher speed production facilities to a lower speed. Yes, there could be a slight increase in the fill fee for that as well. But it depends on where we move, what and when.
And the potential impact on the SG and A. SG and A as a ratio to revenues was higher. So should we anticipate that this is going to continue to In short?
You mean our cost of doing business?
Yes, but on the SG and A side.
Quarter. So our cost of doing business year to date is 34%, which is 2 percentage points lower than year to date last year. Quarter. The increase in cost of doing business or the SG and A in this quarter, particularly as Jay mentioned, was due to adjustments to our accruals quarter. For incentive compensation anticipated by the results we expect through the end of the year.
So we would expect that our cost of doing business will be again somewhere in that 34% range as we end up
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