WD-40 Company

For the company's first quarter fiscal year 2022 earnings conference call, 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. To register and to ask 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 zero on your telephone keypad. I would now like to turn the presentation over to the host for today's call, Ms. Wendy Kelly, Vice President of Stakeholder and Investor Engagement. Please proceed. Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-40 Company's Chairman and Chief Executive Officer, Gary Ridge, Vice President and Chief Financial Officer, Jay Remboldt, and President and Chief Operating Officer, Keith Brass. 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 November 30th, 2021. These documents are available on our investor relations website at investor.wz40company.com. A replay and transcript of today's call will also need to be available at that location shortly after this call. 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. As a reminder on today's call, we will talk about certain forward-looking statements about our expectations for the company's future performance. Of course, actual results could differ materially. 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. 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 currently only as of today's date, January 6, 2022. The company disclaims any duty or obligation to update any form of information, whether as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Gary.

Thank you, Wendy. G'day and thanks for joining us for today's conference call. Today, we reported net sales of $134.7 million for the first quarter of fiscal year 2022, which was an increase of 8% compared to last year. We are pleased with these top line results. However, this is a different game that we're playing now. We are facing a volatile and challenging environment and a first quarter gross margin came in at 51%. reflecting significant cost inflation. As a result, net income for the first quarter was $18.6 million compared to $23.6 million in the first quarter of last fiscal year, a decrease of 21%. Jay will talk in greater detail in a few moments about what has impacted our gross margin and what we're doing to restore it to historic levels. But first, let's start with a discussion about our strategic initiatives. Our strategic initiatives are the continuing plan we have in place to achieve the company's long-term aspirations. As most of you will recall, we recently decided to refresh our strategic initiatives so they more accurately and holistically reflect the top priorities of our organisation. Our strategic initiatives support our long-term revenue growth aspirations, which is to drive net sales to between $650 and $700 million by the end of fiscal year 2025. We strive to do so while following our 55-30-25 business model. Strategic initiative number one is to build a business for the future. Our goal under this initiative is to build an enduring business that will be proud to pass on to the next generation. The desired outcome for this strategic initiative is to further embed infinite-minded decisions into our business and to fully integrate our ESG initiatives into the heart of our strategic planning process. We recently completed an internal diversity, equity, inclusion and belonging survey in support of both our ESG efforts as well as Strategic initiative number two, which is to attract, develop and engage outstanding tribe members. We believe that by building and nurturing an inclusive and diverse purpose-driven learning and teaching organisation, our tribe members will succeed together while excelling as individuals. One of our tribal attributes is belonging. We believe that belonging is the psychological feeling of acceptance, connectedness, security, support, inclusion and identity. I'm happy to share with you that 92% of our tribe members experience a sense of belonging and 88% agree that WD40 is an inclusive place to work. Although these results are positive, our work is not done. We are exploring new ways to create an even more diverse, equitable and inclusive workplace where all tribe members experience a sense of belonging. Strategic initiative number three is to strive for operational excellence. Our goal under this initiative is to foster a culture of continuous improvement in which operational excellence is the responsibility of every tribe member. The world is full of volatility, uncertainty, complexity and ambiguity, more so now than we've ever seen in our lifetime. Almost everything we buy has travelled along some of the millions of miles of networks that make up the world's supply chains. Like many other companies, we've been unable to fully meet increased consumer demand for our products in some markets due to the current state of the global supply chain. In the spirit of making it better than it is today, we are proactively increasing the capacity and the resilience of our supply network in our markets. In the United States, we will double the number of third-party manufacturers we partner with by this fiscal year. While adding the extra capacity is very important, it's equally important that we maintain our high-quality standards throughout this process. Our tribe members are working diligently to maintain consistently high product quality as we move through this project to onboard new manufacturers. Strategic addition number four is to grow WD-40 multi-use product. Our goal under this initiative is to make the blue and yellow can with the red top available in more places to more people who find more uses more often. We will grow the WD-40 multi-use product line through continued geographic and digital expansion, increased market penetration, educating end users about new uses, and through the development of new and unique delivery systems that make the product easier to use. In the first quarter, sales of WD40 multi-use product increased 14% globally to $107.1 million. The desired outcome for this strategic initiative is to grow sales of WD40 multi-use product to approximately $525 million by 2025. Strategic initiative number five is to grow the WD40 specialist line. Our goal under this initiative is to leverage the WD-40 brand by developing new products and categories which build and reinforce the core brand positioning and create growth through continued geographic and digital expansion. In the first quarter, sales of WD-40 specialists decreased 5% globally to $12.5 million. Steve will speak in a few moments about the causes of these declines. He will also share some very positive news of how WD-40 specialists are setting some new exciting benchmarks. The desired outcome for WD-40 specialists in this initiative is to grow sales to approximately 125 million by 2025. Strategic initiative number six is to expand and support portfolio opportunities that help us grow. Our goal under this initiative is to expand and support brands that provide us protection and help us grow. Brands under this initiative include 3-in-1 and GT85, as well as our home care and cleaning products brands. In the first quarter, sales of products included under this initiative decreased 12% globally to $15.1 million. Our home care and cleaning products were up against a very strong comparable period as they benefited from increased demand as a result of the pandemic last year. In addition, we've been unable to fully meet consumer demand for our products due to the challenging supply chain environment. The desired outcome for this strategic initiative will be sales in this category of approximately 50 million by 2025. To reach that number, we expect sales growth of brands like 3-in-1, GT85, 1001 and Novec. Many of our other home care and cleaning product brands will most likely decline in sales, but will continue to contribute healthy returns. Supporting our strategic initiatives are our must-win battles. These are focused action plans that support the strategic initiatives. I would now like to pass the call to Steve, who will share an overview of our sales results and update on our must-win battles.

Thanks, Gary, and good afternoon. When we last spoke, I shared with you that end-user demand for our products continued to be exceptionally strong, and that September was the second largest sales month in the company's history. Today, I'm happy to report total global sales growth of 8% for the quarter. Compared to the double-digit growth we experienced for most of fiscal year 2021, our sales results have softened a bit. But remember, we did not guide the level of sales growth that we saw last year. What is important for investors to appreciate is that the watermark is higher now. Despite our comparable period being very strong, we continue to experience strong demand for our products and believe that many of the new end users who have interacted with them during the pandemic have become permanent users of our brands. Let's take a closer look at what's happening in our trade blocs, starting with the Americas. Net sales in the Americas, which includes the United States, Latin America and Canada, were up 4% in the first quarter to 56.3 million. Sales of maintenance products increased 7% in the Americas due to increased sales in Latin America of 42%. This increase was due to higher sales in many markets in the region, including our newest direct market in Mexico. We continue to see momentum in Mexico from the shift we made in fiscal year 2020 from a distributor model to a direct market. In addition, in American distributor markets, We saw strong sales due to successful promotional programs and increased product availability, as well as the timing of customer orders. The increase in maintenance product sales in Latin America was mostly offset by decreases in sales in both the United States and Canada. Net sales of maintenance products in the United States decreased 1% compared to last year. We experienced strong end-user demand in the United States, resulting in a 5% increase in sales of W40 multi-use products. Unfortunately, this was completely offset by declines in sales of W40 Specialist and 3-in-1, which declined 28% and 30%, respectively. While we continued to experience very strong end-user demand for our maintenance products, we were unable to fully meet those demands due to capacity constraints in our U.S. supply chain. In Canada, net sales of maintenance products decreased 2%, primarily because we were up against a very strong year-over-year comparable period. As a reminder, our maintenance products exclude our home care and cleaning brands. Sales of our home care and cleaning products in the Americas decreased 24% compared to last year, largely due to lower sales of SpotShot, 2000 Plushes and X14. In total, our Americas segment made up 42% of our global business in the first quarter. Over the long term, we anticipate sales within this segment will grow between 5% to 8% annually. Now on to EMEA. Net sales in EMEA, which includes Europe, the Middle East, Africa and India, were up 5% in the first quarter to 57.5 million. Changes in foreign currency exchange rates had a favourable impact on sales for the EMEA segment from period to period. On a constant currency basis, sales would have increased by 1% compared to last year. Sales of maintenance products increased by 6% in EMEA due to increased sales in both our EMEA Direct and our EMEA distributor markets, which increased 4% and 9%, respectively. In our EMEA direct markets, we experienced a 4% increase in sales of both WD-40 multi-use product and WD-40 specialist. We saw particularly strong sales in Italy, France, and Spain, where sales were up 17%, 9%, and 18%, respectively. These sales increases were primarily due to new distribution and successful promotional programs. In the first quarter, net sales in RMA direct markets accounted for 63% of the region's sales. In RMA distributor markets, we experienced a 10% increase in sales of WD-40 multi-use product. We saw particularly strong sales in Poland, Russia, and India, where sales were up 68%, 15%, and 30%, respectively. These sales increases were primarily due to new distribution, successful promotional programs, and favorable changes in foreign currency exchange rates. We continue to experience very strong end-user demand for our products in these regions, but we were unable to meet some of this demand due to shipping container and transportation shortages related to the current state of the global supply chain. In the first quarter, net sales in RMA distributor markets accounted for 37% of the region's sales. In total, RMA's segment made up 43% of our global business in the first quarter, Over the long term, we anticipate sales of this segment will grow between 8% to 11% annually. Now on to Asia-Pacific. Net sales in Asia-Pacific, which includes Australia, China, and other countries in the Asia region, were up 34% in the first quarter to $20.9 million. Changes in foreign currency exchange rates had a favorable impact on sales for the Asia-Pacific segment from period to period. On a constant currency basis, sales would have increased by 31% compared to last year. In China, net sales were 6 million in the first quarter, up 69% compared to last year, driven primarily by successful promotional programmes as well as the timing of customer orders. We remain optimistic about the long-term opportunities in China. We expect volatility along the way due to the economic and health-related impacts of COVID-19, the timing of promotional programmes, the building of distribution, shift in economic patterns and varying industrial activities. In our Asia distributor markets, net sales were 9.3 million in the first quarter, up 36% compared to last year. These sales increases were primarily driven by improved economic conditions as a result of reduced lockdown measures during the first quarter, which resulted in increased demand and higher sales, particularly in Indonesia, Malaysia, Taiwan and Hong Kong. In Australia, net sales were 5.5 million in the first quarter, up 7% compared to last year, to primarily increased sales of W40 specialists, which were up 45% compared to last year. In total, our Asia-Pacific segment made up 15% of our global business in the first quarter. Over the long term, we anticipate sales in this segment will grow between 10% to 13%. Now a brief update on our must-win battles. Our must-win battles are the primary areas of action that will enable us to deliver against our revenue growth aspirations to drive net sales to between $650 and $700 million by the end of fiscal year 2025. These hyper-focused actions support the overall strategy and are the key drivers of revenue growth. Our largest growth opportunity in our first must-win battle is a geographic expansion of the blue and yellow can with a little red top. We continue to experience impressive growth for our flagship brand, with global sales of W40 multi-use product up to 14% compared to last year. We've recently made some significant investments in brand building and awareness, or what we refer to internally as making the end user aware, and these investments are paying off. We've seen significant growth in priority markets like China, Mexico, India and Russia, where in the first quarter sales of the blue and yellow cam with the little red top increased by 79%, 58%, 30% and 14% respectively. In fiscal year 2022, we will continue to invest in building our flagship brand with end users around the world. Our second must-win battle is the premiumization of WD-40 multi-use product. Premiumization creates opportunities for revenue growth, gross margin expansion, and most importantly, it delights our end users. In the first quarter, sales of WD40 SmartStraw and EasyReach, when combined, were 48.3 million, up 10% compared to last year. Our SmartStraw Next Generation delivery system is currently being rolled out in Canada and the United States, and we expect it will be made available in Europe later this fiscal year. SmartStraw Next Generation supports our objective to grow premium delivery system penetration to greater than 60% of our WD40 multi-use product sales by 2025. Our third Muslim battle is to grow W40 Specialists. As Gary mentioned earlier, global sales of W40 Specialists were down 5% compared to last year. We saw solid sales of W40 Specialists in EMEA and Asia Pacific, where sales were up 4% and 21%. However, these increases were entirely offset by lower sales in the United States.