WD-40 Company

Thank you for standing by. Good day and welcome to the WD-40 Company Second Quarter 2023 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 a question at any time during this call, please press star 1 on your telephone keypad. Please make sure 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 President and Chief Executive Officer, Steve Brass, and Vice President and Chief Financial Officer, Sarah Heiser. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending February 28, 2023. These documents are available on our Investor Relations website at investor.wd40company.com. 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 measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as our earnings presentation. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Of course, actual results could differ materially. 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 current only as of today's date, April 6, 2023. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events, or otherwise. With that, I now like to turn the call over to Steve.

Thanks, Wendy, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing our sales results for the second fiscal quarter of 2023. I will also provide you with an update on our must-win battles and the results from an internal diversity, equity, inclusion, and belonging survey we recently completed. Sarah will review some financial topics with you, including our updated guidance for FY23. As Wendy mentioned earlier, we have prepared a presentation covering our second quarter results and have posted it to our investor website. We invite you to refer to that document for the duration of our call. Let's discuss our sales results. Today, we reported net sales of $130.2 million for the second quarter of fiscal year 2023, which was relatively constant compared to the same period of last year. There are several things obscuring top line performance this quarter. Sales volumes are down year over year as expected due to the severe disruptions caused by the price increases we put into place over the last 12 months. We estimate that the disruptions caused by price increases impacted our sales by about $15 million in the second quarter. Translation of our subsidiaries' results into the US dollar had an unfavorable impact of about $5.5 million on our consolidated net sales in the second quarter. On a constant currency basis, net sales would have increased by 4% year over year. Also impacting our top line results this quarter is our values-guided decision to suspend sales of our products to our marketing distributor customers in Russia and Belarus, which negatively impacted our sales by just over 3 million. So now let's take a closer look at second quarter results in our trade blocks, starting with the Americas. Sales in the Americas, which includes the United States, Latin America, and Canada, were up 15% in the second quarter to 62.9 million. This increase in sales is driven primarily by strong maintenance product sales in the United States, which increased 22% in the quarter. This was due to a trifecta of strong sales of WD-40 multi-use products, WD-40 specialists, and 3-in-1, which all performed well in the quarter. The increased sales were driven by the favorable impact of price increases on revenues, as well as increased production capacity and improved availability as our supply chain continues to adapt. These increases were somewhat offset by lower demand, which resulted in decreased sales volumes. Maintenance product sales in Canada increased 12% in the second quarter, primarily due to the favorable impact of price increases, which were partially offset by unfavorable changes in foreign currency exchange rates and weaker economic conditions. Maintenance product sales in Latin America were up 3% in the second quarter when compared to last year due to higher sales in Mexico. Maintenance product sales in Mexico increased 21% in the second quarter, due to increased distribution, successful promotional programs, and price increases, as well as the favorable impact of changes in foreign currency exchange rates. However, this growth in Mexico was significantly offset by decreased sales volumes in our Latin America marketing distributor markets due to weaker economic conditions and lower levels of demand. In total, our Americas segment made up 48% of our global business in the second quarter. Over the long term, we anticipate sales within this segment will grow between 5% to 8% annually. As a reminder, the compound annual growth rates associated with our trade blocks reflect our long-term growth expectations and may not always align with shorter-term trends and results. Now let's take a look at what happened in EMEA this quarter. Thousand EMEA, which includes Europe, the Middle East, Africa, and India, were down 13% in the second quarter to $46.8 million. Currency fluctuations significantly impacted our sales results for our EMEA trade block during the quarter. Changes in foreign currency exchange rates had an unfavorable impact of nearly $5 million on net sales for the second quarter. On a constant currency basis, sales would have decreased 4% compared to the second quarter of last year. The disruptions we've been experiencing in EMEA, primarily due to the pricing actions we've taken over the last 12 months, coupled with our loss of sales in Russia and Belarus, have gotten us off to a rocky start. However, we're expecting a strong comeback in EMEA in the second half of the fiscal year. As you know, we sell into EMEA through a combination of direct operations as well as through marketing distributors. Sales in our EMEA direct markets, which accounted for 74% of the region's sales in the second quarter, declined by 2% during the quarter compared to last year. This decline was due to a lower level of customer orders and promotional programs as a result of pricing actions we took earlier this year and was partially upset by the favourable impact of price increases. In addition, weaker market and economic conditions have led to a reduced footfall in some retail channels. Changes in foreign currency exchange rates also had a negative impact on net sales for the direct markets in the second quarter. Sheldon RMA distributor markets, which accounted for 26% of the region's sales in the second quarter, decreased by 35% during the quarter compared to last year. More than half of this decline was due to our suspension of sales in Russia, which resulted in decreased sales of approximately 3.3 million compared to last year. The remaining decline was linked to the impact of changes in foreign currency exchange rates and lower sales volumes of maintenance products in most distributor markets, but particularly in India and Turkey. In total, our EMEA segment made up 36% of our global business in the second quarter, Over the long term, interstate sales within this segment will grow between 8% to 11% annually. Now on to Asia Pacific. Sales in Asia Pacific, which includes Australia, China, and other countries in the Asia region, were down 4% in the second quarter to $20.5 million. In Australia, sales were up 6% in the second quarter. This increase in sales was driven by strong sales of maintenance products, which were up 15% in the quarter. But this was partially offset by lower sales of home care and cleaning products. Higher maintenance product sales were due to the favourable impact of price increases and successful promotional programmes. Changes in foreign currency exchange rates had an unfavourable impact on sales for the second quarter. On a constant currency basis, sales for Australia would have increased by 10% compared to last year. In our Asia-Pacific distributor market, sales were down 11% compared to last year, primarily due to lower sales of W40 multi-use products driven by weaker market demand and economic conditions, as well as the timing of customer orders. We put a price increase through in December of 2022, and many of our distributors purchased products in advance of those price increases. This decrease in sales was partially offset by the positive impact of price increases. In China, sales were relatively constant compared to last year. The favorable impact of price increases we've implemented were completely offset by the unfavorable impacts of changes in foreign currency exchange rates. On a constant currency basis, sales would have increased by 7% compared to last year. In total, our Asia-Pacific segment made up 16% of our global business in the second quarter. Over the long term, we anticipate sales within this segment will grow between 10% to 13% annually. Now a word on our prospects for the remainder of the fiscal year. We signaled to investors back in October that we expected revenue in the first six months of fiscal year 23 to be disrupted by the implementation of the unprecedented price increases that we'd put in place over the last several months. I'm pleased to report that we have now worked through most of those disruptions and the prospects for revenue growth in the back half of the fiscal year are looking optimistic. Indeed, I'm happy to report that it's looking like the month of March though not yet fully finalized from an accounting perspective, will be a new record sales month for the company. This includes a very strong recovery in EMEA. As we emerge from the price-related disruptions we've experienced, despite slower economic activity in some regions, we expect stronger top and bottom line growth for the remainder of the fiscal year. Now let's talk about our growth aspirations and must-win battles. Globally, we're targeting revenue growth in the mid to high single digits to deliver against our aspirational 2025 goal. The bulk of that growth is expected to come from sales of W40 multi-use product through geographic expansion, increased penetration and premiumization, and supported by our continued investment in digital commerce. These areas are encapsulated by what we refer to as our Muslim battles. Our Muslim battles are the primary areas of action that will enable us to deliver against our revenue growth aspirations. These hyper-focused actions are the key drivers of revenue growth. Our largest growth opportunity in first must-win battle is a geographic expansion of the blue and yellow cam with a little red top. Though consolidated sales of our flagship brand are down 1% in the second quarter and 7% year-to-date, we have a high level of confidence that the W40 multi-use product will return to solid growth this fiscal year. Despite this disappointing result, we've experienced significant growth in priority markets like the United States, Mexico, and China, where sales of W40 multi-use products have increased year-to-date by 13%, 12%, and 10% respectively. We've identified 20 priority markets which show the highest potential for growth, and we will continue to prioritize investing in these priority markets to drive stronger growth into the future. Our second Muslim battle is to grow W40 multi-use product through premiumization. We began our premiumization journey in 2005 when we came up with a solution to the biggest problem our end users were having with our product. They kept losing the little red straw. Our smart straw delivery system solves that problem and as a result, it delights our end users. In addition, premiumization creates opportunities for revenue growth and gross margin expansion. Year-to-date sales of W40 smart straw and easy reach when combined were 89.4 million, down 7%. However, we do expect to return to growth in the second half of the fiscal year. Sales of premiumized products represented 46% of global sales of the V40 multi-use product year-to-date. Our SmartStraw Next Generation delivery system is currently available in the Americas and is being rolled out globally this fiscal year. SmartStraw Next Generation supports our objective to grow premium delivery system penetration to greater than 60% of our WD-40 multi-use product sales by 2025. A third must-win battle is to grow WD-40 specialists. Sales of WD-40 specialists were up 5% in the second quarter and 13% year-to-date. The United States continues to see outstanding momentum with WD-40 specialists this year, reporting an increase of 39% year-to-date. We're pleased that WD-40 specialists is fully leveraging our most iconic asset, the blue and yellow brand with the little red top. We recently conducted some end-user research and learned that DIYers and tradesmen in the US, Germany, and the UK who have used W4D specialists are significantly more likely to highly recommend our brand than those that have only used W4D multi-use products. I shared with you earlier this year that you will see an increased focus in three key areas, which I call my strategic priorities during my tenure. The first of those areas is pivoting the company toward a more sustainable future. I'm excited to share with you today that we've launched a new WD-40 Specialist product developed with sustainability in mind. WD-40 Specialist degreaser and cleaner EZ pods are a new degreasing formulation comprised of concentrated pods rather than the traditional liquid format. EZ pods have no harmful fumes, are non-abrasive, non-corrosive, leave no residue, and don't require California Prop 65 warning. This innovative new product is one of the first products of its format. When paired with a reusable plastic bottle, our easy pods reduce plastic waste. In addition, shipping the small pods rather than larger liquid-filled containers improves transportation and storage efficiency and costs. The product is currently available in the United States. Going forward, we expect W40 Specialists will be our vehicle to launch many more sustainable products in the future. With this in mind, we've recently added two new roles to the company, one in research and development and another in supply chain. Both these senior global functions will have a significant role to play in pivoting the company and its products towards a more sustainable future. Our final Muslim battle is focused on driving digital commerce. E-commerce sales were up over 18% in the second quarter and 34% year to date. This was driven primarily by strong growth in the U.S. and China. We continue to believe we are well positioned to benefit from the significant shift to online behaviors in the post-pandemic world. Digital commerce is not just about driving online sales. It's about driving awareness of our brands and teaching end users how to use them. We're focused on developing a data-driven marketing strategy that empowers us to engage directly with end users in meaningful ways online and expect e-commerce will be the fastest growing retail sales channel globally for the duration of fiscal year 2023. Now I'd like to share a quick update on our tribe with you. We call ourselves a tribe at W40 Company. We define tribe as a community of people with shared values and a shared purpose. At W40 Company, we know our culture is our superpower. One of the things I'm most proud of is our stable, highly engaged, highly committed tribe of employees. We recently conducted a check-in with our tribe and our global employee engagement score continues to be industry leading at 94%. We benefit greatly from the discretionary effort that comes from that high level of engagement. In addition to regularly measuring employee engagement, we've begun to regularly measure diversity, equity, inclusion, and belonging. I'm happy to share with you that 84% of our tribe mates believe our company actively promotes and values diversity. 78% agree that W40 Company is an equitable place to work. 89% believe our culture is an inclusive one, and 92% of our tribe mates experience a sense of belonging here. We believe that belonging is a psychological feeling of acceptance, connectedness, security, support, inclusion, and identity. Although these results are positive, our work is not yet done. We're exploring new ways to create an even more diverse, equitable, and inclusive workplace where every tribe mate experiences a sense of belonging. One of the lessons we've gained from this work is that belonging exists when diversity, equity, and inclusion behaviors exist. This mindset must begin at the very top of the organization, and to achieve this, senior management and board-level diversity are critical. We have made fabulous progress in this area, as reflected by the makeup of our board of directors and senior leadership team, which we refer to internally as the Global Strategic Council. Our current board reflects the most diverse board composition in our company's history. In addition to gender and ethnic diversity, our board is comprised of diverse nationalities, cultural backgrounds, and world views. We are equally proud that our Global Strategic Council currently has eight female members out of 16 management members, and six nationalities are represented. We believe diversity in leadership fuels diversity of thought, which leads to better strategic decision-making. Also supporting our tribe and another one of my strategic priorities is to leverage our capability as a global learning and teaching organization and transform our company into a true global learning organization. We believe that learning is the foundation of our agility in sustainable growth into the future. In support of this initiative, we now have a global director of learning who is 100% focused on enabling us to learn faster, to grow faster, by coordinating increasingly consistent global learning programs. The level of global interaction of our tribe mates around key aspects of strategic execution is increasing exponentially, and the mantra of learning faster to grow faster is permeating our language and actions. Now I'll turn the call over to Sarah, who will provide you with a financial update on the business.