WD-40 Company

quarter fiscal year 2024 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 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 0 on your telephone keypad I would now like to turn the presentation over to the host for today's call, Ross Cooling, Communications Manager, Investor Relations and Stakeholder 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, Finance 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-K for the period ending February 29, 2024. 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 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 the earnings documents posted on our investor relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Actual results could differ materially. The company's expectations, beliefs, and projections are expressed in good faith, but there can be no assurance 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 9th, 2024. 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.

Thank you, Ross, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing several strategic actions we've taken to support our 4x4 strategic framework, followed by an overview of our sales results for the second fiscal quarter of 2024. I'll also provide you with an update on our must-win battles and some of our strategic enablers. Sarah will provide further details on our second quarter results, an update on our business model, and our outlook for the remainder of fiscal year 24. And then we will take your questions. Over the last few months, I'm proud of the significant progress we've made on our 4x4 strategic framework. In March, we acquired our Brazilian marketing distributor and longtime business partner, Terone Marketing, for approximately $7 million in an all-cash transaction. This transaction directly supports our first Muslim battle to lead geographic expansion activity 40 multi-use product. Strategically, this allows us to have a direct market presence in Brazil to drive faster growth versus building up a direct market from the ground up. As you may recall, we successfully shifted from a distributor model to a direct market in Mexico in May 2020, and our revenues in Mexico have virtually tripled since making that shift. Taking Brazil direct through an acquisition presents a similar growth opportunity. and we are well positioned to capture that growth. Our prior agreement with Teron Marketing was based on a royalty model, and moving to a direct market provides us with an immediate benefit to our top line. We expect the Brazil market to drive revenue growth in excess of $10 million over the next year as a result of transitioning to this new business model. This is a substantial increase over the growth expected under the old royalty-based business model which generated approximately $2 million of annual revenue. We've also made the strategic decision to more actively pursue the sale of our US and UK home care and cleaning product portfolios. For the time being, we intend to strategically maintain the home care and cleaning product portfolio in Australia, as it is a substantial portion of that market's business. Net proceeds from the sale of our US and UK home care and cleaning product portfolios will provide us with an opportunity to reinvest in our core business for long-term growth. While this will have an unfavorable impact on our sales in the short term, once we divest the portfolio, it allows us to place even more focus on creating revenue growth through our must-win battles and focus on our higher margin business centered on our maintenance products over the long term. The immediate accretion from the visual marketing distributor acquisition and the additional investments we will make to accelerate growth in our high-potential markets will offset lost revenue from this sale over time. And finally, during the second quarter, we went live with the first and most significant phase of our Enterprise Resource Planning, or ERP, system. This is no small task, and we did anticipate there being some level of disruption, as can be expected for a project of this nature. These disruptions resulted in a minor, unfavorable impact on the quarter's performance, particularly in the U.S. I'm proud to report that due to the ingenuity and resilience of our team members and the longstanding partnerships with our customers, we have worked through most of these challenges and are confident going forward as we continue to improve our processes and leverage the value this system brings across the organization. I want to acknowledge and thank our employees for their ongoing diligence in managing through this implementation. We know projects like these allow us to live out one of our core values of making it better than it is today, which will only strengthen us over time. Sarah will provide more details on the ERP implementation. Now turning to our sales results, I'm happy to share with you that for the second consecutive quarter, we saw sales growth across all our trade blocks. For the second quarter, we reported net sales of 139 million, an increase of 7% over the prior year. Excluding the favorable impact of currency, revenue grew 5%. On a year-to-date basis, net sales grew 10% on a reported basis and 7% excluding the favorable impact of currency, which is in line with both our FY24 guidance and our long-term growth targets. We remain encouraged that the improvement in trends we experienced in the second half of FY23 have carried into the first half of fiscal year 24. We're also pleased to report continued expansion of our gross margin versus prior year, which allows us to invest across other areas of our business, such as advertising and promotion activities, in order to continue to drive top line growth. Now let me discuss second quarter sales results by segment. Unless otherwise noted, I will discuss sales and comparisons to prior year on a reported basis. Sales in the Americas, which includes the United States, Latin America, and Canada, of approximately 63.5 million grew 1% over the prior year fiscal quarter. We're pleased to report that strong demand and sales growth throughout the U.S. more than offset the short-term impacts that ERP implementation had on our net sales. W40 specialists and other maintenance product sales increased across most regions in the Americas, and we continue to see encouraging signs across the region. The growth in maintenance products was partly offset by a decline in home care and cleaning product sales, primarily due to lower volume in the U.S. as a result of reduced demand. In total, our America segment made up 46% of our global business in the second quarter. Turning to our sales results in IMEA, which includes Europe, India, the Middle East, and Africa. The recovery we experienced in the second half of last year in IMEA has continued throughout the first half of this year. IMEA sales of 54.3 million increased 16% over the prior year. Currency fluctuations positively impacted our sales in IMEA, and on a constant currency basis, sales would have increased 11%, marking the fourth consecutive quarter of double-digit sales growth in constant currency. The growth was driven in large part by higher sales of W40 multi-use product, which increased 17%, and W40 specialist, which increased 23%. As a reminder, volumes last year were unfavorably impacted by price increases we had implemented, resulting in temporarily reduced demand as customers adjusted to these prices. The combination of recovering volumes and increased selling prices resulted in higher sales across most regions in IMEA this quarter. In the second quarter, sales of WD-40 multi-use products increased most significantly in France, India, and Iberia, which increased $1 million 0.9 million, and 0.6 million, respectively. The growth in maintenance products was partly offset by a decline of 10% in home care and cleaning product sales, which is a much smaller part of the business for IMEA. In total, our IMEA segment made up 39% of our global business in the second quarter. Turning to Asia Pacific, which includes Australia, China, and other countries in the Asia region, sales of 21.3 million were up 4% over the prior year, The growth was driven by higher sales of W40 multi-use products, which were up 3%, and home care and cleaning products, which were up 23% over the prior year. This was partly offset by a 3% decline in W40 specialist product sales. In China, sales of maintenance products were up 3%, primarily due to successful promotional programs and marketing activities that led to increased sales volume. On a constant currency basis, sales for China would have increased by 5%. In our Asia Pacific distributor market, sales of maintenance products were up 3%, primarily due to price increases in these markets and successful promotional programs in certain regions. In Australia, sales were up 6% over the prior year, primarily due to higher sales of home care and cleaning products. In total, our Asia Pacific segment made up 15% of our global business in the second quarter. Now let me discuss the progress we've made against our must-win battles and provide you with an update on some of our strategic enablers that support our 4x4 strategic framework. We look at these must-win battles as growth drivers over the long term, and therefore we will focus our discussion on the year-to-date results of these battles. Starting with must-win battle number one, lead geographic expansion, as mentioned earlier, the acquisition of a Brazilian marketing distributor is a strategic decision that aligns with and supports this must-win battle. Through the first half of the year, global sales of W40 multi-use product of 215 million grew 10% over the prior year, led by strong growth of 19% in IMEA, followed by growth in the Americas and Asia Pacific of 6.5% and 3% respectively. We continue to make investments in our flagship brand to build awareness and increase market penetration in identified key markets. As a result, we made excellent progress in volume recovery in many key markets. Next is Muslim battle number two, accelerating premiumization, which is a major contributor to our revenue growth and gross margin expansion. Year-to-date sales of WD-40 SmartStraw and EasyReach when combined were up 13% over the prior year. Our implementation of WD-40 SmartStraw Next Generation in the Americas and of multiple packages in IMEA is contributing to the sales growth of premiumized products. This growth aligns with our long-term net sales compound annual growth rate target of greater than 10% in reported currency for premiumized products. Our third must-win battle is to drive WD-40 specialist growth. Through the first half of the year, sales of WD-40 specialist products were 34 million, up 10% over the prior year, led by strong growth in IMEA of 17%. In the Americas, sales of WD-40 specialists grew 4%, while Asia Pacific, which is a much smaller portfolio, grew 9% compared to the prior year. We continue to target a net sales compound annual growth rate of greater than 15% in reported currency for W40 specialists. Our fourth and final must-win battle is to accelerate digital commerce. We see this as an accelerator for all our other must-win battles as it improves brand awareness and online engagement, leading to an improved customer experience and sales across our channels. Year-to-date e-commerce sales are up 24%, with strong growth in both IMEA and the America's Trade Blocks. Turning to the second element of our strategic framework, our strategic enablers, which collectively underpin our must-win battles. I want to take a moment to discuss strategic enabler number one of ensuring a people-first mindset. At WD40 Company, we pride ourselves on our culture and continuously focus on how to improve it. Our greatest asset cannot be found on a balance sheet, but rather it resides within our talented team. I'm extremely proud that we have been able to maintain an employee engagement score of around 93%, particularly given some of the significant changes we've experienced over the past 18 months. This includes changes within our leadership team, as Sarah and I have gotten up to speed in our roles, and changes across the global organization, as we've implemented an updated pricing structure, completed the first and most significant phase of our ERP implementation system, and have continued to face uncertain macroeconomic conditions. Once again, I want to thank our strong and resilient team as we continue to evolve our internal processes. A major area of focus will be on implementing cultural pulse checks for real-time feedback for us to be more proactive versus being reactive in this area. And as previously discussed, we are making great progress on our strategic enabler number four, which is to drive productivity via enhanced systems with our new ERP system. As a lean company with just over 600 employees, we recognize the importance of providing the best systems and have increased our investments in new systems and system enhancements. And we are not done, as we will continue to invest to support this important enabler to drive our strategy and support sustainable, profitable growth for our organization. With that, I'll now turn the call over to Sarah.