WD 40 : Q1 2022 Earnings Call Corrected Transcript

Corrected Transcript

06-Jan-2022

WD-40 Co. (W DFC)

Q1 2022 Earnings Call

	Total Pages: 15
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WD-40 Co. (WDFC)	Corrected Transcript
Q1 2022 Earnings Call	06-Jan-2022

CORPORATE PARTICIPANTS

Wendy Kelley	Steven A. Brass
Vice President-Stakeholder and Investor Engagement, WD-40 Co.	President & Chief Operating Officer, WD-40 Co.
Garry Owen Ridge	Jay W. Rembolt
Chairman & Chief Executive Officer, WD-40 Co.	Vice President-Finance, Treasurer & Chief Financial Officer, WD-40 Co.

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OTHER PARTICIPANTS

Daniel Rizzo

Analyst, Jefferies LLC

Linda Bolton Weiser

Analyst, D.A. Davidson & Co.

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MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company 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. [Operator Instructions]

I would now like to turn the presentation over to the host for today's call, Ms. Wendy Kelley, Vice President of Stakeholder and Investor Engagement. Please proceed.

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Wendy Kelley

Vice President-Stakeholder and Investor Engagement, WD-40 Co.

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, Garry Ridge; Vice President and Chief Financial Officer, Jay Rembolt; and President and Chief Operating Officer, Steve 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 30, 2021. 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 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.

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WD-40 Co. (WDFC)	Corrected Transcript
Q1 2022 Earnings Call	06-Jan-2022

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, January 6, 2022. The company disclaims any duty or obligation to update any forward information, whether as a result of new information, future events or otherwise.

With that, I'd now like to turn the call over to Garry.

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Garry Owen Ridge

Chairman & Chief Executive Officer, WD-40 Co.

Thank you, Wendy. Good 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 that 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 organization. Our strategic initiatives support our long-term revenue growth aspirations, which is to drive net sales to between $650 million 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 we'll 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 organization, 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 WD-40 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.

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WD-40 Co. (WDFC)	Corrected Transcript
Q1 2022 Earnings Call	06-Jan-2022

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 [ph] for (06:58) 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 initiative number four is to grow WD-40Multi-Use Product. Our goal under this initiative is to make the blue and yellow can with the little red top available in more places to more people who find more uses more often. We will grow the WD-40Multi-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 [ph] systems (07:48) that make the product easy to use.

In the first quarter, sales of WD-40Multi-Use Product increased 14% globally to $107.1 million. The desired outcome for this strategic initiative is to grow sales of WD-40Multi-Use Product to approximately $525 million by 2025.

Strategic initiative number five is to grow the WD-40 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 Specialist 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 Specialist is setting some new and exciting benchmarks. The desired outcome for WD-40 Specialist 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 in this initiative is to expand and support brands that provide us protection and help us grow. Brands under this initiative include 3-IN-ONE 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-ONE, GT85, 1001 and no vac. 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 supports 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.

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Steven A. Brass

President & Chief Operating Officer, WD-40 Co.

Thanks, Garry, 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

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WD-40 Co. (WDFC)	Corrected Transcript
Q1 2022 Earnings Call	06-Jan-2022

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 to 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 logs, 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 our 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 WD-40Multi-Use Product. Unfortunate, this was completely offset by declines in sales of WD-40 Specialist and 3- IN-ONE, which declined 28% and 30%, respectively. While we continue 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 US 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 [audio gap] (12:59) year, largely due to lower sales of Spot Shot, 2000 Flushes and X-14. 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 and Middle East, Africa and India, were up 5% in the first quarter to $57.5 million. Changes in foreign currency 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 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% (sic) [3%] and 9%, respectively. In our EMEA direct markets, we experienced a 4% increase in sales of both WD-40Multi-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 our EMEA direct markets accounted for 63% of the region's sales.

In our EMEA distributor markets, we experienced a 10% increase in sales of WD-40Multi-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 weren't able 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 our

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