Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Third Quarter Fiscal Year 2020 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'd now like to turn the conference over to host for today's call, Ms. Wendy Kelley, Director of Investor Relations and Corporate Communications. 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, 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 [Technical Difficulty] 2020. 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, July 9, 2020. 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 Garry.

Thanks, Wendy. Good day, and thanks for joining us for today's conference call. Jay, Steve, Wendy, and I are once again dialing in from our respective homes. We hope you and your families are staying safe and healthy in these unprecedented times. I am so grateful for the highly engaged tribe we have at WD-40 Company. As a global business that operates in 176 countries around the world, each of our locations has been impacted by COVID-19 in different ways, but one thing is certain, our tribe members everywhere adapted quickly to an unparalleled situation. Through considerable effort and ingenuity, the tribe has demonstrated agility and innovation, quickly making dramatic changes to how we conduct business. This has enabled us to hold our own this quarter even when confronted by extremely challenging circumstances. The results our tribe have been able to deliver during this volatile and uncertain time has reinforced to me the importance of a highly engaged workforce. On a completely different topic, I’d like to take a moment to share something that has been on everyone's minds. WD-40 Company has a long history of doing the right thing as it relates to how we conduct ourselves, but we typically refrain from speaking publicly about social or political issues because we have tribe members in 16 countries which span the range of political structure, ethnicity, language, religions, and cultures. However, we want our stakeholders to know that racism runs counter to everything we teach, and the senseless acts of racial injustice that continue to plague our world are both wrong and deeply saddening. At WD-40 Company, we celebrate equality, diversity, and inclusion. And while these things are central to our culture and how we operate, there is always room for improvement. To that end, we are listening, learning and…

Thanks Garry and good afternoon. The impact of the global health crisis on our operations presents us with unique challenges that we continue to evaluate and address on a daily basis. When we spoke to you back in March, we didn't know how hard we would be hit as a result of the COVID-19 pandemic. We were optimistic and shared with you that despite the enormous disruption experienced in many countries, March revenue levels were roughly in line with what we've historically seen. Unfortunately, April and May became much more of a challenge for us as more and more countries around the world went into lockdown. Though our sales held up relatively well compared to some industries, the performance of our individual segments in the third quarter was driven primarily by whether or not distribution channels were open in any particular market. We saw the most significant sales declines in markets that were hardest hit by COVID-19 and which had the most stringent lockdown orders in place. For example, in the United States and Australia, sales increased 1% and 16%, respectively. This is because in these markets most of our traditional distribution channels were open. And in the U.S., we have a developed e-commerce business, which helped us to offset losses we experienced in other trade channels. In markets with very strict lockdowns, for example, many of our emerging markets, distribution was simply shut down and our e-commerce business in those markets is less developed. As a result, sales in these markets were severely restricted in the third quarter. One thing that's become very clear to us in the last four months is how important it is for us to have a robust e-commerce strategy in place. In 2018, we committed to our global vision of becoming the category leader…

Thank you, Steve. From a financial perspective, we believe we're in a enviable position with a very strong balance sheet, a manageable amount of debt, good cash flow, and historical precedence that indicates our revenue numbers can hold up during an economic recession and rebound fairly quickly thereafter. We believe these factors will help us navigate a world filled with continued uncertainty. Let’s start with the discussion about our 55/30/25 business model, the long-term targets that we use to guide our business. In the third quarter, our gross margin was 54% compared to the 54.5% last year. This represents a decline of 50 basis points. Higher warehousing and inbound freight primarily in EMEA negatively impacted our gross margin by 120 basis points. In addition, increased promotional activities, primarily in the Americas had an unfavorable impact on our gross margin of 70 basis points. The cost of promotional activities, such as sales incentives, trade promotions, and cash discounts that we give to our customers are recorded as a reduction to sales. And the timing and magnitude of these activities can cause fluctuations to gross margin from period to period. Changes in major input costs positively impacted our gross margin in total by 60 basis points. Petroleum-based specialty chemical cost positively impacted our gross margin by 80 basis points, period-over-period. However, increased cost of aerosol cans negatively impacted our gross margin by 20 basis points, and offset some of the gains we've realized due to the lower petroleum-based costs. Beginning in late February, crude oil reached multiyear lows, and we expect falling oil prices will continue to be a net positive to our gross margin. It typically takes between 90 and 120 days before we begin to realize the benefit of lower crude oil prices. In the third quarter, we began to…

Thanks, Jay. In summary, what did you hear from us on this call? You heard that global sales declines in the third quarter were primarily due to end users not being able to easily buy our products, due to the distractions related to COVID-19. You heard despite these disruptions, sales of WD-40 Specialist remained constant in the third quarter, which we view as a win and a credit to our e-commerce strategy. You heard that sales of WD-40 BIKE were up 51% in the third quarter, primarily due to strong demand in our EMEA segment and strong sales in e-commerce. You heard that sales of our homecare and cleaning products were up 10% due to the strong demand for cleaning products due to COVID-19. You heard that we continue to make outstanding progress in the area of digital and e-commerce, and our e-commerce sales have grown approximately 77% year-to-date. You heard that Smart Straw Next Generation has arrived on some store shelves in Canada. You heard that the refreshed packaging for WD-40 Specialist product line has arrived on some stores’ shelves in the U.S. You heard that we continue to return capital to investors through regular dividends. And you heard that current market conditions suggest that our full year fiscal consolidated revenue is likely to be in the range of $395 million to $405 million. And you heard that we remain confident that our growth aspirations remain a realistic future opportunity. In closing today, I'd like to share a quote from Dr. Martin Luther King Jr. “If you can't fly, then run; if you can't run, then walk; if you can't walk, then crawl, but whatever you do, you have to keep moving forward.” Thank you for joining us on our call today, we'd be pleased to open the conference call to any questions. Over to the operator.

[Operator Instructions] Our first question comes from Linda Bolton Weiser with D.A. Davidson.

Hi. How are you?

Good, Linda.

That’s good. So, thank you for the commentary on what you think sales might be for the year. I guess that implies, if I did my math right, about down 8% to up 1% for the fourth quarter, something like that. What do you see as being the main factors that determine whether you come in at the lower end of that or the higher end of that?

I think there is one thing that plays in completely, and then I'll ask Steve to give his point of view. It's really what will get shut down that we're not aware of right now. In my comments earlier, the thing that's become very clear to us in this last quarter is that, there is high demand for our product, particularly given the increased amount of DIY activity that's going on in the United States and Europe, and where trade channels are open, our point of sale is ahead of last year. But, when consumers can't or end users can't buy our product, that shuts us down. So, I think the biggest risk factor is the risk of unknown of what's going to happen next. So, Steve, what would you want to say about that?

I think that's very true, Garry. So, it's certainly seen a considerable uptick as people have been kind of stuck at home around the world, a significant uptick in DIY activity, which has improved in certainly across the U.S. and Europe. I think secondly, we're in a position to -- fortunate position with our e-commerce capability to be able to respond to some of those lockdown conditions that have occurred. And as you've seen, our e-commerce businesses have absolutely boomed in the third quarter and taken out some of the slack of distribution channels that have been closed down elsewhere.

And then, can you talk about the new product launch in Canada? And can you just mention maybe why you chose Canada first for that launch? And then, what do you think the timing of the next market entry might be, and would the next market be the U.S.?

We chose Canada because a number of years ago we were in Canada with Smart Straw, and we learned through discussion with regulators there that we would have to have a lockable delivery system to meet the regulations. And that was one of the main reasons behind the development of Smart Straw Next Generation. So, Canada was obviously the first place because we've not had Smart Straw there before. And given that we're in early stages of production, volumes are nowhere near where they need to be yet. So, Canada was a great place for us to start. Smart Straw Next Generation is made up of two different delivery systems. It's what we call 2.0, which has the toolbox-friendly lockable delivery system, and then it has 1.5, which is an improvement of the current Smart Straw but not lockable. So, we will start to convert a lot of markets to 1.5 as we bring up production. And that will happen -- start to happen into the mid part of next year, which will mean we'll have a better product with the capabilities to manufacture quantities at a level that will allow us to now certainly push the conversion of markets that don't have Smart Straw at all. So, it's going to be a year to 18-month program probably, Linda, till we see the original Smart Straw 1 gone and it's replaced by 1.5 or 2.0.

And then, can you just talk about -- if you're seeing -- I mean, you mentioned some areas where you are actually benefiting, like the BIKE from sort of these stay-at-home, doing outdoorsy type stuff. Are you seeing any recessionary-type weakness or signs of it as a result of reduced industrial production or anything of that sort in any of your markets?

I don't know, Linda, how I would dissect that from this economic ice age that we're going through right now. I mean, I'm not sure who is back, who is not and why. Now, having said that, we've seen manufacturing start to return in China. But at this time, I think that there is such a disruption in both the market and the distribution channels that it's very difficult to get a clear read on what's moving where. What we have got, which is very reliable is point of sale. And where -- for example, point of sale is extremely positive for us in areas where we know that artisans and trades people would normally buy. So, that tells us that -- there was a great study, and Steve, you might want to mention this, there is a great study that came out in Europe just last week around DIY activity. And Steve, you may want to just touch on the headline of that, if you’ve got that information handy.

Yes. It was just showing a study across multiple countries, I believe, seven or eight key countries across Europe that showed DIY activity during the COVID-19 lockdown period was up by around 30% across Europe.

Thank you. That's very interesting. And then finally, when you report the fourth fiscal quarter in a few months, do you think that you'll have enough visibility to be able to give FY21 guidance? Do you have any sense for that right now?

I don't know.

Okay.

It depends on where we are in the world. I mean, if we've got a vaccine and things are starting to normalize, we maybe able to. But, I think if we come in at that $395 million to $405 million, we're going to be nearly flat -- well, we're going to be nearly flat with last year in some ways. I think, we'll be off between 4% and 8%. And I think, that's a pretty good result given the trauma that the businesses are going through.

Thanks. And just one more that I thought of. It seems that the distributor markets are the ones where sometimes these disruptions occur. Can you just remind us what percentage of your revenue is direct versus through distributors?

I think, Steve, you might have the update, but I think 75% is direct and 25% is through distributors. Is that right, Steve?

That's correct. Yes.

Okay. Thanks very much. I appreciate it.

Thanks, Linda. Stay safe and well.

Thanks.

Our next question comes from the line of Daniel Rizzo with Jefferies.

Hi, everyone. How are you doing?

Hi, Daniel.

Hi. You mentioned that you made a reopening that the outlook for sales is dependent upon what shut down or not. I was wondering if your other -- the emerging markets and I guess, Southeast Asia and Latin America are starting to show signs of reopening too of the distribution channel.

Daniel, it varies week to week. Our leadership team currently meets on a weekly basis and we have our global leaders from Europe and Asia Pacific and the Americas on that call. And I must say, it varies from week to week. Certainly, countries like Indonesia, India have been very, very hardly hit -- hard over time. So, it's uncertain yet which countries are moving faster or not. Just this week, even though Australia was doing very well, they had another flare up in Victoria and in Melbourne. Now, where is this being going next? We don't know.

Okay. And then, with the rollout of the next generation of Smart Straw, have you disclosed -- if there is a price premium on that, if you -- I don't know to raising prices just because you were doing introductions or have you not set that?

Certainly, the 2.0 version, which is the lockable one, has a premium. The 1.5 at this stage, it doesn't premium. But, because of manufacturing improvements, it's going to be accretive to gross margin.

Okay. And then, finally, it was mentioned that one of the reasons why the tax rate jumped is because of less sales offshore, less foreign sales. Now, with EMEA rebounding, the world opening up again, I was wondering is it possible to say that that will go back to a more, I mean, more normalized rate for the fourth quarter and going forward from there.

I'll let Jay answer that question.

Yes. Certainly, the rebound in -- somewhat it depends on the rebound in EMEA, but it also depends on the rebound in some of the other markets, like for example Asia and Latin America, whereby we achieve the intangible benefit from sales into those markets as well. So, it's some of our foreign markets are more impactful than others. EMEA, Latin America and the Asian distributors are key to that.

Our next question comes from the line of Rosemarie Morbelli with G.research. Please proceed with your question.

Thank you. Good afternoon, everyone.

Hi, Rosemarie.

Glad to see everyone is well. I was wondering if during this pandemic the different lockdown in the different regions and so on, you have established a new marketing method that you are going to pursue as we come out into what I call the new normal, which may not be normal at all. So, any changes in the way you are operating in the way the tribe is operating, less -- fewer people in offices, which could mean that you don't need as many office facilities? If you could help give us a feel for what you intend to do or how you will change?

Yes. So, one of the things that we are taking advantage of this time is really making sure that we are very conscious of what learnings we had. So, we haven't made any decisions. Already a great number of our people work remotely. But, we believe strongly that social interaction is important, creativity is driven. What has happened though is we become much better at being virtual. So, I think our overall communication and collaboration will improve over before. As far as market is concerned, no, we are sticking to the tried and true, make the end user aware, make it easy to buy. I think, the one area that is continuing, and Steve mentioned it, was around e-commerce and the way that's changed over time. And Steve, you might want to touch on how e-commerce is really playing into what we do, particularly given the development of the major e-commerce players and how they've now distributed around the world?

Sure, Garry. Thank you. So, yes, I mean, we are absolutely reallocating resources. So, owing the money, the growth is happening online around the world. And there has been certain news out there about our product not being suitable for e-commerce due to transportation reasons. I mean, that's just complete hogwash in terms of the transport ability of our product. And the number of the distribution centers are out there in the e-commerce network today, in the U.S. alone, there is over 100 distribution centers for the major U.S. retailer. So, it's just not a barrier to our growth. And that's where we're reallocating resources and [indiscernible] with very, very positive results around the world.

So, you are obviously strong in North America based on what -- I mean, if I heard properly. What about Europe though?

E-commerce in Europe?

E-commerce in Europe, yes.

Yes. In terms of e-commerce, look, we have a global strength. And with the marketplaces, I mean, the same players, the strong in North America, we have a considerable strength also in the EMEA region across multiple countries, and also China is the largest e-commerce market in the world. We have a very strong e-commerce capability there also.

And of the $25 million of CapEx for this year, how much are you adding to the e-commerce project and taking away from another area, if you are?

So, e-commerce is not capital intensive. It's really people intensive. That capital this year is really primarily going toward the Smart Straw Next Generation. But what we have done is brought in some very big talent. And Steve, you might want to mention we brought about our global digital advisor that we brought in and some of the way we are bringing the e-commerce squad together around the world.

Sure. Thanks, Garry. So, yes. So, a couple of years ago, we put one of our best upcoming global leaders in terms of the talented individual to head up our global e-commerce squad. They've achieved just wonderful results for us. And really, doing what we're able to do with the global player, so taking the learnings out of China or EMEA or the USA and spreading them across the world to make great progress on our e-commerce business. So, that's been a big strength. We recently added a Chief Digital Advisor who came in from a major consultancy and is advising the business, Garry and myself in terms of our long-term digital strategy. So, we are making great progress, not only in e-commerce but in the digital strategies that support e-commerce. Our internet traffic during this pandemic has just gone through the roof. And that's certainly leading to conversion in sales around the world.

Steve, one of the markets that's performed very well with e-commerce is Italy. And I think year-to-date our Italian sales are up over last year, but we've made significant progress against the competitive landscape in Italy. Correct?

That is correct. It's just one example and there are many more. So, yes, we're achieving very, very strong growth in many places like Italy. The U.S. performance, obviously, the U.S. market is a very large e-commerce market for us and growing very, very strongly. So, really taking some very nice share in this very fast-growing situation.

All right. Thank you very much. I appreciate the help.

Thank you.

Ladies and gentlemen, that concludes our allotted time for the questions. We thank you for your participation in today's conference call and ask that please disconnect your line.