Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Fourth Quarter and Full 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 would now like to turn the presentation over to your host for today's call, Ms. Wendy Kelley, Director, 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 10-K for the period ending August 31, 2020. These documents are or will be 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, October 20, 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'd now like to turn the call over to Garry.

Thank you, 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 that you and your families are staying safe and healthy in these challenging times. Today, we reported net sales of $111.6 million for the fourth quarter of fiscal year 2020, up 5% compared to the fourth quarter of last year. Translation of our foreign subsidiary results from their functional currencies to the U.S. dollar did not have a meaningful impact on the sales in the fourth quarter. For the full fiscal year, net sales were $408.5 million, down 4% compared to fiscal year 2019. Translation of our foreign subsidiaries results from their functional currencies to the U.S. dollar had an unfavorable impact on sales in the full fiscal year. On a constant currency basis, net sales would have only declined 2% for the full year. In a few moments, Steve will share with you the drivers of the revenue growth we experienced in the fourth quarter as well as some of the challenges we encountered. But first, I want to take a moment to thank our tribe for their resilience and determination during these unprecedented times. The results we are reporting today are a testimonial to the wonderful work of our -- our tribe is doing. Thank you for working hard to ensure that customer orders are obtained, production lines are functioning, orders are fulfilled and customers and end users are getting the products they need. I think it's remarkable that with 90% of our tribe working from home, we were still able to deliver these results. For the purpose of this call, after discussing our strategic initiatives, we will focus primarily on the financial and operating results for the…

Thanks, Garry, and good afternoon. The impact of the pandemic on our operations over these last seven months has presented us with both opportunities and challenges. When we last spoke, I shared with you in our EMEA direct markets, the U.S., Canada and Australia, we saw a very strong rebound in June. I'm pleased to share with you that the trends we saw in June continued throughout July and August. In fact, in all these markets, we experienced double digit sales growth in local currencies for the fourth quarter, driven primarily by the isolation and renovation trend that Garry mentioned earlier. However, what the pandemic giveth, the pandemic taketh away, and offsetting those sizable gains were significant sales declines in our distributor markets and in China. I will talk more about the drivers of those disruptions in a few moments. In 2018, when we made the decision to fast track our global digital presence, we had no way of knowing that 2020 would be the year, a global health crisis would transform how people shop. One thing that's become very clear to us in the last seven months is how important it is to have a robust, digital and e-commerce strategy in place. During fiscal year 2020, we continued our heightened focus in the areas of digital and e-commerce. We expanded our low-cost, high-performing website model to more than 90 countries around the world, and our global web traffic has increased by 81%. Our social media and other digital marketing efforts put our brands in front of more people online than ever before during fiscal year 2020. This helped drive year-over-year global e-commerce sales growth for approximately 58% in fiscal year 2020, with strong growth across all three trading blocks. So now let's take a closer look at what's happening…

Thanks, Steve. In a typical year, I'd begin our discussion today with an update on how we performed against our most recent issued 2020 guidance. But 2020 is not a typical year. As you all know, we withdrew our guidance in April, when the pandemic began. Last quarter, we did share with you that we saw solid performance from the U.S., our European direct markets, Canada and Australia in the final weeks of the third quarter. These market conditions suggested to us that for the full fiscal year, net sales would be in the range of $395 million to $405 million. Today, we reported full year revenue of $408.5 million, down just 4% compared to fiscal year 2019 and coming in above our projected expectations. Now let's review our 55/30/25 business model, the long-term targets we use to guide our business. As you may recall, the 55 represents gross margin, which we target to be at 55% of net sales. The 30 represents our cost of doing business, which is our total operating expenses, excluding depreciation and amortization. Our goal is to drive our cost of doing business over time toward 30% of net sales. And finally, the 25 represents our target for EBITDA. First, a look at the 55 or our gross margin. In the fourth quarter, our gross margin was 56.3% compared to 54.6% last year. This represents an improvement of 170 basis points year-over-year. Changes in major input costs, which include petroleum-based specialty chemicals and aerosol cans, positively impacted our margin by 270 basis points. Petroleum-based specialty chemical positively impacted our gross margin by 180 basis points, and the remaining 90 basis points came from lower costs associated with aerosol cans. Beginning in late February, crude oil reached multiyear lows, and though it did rebound slightly, it…

Hey, thanks, Jay. In summary, what did you hear from us on this call? You heard that global sales increased in the fourth quarter by 5%, primarily due to isolation renovation, which resulted in double-digit sales growth of WD-40 Multi-Use Product in many of our largest markets. You heard that sales of WD-40 Specialist were up 7% in the fourth quarter. You heard that sales of WD-40 BIKE were up 160% in the fourth quarter, primarily due to strong demand around the world. You heard that sales of our homecare and cleaning products were up 15% in the fourth quarter due to the strong demand for cleaning products due to the pandemic. You heard that global e-commerce sales grew by approximately 58% this fiscal year with strong sales across all three trading blocks. You heard that we continue to return capital to investors through regular dividends. You heard that our tribe rallied to the challenge, truly uniting us as one world, one company, one tribe. You heard that we are cautiously optimistic about the sales growth trends we have seen in September and October and are hopeful that these trends will continue. And you heard that while we are not issuing guidance, we remain confident that our revenue growth aspirations remain a realistic opportunity for the future. In closing today, I'd like to share with you a quote from Dr. Rebecca Homkes: "One of the essential distinguishers of a high-growth company is learning velocity. Companies that learn faster grow faster." Thank you for joining us for today's call. We'll now return for questions.

[Operator Instructions] Our first question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed.

Thank you. Congratulations on a great quarter. I hope you're all doing well.

Thank you, Linda. We are. Thank you.

So, I guess, I'd just like to start out with this idea of the isolation renovation. I think you mentioned that individual users are increasing their purchasing of WD-40. And you said that in many cases, they're hiring contractors to do work. But I guess when you still think about it, individual users are a small percentage of your overall consumption, if you look at the big picture. So can you give us some color maybe on other sectors, other users, like, I don't know, like one area I'm thinking about is like auto garages that there's been increased auto usage. Maybe there's more going toward that area in terms of auto, fix it. Can you just comment on some of the other areas too in addition to the isolation renovation?

Yes, sure. Thanks, Linda. When we talk about isolation renovation, we're also referring to artisans and tradesman who are performing more work across the globe. We saw some data that came out of Europe that said that, that activity was probably up between 17% and 24%. I don't know if anybody has tried to hire a tradesman lately, but they're certainly very busy as people are working. So, although at home use -- and I -- when I call that home use, I refer to someone stopping a squeak. But there's those passionate DIY, the auto repair people, the car enthusiasts, the passionate hobbyists that in that area of higher use than just the normal household that we've seen. We've also seen some evidence where millennials and I'll ask Steve to talk about this, where millennials have actually entered the DIY or the -- that area real quickly. Steve, do you want to just touch on that briefly?

Certainly. Thank you, Garry and hi Linda. Yes, it's certainly a trend we've seen across both North America and Europe as well, which is for the first time, millennial, new millennial users coming into our brand to complete home improvement projects, which is certainly linked to this isolation renovation kind of activity.

Okay. Can you also talk a little bit about margins? I mean your gross margin, as you discussed, was benefited in the quarter from lower major input costs. I mean, when we're talking about a 56% gross margin, should we consider that not normal? Or is that a new normal for you? Or should we expect something to trend back down to 54% or 55%?

Linda, as you know, we've had a goal to continue to increase gross margin, particularly as our percentage of Specialist business increases as a percentage of the total. One of the things that's been really encouraging for us, as we've learned more coming through COVID, particularly with our success in e-commerce is that end users are searching for solutions on e-com. And because of the brand - a brand presence of WD-40, our Specialist sales have really benefited, particularly on e-com. So that's a benefit. Going forward, we would like to continue to work on increasing our gross margin. I think that the levels that we're at now are probably somewhat realistic. However, I will caution that we are seeing some pressure and some extra costs coming through the supply chain because of the COVID pandemic. For example, distancing on production lines is very important for the safety of those working in our third-party fillers, some slowing of lines. So we are seeing some cost pressures yet to be totally identified. But we're certainly -- totally committed to our gross margin, certainly north of 55%, now at 56%. And hopefully, as this thing passes us, Smart Straw next generation gets into play and Specialist continues to grow, we'll see our margins even move further in a positive direction.

Thank you. That's very helpful. And I guess just on the topic of guidance, I guess it's not too surprising. There are still so many companies not issuing guidance, but you did see your trends clear enough to be able to give guidance, at least on sales for this past quarter. And it sounds like trends are continuing generally in a cautiously optimistic way. So, I'm curious as to why you maybe couldn't adopt some approach of giving some guidance for the quarter. Or is there something that you're seeing that is just making you really unsure even about the quarter coming up?

Well, Linda, I always said, we don't guide quarter-to-quarter. And as Steve mentioned, we are encouraged that we've seen trends that came into play in the latter part of last fiscal year carried through September and into October. But this COVID situation is so dynamic. We see markets opening and closing every day, and we don't know what could close us down tomorrow. Now, why we've had some successes this past year is that, when we are easy to buy, either through trade channels that have remained open or countries that have remained opened or because of the wonderful work that the tribe has done over the last three to four years building up our e-commerce capacity, we've done very well. Where countries are shut down and people can't buy us, obviously, we've not done as well. So, I think it would be foolish for us to try and predict the future. We're not very good clairvoyance. And -- but we're watching this on an ongoing basis. And as I said, we're quite -- we're confident about the fact that these trends carry through. Let's hope that it continues, and there's not an enormous shutdown of something that's going to derail the ability for people to buy our product. As soon as we feel more comfortable, we'll be sharing that out.

Okay. And just one final one from me. In terms of the next fiscal year, and I know you don't want to give guidance. You just said that. But to the extent that you have some unusual comparisons, and the net effect of COVID was negative for the year, full fiscal 2020. It wasn't positive. It was a negative net effect. And there's -- particularly, the third quarter was very weak. So is it fair to say that your growth comparison is so easy that we may have some quarters in the next fiscal where you'll see a higher-than-normal growth? Because you're against those unusual comparisons, just that concept, am I thinking correctly about that?

Well, we did have some pressure coming through the second quarter. So, if these trends continue, then we may see a more unusual comparison going into this year. But again, it really gets down to the point of -- we can't predict the future. And however, we are -- we do feel comfortable, and we're confident that, if our markets are available and operating that we will be very much available to our end users, and our consumption will be there, and we'll continue to service our customers, and hopefully deliver reasonable results as we go through the rest of this year.

Okay. Thank you so much. I really appreciate it.

Thank you, Linda. Stay safe and well.

Thanks.

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

Hey, everyone. How’s everybody doing?

Hey, Daniel.

Could you just provide a little more color on industrial sales in China? I think you indicated that it was pretty soft because of shutdowns. It's just that other chemical companies, particularly industrial chemical companies that I cover have kind of indicated that China is up to pre-pandemic levels. This is mostly with the heavy industry and auto. And I was just wondering where the difference was. Like I mean, is it just distributor channel? Or is it just, I mean, it's a different part of the market?

Yes. Sure. I'll let Steve talk about some of the differences in China.

Thank you, Garry. Hi, Daniel. Yes. And so what you've really got to do is chase China's look sequentially at the quarters throughout the year. So we went into the first quarter with a very strong Q4 in FY 2019, I believe we were over $7 million in our Q4 net sales in China. Q1 was then much lower sales at $2.3 million. We went into the pandemic in our Q2 of FY 2020 and only achieved $1.44 million. When you look at the front half of our FY 2020, we achieved $3.8 million in the first half. When you look at the Q3 and Q4, so Q3 at $4.93 million and Q4 at $4.76 million. So whereas Q4 was up against a strong comparable from FY 2019, it was actually fully in line with Q3. So you've seen levels of Q3 and Q4 sales in China, which are pretty well in line with historic precedent. So sales have recovered, it just didn't look that way on Q4, because of the comparable to the prior year.

Okay. That actually makes a lot of sense. So if we think about it going forward then, should we think, I don't know, just the run rate that we've seen over the last couple of quarters, at least for the near term, is what we should kind of expect in China?

I think, to take Garry's point, I don't think we're predicting the future. We have seen a good September in many of our markets as they continue to rebound. So we've seen progress, but not necessarily complete recovery. We still have some suppressed activity due to factories with lower export orders than they would normally have. And we continue to get great growth in China, and our e-commerce business was up substantially and WD-40 Specialist continues to grow and there'll hopefully be some rebound impact in FY 2021.

But just to add one -- a little bit more to that, Daniel. Some of the larger chemical companies that you're probably referring to have direct sales into industry, I would assume. We have a bit of a buffer in between because we sell into hardware and industrial distribution, who then sell into industry. So when the pandemic hit and some of those huge hardware and industrial markets shut down, they had inventory on hand. So as these are opening up now and some of them are becoming more active, that inventory is moving through. So we probably feel it a little later than others because we're not shipping tanker loads of some chemical directly into a factory. We're selling cases and drums of product into industrial distribution, into hardware distribution, who are then selling it into the maintenance, repair and overhaul facilities of factories.

Okay. That's very helpful. And then I guess, just -- can any of the strength in EMEA and the Americas be attributed to a restock cycle because of low inventories? I mean, I guess most -- you kind of pointed to the direct sales market as being more of a reason, but I was wondering if there was any restock cycle that can kind of contribute to such a strong fourth quarter.

I would say there was a little bit of a restock in EMEA. But what we're encouraged about is our point-of-sale trends. And we've been seeing some really encouraging point-of-sale trends. So the inventory is actually moving through the system. We don't think there's a material amount of restocking going on. And if there was, we wouldn't have seen the trend also continue out of August and into September as we've indicated it mostly did.

Okay. Thank you. And then finally. I think you -- I saw in the deck or maybe you mentioned that there was a slight mix headwind in 2020. I was just wondering with the -- with the rollout of the next generation of Smart Straw and the increase in Specialist sales, should we expect that to reverse, whereas mix should be kind of a tailwind for the next couple of years?

And you mean impacting our gross margin?

Yes.

I'll leave that to Jay. Jay, would you like to address that question, please?

Yes, Daniel, if I get your question right, you're really just wanting to see if we're going to get a mix benefit as we go forward. Our overall long-term, we will definitely get a mixed benefit as we go forward. The challenge that we would have with anything in kind of what I would call the near-term of anticipating they'd bounce back in any particular quarter is a little bit more difficult. But as we move forward, as Garry talked about earlier, the transitions to some of our more premiumized products, which carry a higher margin, we'll gradually see accretion to gross margin.

Okay. Well, thank you very much, guys.

Thanks very much, Daniel.

Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your lines.