Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Second Quarter Fiscal Year 2021 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 today, 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 10-Q for the period ending February 28, 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, April 8, 2021. 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 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. Our tribe continues to work together through the challenges and opportunities associated with the COVID-19 pandemic. We continue to experience very high demand for our maintenance products due to the renovation trends associated with the pandemic or what we call isolation renovation. As a result today, we reported net sales of $111.9 million for the second quarter of fiscal year 2021, up 12% compared to the second quarter of last year. Translation of our foreign subsidiaries results from their functional currencies to the U.S. dollar had a favorable impact on sales in the second quarter. On a constant currency basis, sales would have been $109.2 million, up 9% compared to the second quarter of last year. Net income for the second quarter was $17.2 million compared to $14.3 million last year. Diluted earnings per share for the second quarter was $1.24 compared to $1.04 for the same period last year. I do want to caution investors that due to the uncertainty that health crisis continues to present, it is very difficult for us to estimate how our business will be impacted by the pandemic over the short to medium term. We offer a variety of maintenance products that have been in very high demand due to renovation trends associated with the pandemic. However, the pandemic has also caused some disruptions and constraints to our supply chain, primarily in the United States. Steve will share these puts and takes with you in greater detail in a moment. But first, I'm going to share a quick update with you on our strategic…

Thanks, Garry, and good afternoon. When we last spoke, I shared with you that despite the many disruptions caused to our business by the pandemic, we were experiencing increasing demand for our products due to a change in end user behavior caused by the isolation renovation phenomenon. Today, I'm happy to share with you that those trends continued throughout the duration of the second quarter, and today we're reporting total global sales growth of 12% for the quarter. However, we also encountered some challenges in the Americas related to keeping up with end user demand in a COVID environment. Like many consumer goods companies, we are experiencing significant disruptions and constraints within our supply chain in certain geographies. In the United States, some of our third-party manufacturers have been experiencing increased absenteeism and labor shortages, which have resulted in slower line speeds, capacity constraints and increased competition for line capacity within the aerosol industry. In addition, we've been managing raw material shortages and transportation bottlenecks, which have impacted our ability to deliver products and meet some of our normal levels of service with our customers in some markets. These challenges have mostly impacted our Americas trade block and have resulted in lower sales for the United States, as well as increased cost of goods for the quarter. Jay will talk in more detail about the gross margin impact in a moment. Let's take a closer look at what's happening in our trade block starting with the Americas. Net sales in the Americas, which includes the United States, Latin America and Canada, were down 1% in the second quarter to $46.2 million. Sales of maintenance products decreased 3% in the Americas due to decreased sales of WD-40 Specialist and WD-40 Multi-Use Product in the U.S. which declined 42% and 5% respectively.…

Thanks, Steve. Let's start with a discussion about 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 long-term target for EBITDA. First, the 55 or our gross margin. In the second quarter, our gross margin was 55.4% compared to 53.6% last year. This represents an improvement of 180 basis points year-over-year. Changes in major input costs, which include petroleum-based specialty chemicals and aerosol cans, positively impacted our gross margin by 210 basis points. Petroleum-based specialty chemicals positively impacted our gross margin by 160 basis points and the remaining 50 basis points came from lower costs associated with aerosol cans. Although the price of crude oil has recently increased compared to the prices seen in early calendar 2020, the average cost of crude, which flowed through our cost of goods sold was lower during the second quarter of fiscal 2021 compared to the prior fiscal year's quarter. In addition, we achieved favorability in the cost of aerosol cans due to higher-than-anticipated purchase volumes especially in our EMEA segment, also positively impacting our gross margin were sales price increases, which impacted our gross margin by 20 basis points in the second quarter. And finally, additional miscellaneous costs, favorable sales mix changes and changes in foreign currency exchange rates when combined positively impacted our gross margin by 40 basis points. These positive impacts to gross margin were partially offset by the negative effects of higher warehousing and inbound freight…

Thanks, Jay. In summary, what did you hear from us on this call? You heard that sales of WD-40 Multi-Use Product were up 14% in the second quarter. You heard that sales of WD-40 Specialist were up 4% in the second quarter. You heard that sales of WD-40 BIKE were up 34% in the second quarter due to strong demand around the world. You heard that sales of our homecare and cleaning products were up 3% in the second quarter. You heard that global e-commerce sales grew by over 61% in the first half of fiscal 2021, with strong performance across all 3 trading blocks. You heard that our Board of Directors increased our dividend by more than 7% last month. You heard that we are experiencing disruptions and constraints within our supply chain in the Americas, and these headwinds are impacting our ability to entirely meet the increased end-user demand in the U.S. market. You heard that disruptions within our supply chain and increased commodity costs will most likely result in some pressure to our gross margin in the second half of fiscal 2021. You heard that despite of these uncertainties, we remain cautiously optimistic about fiscal 2021 and believe our current market conditions suggest for the full fiscal year total net sales are likely to range between $445 million and $475 million. And this upward revision is driven primarily by favorable changes to foreign currency exchange rates. And you heard that while we are not issuing comprehensive guidance, we remain confident that our long-term revenue growth aspirations remain a realistic future opportunity. In closing today, I'd like to share with you a quote from Winston Churchill, "Kites rise higher against the wind, not with it.” Thank you for joining us, and we'd like to now open for questions.

[Operator Instructions] And our first question comes from the line of Linda Bolton Weiser with D.A. Davidson.

So, can you perhaps quantify in any way the impact of the supply chain disruptions? And did you say that affected both the Americas and Asia? Is there any way you can quantify in each of those regions?

Sure. Thanks, I will. The major impact was in the United States. In the U.S., we would estimate that we shipped roughly 50% of the volume of Specialist, and 85% of the volume of our MUP Product against our demand signals. Now those estimates are probably wrong and roughly right, but more important is that the end-user demand based on point-of-sale remains high, so the major impact is on the U.S. market. In Asia Pacific, the impact was only in the marketing distributor markets and it was primarily due to our inability to ship because of shortage of containers. We don't have a supply chain issue in Asia Pacific or in the MD markets. It's a container-shortage issue, and we haven't actually quantified that completely, but it was enough to ensure that we didn't grow as we wanted to in that -- in the quarter.

Okay. And then just -- maybe you said this, but I didn't catch it, but did you say that these issues would be all cleared up kind of in the third quarter or more in the fourth quarter?

We're working through them, and currently we are working to -- with a recovery plan, and we should be through this completely by the end of the fourth quarter, but it will be a ramp-up completion, but things are improving, and we hope to see better results around supply, against demand signals as we move further through the year. Again, it is totally or primarily isolated to the United States, and the biggest impact is in the United States on our Specialist product line and then to a lesser extent onto our MUP line.

Okay. And then, I guess, sort of -- maybe you can marry that idea with the comment from Jay that the gross margin would kind of still be impacted by the issues. Is that kind of like a gradual improvement there or is there some kind of disconnect between the revenue impact and the gross margin impact?

I'll let Jay talk about that.

Thank you, Garry. We see that we could have some deterioration somewhere between 200 basis points to 300 basis points from where we are today as we go through the third and fourth quarter. It would be kind of a -- and it really depends on how the timing of our -- of the plan that we have in place, should we see delays in the plan that might slow some of the recovery down, but we would expect to feel the impact potentially through the end of the year.

Okay. And then did I catch you saying that the new Smart Straw would launch in the Americas in the fourth fiscal quarter, is that what you said? And is that what the original plan was or has that delayed a little bit?

Sure. Linda, what we've been able to do in the recovery plan because part of the volume increase in Specialist has really put a strain on our production of the Specialist delivery system, the 1.0. A good thing happened is we were able to commission some of the new machinery for the 1.5, and that's going into production during May. So, you'll see that come into the market after May, probably the June period, which means we have enough of the 1.0 delivery system to continue to fuel the growth in other markets around the world. So, it's coming in earlier. One of the machinery is coming in earlier, and that's going to allow us to meet the overall demand for Smart Straw.

Okay. And then finally, just a question about your marketing plans, your marketing spending plans. If you're experiencing these sort of shortages a little bit here, has that caused you to change -- like should you pull back on marketing while you're having shortages in certain areas? Are you still kind of going to spend as per your plan?

We're going to invest as per plan because a major part of our investment is really around growing the must win battle number one in a lot of markets around the world. So, we don't have one of those turn the tap off, turn the tap on kind of marketing programs. So no, we would expect that we would continue to drive it forward.

And our next question comes from Daniel Rizzo with Jefferies.

Just relating to the supply constraint issues that we kind of talked about, I was just wondering why it's becoming an issue or was an issue in this quarter and not in the past? Have we gotten to a point where it's just kind of a -- I don't know, it's just overwhelmed finally, some of your suppliers, and it wasn't an issue in the past? I just -- I don't know, I mean, as we kind of come out of pandemic, I thought this could have been an issue 1 to 2 quarters ago? And two, would -- could it become an issue in Europe, which seems to be unscathed at this point?

The first part of the question is, these supply chain pressures have been on us ever since the start of the pandemic. And what has happened is that as demand started to increase and the pressures became greater, the gap became wider. And at the same time, we've had increased demand around aerosol fuel line demand around the U.S. So, this thing has been bubbling. We've talked about it a little bit in the past and we're taking the steps to get back to where we need to be. The good news is when we come out this completely, the steps that we're taking now will give us enough upside production to carry us through. In Europe, we don't see the issue there because there -- it's a more diversified supply chain. And so, we don't see them. We have had some, but they're not as obvious as they are here in the United States.

And then you mentioned about introducing additional third-party manufacturers to kind of alleviate the issue. I was wondering if that's kind of a long process or how that works? And again, a 2-part question. Some of the lost sales you've had here in this quarter, are they lost? Or are they just delayed?

The first part of your question, it depends. In one case, we were able to, in one of our manufacturing plant, partner plants, bring on a second shift. Talk about 2 months to actually bring that into play. By the time we were able to bring the second shift into play because labor shortages have been evident across the markets, lines have slowed down because of distancing. There's been a whole lot of things that happen. So -- and then if we're bringing on a completely new supplier, we still need to go through our mandatory safety, quality and R&D testing at a plant before we commission it and spin it to be able to manufacture our product. That takes anything from 30 to 60 days. So that has been some of the delay. But the new plants that we -- one of the new plants that we've brought on is up and running now, and we're now -- you're bringing new product in behind it. So there is a delay, mainly caused by quality, research and development clearance, regulatory clearance, et cetera.

Okay. Last question. I was just looking at the cash flow statement and it seems like working capital has improved recently. I don't know if this is just kind of the lumpiness? Or if something has changed, where it should be, I don't know, the numbers should be improved just as we kind of model going for the next couple of years or so?

I'll ask Jay to answer that.

Yes. I think that the one thing that we have noticed is that we've had a lot lower levels of inventory than we would have certainly had in the past. And it really is reflective of some of the supply chain problems that are being discussed. So we would much rather have more inventory and have that investment in our working capital than the situation we've found ourselves in. So yes, so some of that should come back and normalize.

And our next question comes from Rosemarie Morbelli with G. Research.

You mentioned the supply issue. And I was wondering if that is solely because of the deep freeze in Texas and the strong demand, or if there is some impact from the ship jam in the middle of the Suez Canal, and whether we will see that impact in the next few quarters in terms of containers shortages in Asia?

We don't see any evidence at this time that we're having any material impact from the delays that happened in the Suez Canal. The container issue has been one that has been around us ever since COVID started. So yes, I think there will be some shortage of containers continuing. It's a periodic thing and it goes away. The supply chain, yes, there was some impact from Texas. There was some -- but really, the majority of the impact has been the increased demand on aerosol fill line time and the slowing of those lines due to labor restrictions caused by COVID. That's been the main -- those are the main impacts.

And looking at the gross margin, I understand that the supply may be an impact, but is then the largest impact coming from the inflation on your raw material side?

Jay?

Yes, there will be -- the cost of oil will be also impacting that and have a fairly significant impact. We've got other costs. We're seeing other component cost increases as well. So yes, that's a combination of both the impacts from these supply chain disruptions as well as from input costs.

Okay. And then lastly, if I may. When you get a new third-party manufacturing -- manufacturer online, are they doing it at a similar cost basis? Or is it at a higher cost than your existing relationships?

It depends on what they're filling. If we're bringing on -- most of the supply chain impact has been on Specialist in the United States. And Specialist, the runs of Specialist product are shorter runs. So already the fill fees are higher. So yes, there are -- depending on what the SKU is, there could be a slight increase in our fill fees. On the other side, where we have high-speed lines around MUP, if we have to move some of our MUP production from some of the higher speed production facilities to a lower speed, yes, there could be a slight increase in the fill fee for that as well. But it depends on where we move, what and when.

And the potential impact on the SG&A as a ratio to revenues was higher. So should we anticipate that this is going to continue to in short?

You mean that cost of doing business?

Yes. But on the SG&A side.

So our cost of doing business year-to-date is 34%, which is 2 percentage points lower than year-to-date last year. The increase in cost of doing business or the SG&A in this quarter, particularly, as Jay mentioned, was due to adjustments to our accruals for incentive compensation, anticipated by the results we expect through the end of the year. So we would expect that our cost of doing business will be, again, somewhere in that 34% range as we end up through the rest of the year.

And ladies and gentlemen, thank you. And 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 line.