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.

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 being 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 discussions. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is currently 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.

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 our 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 will be proud to pass on to the next generation. The desired outcome for this strategic initiative is to further embed infinite mind decisions into our business and to fully integrate our ESG initiatives into the heart of our strategic planning process. We recently completed an…

Thanks, Garry, and good afternoon. When we last spoke, I shared with you end user demand for our products continued to be exceptionally strong, and that September was the second largest sales month in the 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 blocks, 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 and 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 Latin 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 and maintenance…

Thank you, Steve. We delivered solid results in our first quarter, fueled by strong end user demand in the face of a volatile and challenging economic and supply chain environment. Let's start first with 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, our gross margin. In the first quarter, our gross margin was 50.8% compared to 56.4% last year. This represents a decline of 560 basis points. Over the last four quarters, we've seen a consistent decline in gross margin due to inflationary headwinds and the challenges in supply chain. Like others, we're experiencing significant increases in input and transportation costs as well as increased costs from our third-party manufacturers. Our opportunity this fiscal year is to reverse this sequential trend and drive gross margin back up to historic levels by the end of the fiscal. In the first quarter, changes in Specialty Chemicals were the primary driver of this decline and negatively impacted our gross margin by 390 basis points. Higher warehousing distribution and freight costs, primarily from supply chain constraints in the Americas and EMEA negatively impacted our gross margin by 140 basis points. Gross margin was also negatively impacted by 80 basis points due to foreign currency exchange rates and 70 basis points from higher filling fees paid to our third-party contract manufacturers, primarily in the Americas. These factors were partially offset by a benefit…

Thanks, Jay. In summary, what did you hear from us on this call today? You heard that we are operating in an environment that is volatile, uncertain complex ambiguous, and that this is a different game we're playing now. You heard the total net sales were up 8% in the first quarter. You heard that sales of WD-40 Multi-Use Product were up 14% in the first quarter. You heard that sales in Asia Pacific were up 34% in the first quarter. You heard that we continue to return capital to investors through regular dividends, and we raised our dividend by more than 8% last month. You heard that though we have been experiencing pressure on gross margin, we have a restoration plan in place that will take some time to execute. You heard that we've adjusted our guidance for fiscal year 2022, and we believe that net sales will grow between 7% and 12%. In closing today, I'd like to share a quote with you from Seth Godin: "If the game is designed for unit loss, don't play that game. Play a different one." Thank you for joining us today, and we would be pleased to take your questions.

[Operator Instructions] The first question comes from the line of Daniel Rizzo of Jefferies. Please proceed with your question.

You indicated that some sales were -- there were some sales losses, I guess, in the quarter due to supply chain constraints. I was wondering if there were losses deferred, if it's just delaying the sales or if it's something that's really tough to get back?

Thanks, Daniel. This is Garry. That's not an easy question to answer. My history has been if you lose a sale, you lose a sale. Now having said that, the thing that's really important is that in the quarter, 80% of our revenue came from our core product, which is WD-40 MUP, and it was up 14% in the quarter. And as you know, Daniel, much of our long-term growth is based on the expansion of our WD-40 Multi-Use Products. So, there's a lot of noise going on around the business in certain areas. Some areas are up significantly, some are a little slower, supply chain or whatever. But I think it's important to really reflect on the fact that 80% of our business, which is our core business, was up 14%.

No. Okay. That's helpful. And then with the real -- the strength in China, which I think was up 60-plus percent, I was wondering if that was like that there was some pull forward there. I know it can be fairly lumpy from time to time and in some quarters in the past where it's been down 40% because of the delays. I was wondering if there was any pull forward here in anticipation of the Chinese New Year or something like that?

Not materially. Chinese New Year is coming up, and we would expect, hopefully, that the Chinese New Year will go through in its normal way, and we won't see any massive disruption. But we're looking for a solid year in China, but all markets in the world that are COVID affected, it seems to be the most stable right now because it's China. So, we would think that this year will be a reasonably good year in our China market.

Okay. And just a couple more. You mentioned that by 2025, I think you want 60% of MUP sales to be -- I'm sorry, yes, 60% of MUP sales will be Smart Straw. I was wondering what the percentage is now? Like what is the growth projection there?

Steve, would you like to address that?

Sure, and hi, Daniel. Yes, so our first quarter sales were just in the mid-40s. Last year, we closed at 50% for the full year. So, we expect for the year to be approaching that 50% plus rate between Smart Straw and EZ-REACH sales combined.

Okay, okay. And then finally, you mentioned raising awareness in China, that's like one of the strategies raising awareness in China, Russia, India, and Mexico. I was wondering how you do that? I mean, it sort of like -- is it like an ad campaign or billboards? Or I mean, I know you're going to like think to like commercial first. So, I was just wondering what specific steps you take, if you can provide any color on that?

Steve, would you like to speak on that?

Sure. So, it's the old formula of expanding distribution, so making the product available in more places whilst also making the end user aware, and a big part of making the end user aware of WD-40 Company globally is sampling program. So in China, a lot of that growth that we're seeing in China now has come from big investments and more substantial investments we made at the end of last year in sampling industrial end users across all of China. So, sampling programs across all of our major growth potential markets are a very effective way of us bringing in new users.

You may remember, Daniel, in Q4 last year, as Steve referenced, we made a substantially larger marketing investment, and we referenced the fact that we were doing it in these markets. So we're -- as Steve said, we're starting to see some of those sampling programs pay off.

Thank you. And our next question comes from the line of Linda Bolton-Weiser of D.A. Davidson.

So, your top-line results certainly were strong in the quarter, and you've talked about the fact that the core product was so strong, so up double-digit against pretty much a hard comparison last year. So, can you just give a little more color on like what is going on? I mean, do you think that this isolation [indiscernible], the consumer behavior is continuing, you know just as a normal behavior doing more stuff around the home or whatever. And do you think there's -- and can you comment too if there's anything in your business in particular related to Omicron that you think is affecting demand?

Well, Omicron who knows. I think what we're seeing -- I'll talk a little bit and I'm going to pass to Steve to talk about some of the new end users that we feel that we've pulled in. But again, I think what we're really witnessing in our business, and you can see it by the different growth rates in different countries around the world. And specifically, now I'm talking about COVID, we're seeing the positive resilience of having a very diversified business around the world because I just returned from Australia two days ago. And while I was there, Omicron blew up in a massive way. And we're seeing pockets of this everywhere, but because we're so diversified globally, we still saw in Europe in the past quarter very strong growth in Italy as we talked about Spain, areas where things open up and close down. So, I think we've kind of got used to maneuvering these really unusual business conditions, but thank goodness, we have the infrastructure and the global awareness and distribution that we have because we're not getting hit all at once in one place. So, that's my view on the continued learning of the effect of COVID and Omicron and who knows what the next one is, I don't know. Steve, do you want to talk about the overall demand and how we're seeing end users, et cetera.

Sure. Thanks, Gary, and Hi Linda. Yes, so those new users, they are the kind of DIY boom, the isolation renovation, phenomenon Gary referred to many times, those new users, we believe will be permanent users of our brands, and that will carry forward. There has been a definite reduction across many areas of the world, not all, but many areas of the world on the DIY side. So our DIY channel sales have flattened somewhat, but that's been replaced by a switch to certainly towards professional use. Our industrial sales across the globe are doing really, really well. So I believe our industrial sales are up mid-30s percent across the world, and that includes China and those investments we've made, which are mainly in industrial sampling to industrial end users in China. So there's been some switch there, some rebalancing. You heard of the e-commerce rebalance towards physical stores as well. So there's been some channel shifts, but thankfully, it's still resulting in strong overall revenue growth.

Okay. Great. That's helpful. And then can you -- just I mean looking at your gross margin, it was a little bit lower than we had thought in the quarter. And I guess the way we had modeled it, we thought it might have bottomed out last quarter and then maybe gone up sequentially this quarter, and yet it went down sequentially again. So do you think that this quarter is the bottle? I know it's hard to project, but do you think this is kind of the trough and then you have a sequential little bit of increase maybe in the second quarter? Do you have any view on that?

Jay, do you want to talk on that?

Yes. Thank you, Gary. Yes, Linda, this surprised us as well from a standpoint of where we ended up in the quarter. We had -- and it really has been a result of just continued cost increases that have come at us -- And like we said in the call, we are attempting and will be having additional price increases to help recover that gross margin. So the timing of which, as we are modeling it today suggests that we'll be able to see a flattening out and with some slight uptick in margin in the second quarter. But I hate to make that commitment given the fact that we continue to see waves of cost increases. But we would expect that where we're really glad to see the recovery of margin will be closer to the fourth quarter at the level that we were at historical levels rather than kind of in the third quarter where we had initially thought. So, we've been pushed out a quarter probably a little bit longer, maybe.

Okay. Thank you. That's very helpful. And then I think you did explain this. I think I asked this like a couple of quarters ago about the Specialist supply chain issues and why it's different from regular WD-40. Is it different factories or different -- like why is it there's a problem with that, but not so much with the regular product?

Because we chose to prioritize. The Specialist supply chain issue was mainly in the United States, and that's where we had the most pressure on aerosol manufacturing supply in the world. So we made a choice. We said we will forever protect our core, and we will forgo some WD-40 Specialist business to ensure that, that 80% of our business is in the most robust supply can be. Now as you may have heard, we are doubling the amount of manufacturers we have in the U.S. And progressively now, those new manufacturers are coming online and primarily to support our specialist product line. So it was a sad day for us because Specialist has proven and is proving to be a really huge opportunity, particularly since we made the change in the trade dress. You may have heard Steve reference, but in Australia now, where we've had no disruption in the Specialist supply, it's now 37% of our MUP sales. And when we first came out with Specialist, our estimate was we could get it to 25% of our MUP sales. So in a number of markets around the world, we've proven that the benchmark is higher, which means the long-term opportunity is higher. But we will recover in the U.S., and we're slowly getting there. As we bring on new suppliers, we have to go through stability, quality checking. There's -- it's not easy to turn on a supplier and maintain our high-quality standards, as we must do. So that's the reason, Linda. It was a choice we made. And we are working through it, and we'll get over it, and we'll be back on track in the near term.

Okay. That's very good explanation. And finally, let me just slip in one more about, your A&P ratio in the quarter was a little lower than we had expected at 4.2%. And that's a little lower than what you're kind of planning for the year. Is there any way to be able to give us some guidance on how that will go in the corners? I mean, do you expect more spending in the second half of the year? Or is that hard to predict?

Yes, we would expect to come in for the full year in the range that we're predicting now. Some of this is timing of ability to be able to execute programs. As you know, a lot of our marketing is around sampling. And if we get shut down in markets, sometimes it's hard to do so, it shifts. Also, our revenue was a little higher than I guess you predicted also, so the percentage is a little lower. But we would think that the range we have for the year will work out that way. And we don't run our business on a quarter-to-quarter basis.

Thank you. And 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 line.