Ladies and gentlemen, thank you for standing by. Good day. And welcome to the WD-40 Company Fourth Quarter and 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 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.

Good afternoon and thanks to everyone for joining us today. Joining us on our call today are WD-40 Company’s Chairman of the Board, Garry Ridge; President and Chief Executive Officer, Steve Brass, Vice President and Chief Financial Officer, Jay Rembolt; and Vice President, Global Finance Strategy and incoming Chief Financial Officer, Sara Hyzer. 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, 2022. 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 can 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 all information presented is current only as of today’s date, October 19, 2022. 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. Today is my 100th earnings call at WD-40 Company. It’s also my last. As we shared earlier this year, I formally handed the CEO realms to Steve on September 1st as part of our planned leadership transition. However, I wanted to join you all one last time to wrap up fiscal year 2022. 25 years ago, we had a dream to take the blue and yellow can with a little red top to the world. Today, I am extremely pleased to say you can find WD-40 Multi-Use Product in 176 countries and territories around the world. Indeed, the sun never sets on WD-40. As Marshall Goldsmith says, the best leaders understand that long-term results are created by the great people doing the work, not just the one person who has the privilege of being at the top. I have had the honor of working with many exceptional people during my tenure at WD-40 Company, many of whom remain on the global leadership team today and who will continue to work closely with Steve in the coming years. In addition to the leadership team, there are many talented people within the organization from all functions, trade blocs, countries and time zones who are committed to ensuring that millions of new people will meet the blue and yellow can with little red top for the first time in the years to come. Now let’s take a bit of a closer look on fiscal year 2022. In business, there are often headwinds and tailwinds, both are somewhat manageable because you know they are coming and you can plan accordingly. We have had plenty of headwinds and tailwinds this fiscal year, but we have also had turbulence. Turbulence is more…

Thank you, Garry, and good afternoon. Today is quite an emotional day for this earnings team as both Garry and Jay complete their final earnings call. I want to take a moment to thank Garry and Jay for their relentless commitment to our company and its stakeholders. Their fingerprints are all over this wonderful company and I honestly don’t think I could be inheriting a better situation. As part of Garry’s legacy, it’s created a powerful global infrastructure over the last two and half decades. The blue and yellow brand with a little red top is stronger than ever and is one of the most widely distributed and most consistently executed global brands out there. And then, of course, as our secret formula, not the one found inside the blue and yellow can with a little red top, but rather our wonderful global tribe mates. We believe in the will of the people. Will is not tangible, and you won’t find it on our balance sheet. It encompasses morale, motivation, collaboration and a desire to offer discretionary effort. Our special culture is absolutely a key source of competitive advantage and a critical multiplier of our strategic effectiveness, which will enable us to drive progress and sustain success. Now let’s take a closer look at our results. Last quarter, we shared with you that market conditions suggested that for the full fiscal year, sales were likely to be in a range of between $519 million to $532 million, reflecting year-over-year growth of between 6% and 9%. Today, we reported net sales of $518.8 million for fiscal year 2022, up 6% over last fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $8.3 million on net sales for fiscal year 2022. On a constant currency basis, net sales…

Thank you, Steve. It’s hard for me to believe that today is my final earnings call at WD-40 Company. However, I will remain in my current role as CFO until the end of the month. As we shared with you earlier this year, Sara Hyzer, will officially step into the role of CFO on November 1st and I am thrilled to be handing the baton to such a capable leader. Sara has worked alongside our global financial and accounting team as a financial strategist for a year now, and her financial expertise and growth mindset are an excellent fit for our company and its culture. I know you will enjoy working with Sara as much as I have. Now let’s start with a discussion about how we performed against our most recently issued fiscal year 2022 guidance. We expected net sales growth to be between 6% and 9%, with net sales of between $519 million and $532 million. Today, we reported fiscal year revenue of $518.8 million, up 6% compared to the prior fiscal year. As a reminder, our guidance excludes the impact of foreign currency exchange rates. Fluctuations in foreign currency had a significant negative impact on both the fourth quarter and full fiscal year sales results. We expected gross margin to be around 50%. Today, we reported gross margin of 49.1%, slightly below our guidance expectations. We expected our global advertising and promotion investment to be between 5% and 5.5% of net sales. Today, we reported an A&P investment of 5.3%. We expected net income to be between $69 million and $70.1 million, and a diluted EPS of between $5.02 and $5.10. Today, we reported net income of $67.3 million and earnings per diluted share of $4.90, slightly below our guidance expectations. To better understand what is driving…

Thanks, Jay, and thank you for that lovely introduction. I am very happy to be here and eager to get started in my new role on November 1st. My primary objective will be to sustain the financial success that WD-40 Company has experienced throughout Garry and Jay’s tenure. Several factors have contributed to the company’s financial success, but there are two that I would like to focus on today. First is the 55/30/25 business model. For many years, we have run our business guided by these targets and have demonstrated that by aligning the organization behind these targets, we have continually improved the financial performance of our business. The model is being tested right now due to the inflationary environment we are operating in. However, we remain committed to our 55/30/25 business model and are focused on managing our business so that we can restore gross margin to our target of 55% in the future. Second is the company’s comprehensive capital allocation strategy, which I am committed to maintaining. The capital allocation strategy begins with targeted revenue and earnings growth in the mid-to-high single digits. We have a cash flow accretive business that generates adequate liquidity to support our near- and long-term growth strategy. Historically, our business model has been asset light, which has typically required low levels of capital investment, roughly between 1% and 2% of sales. In fiscal year 2023, we expect to return to those historic levels and invest approximately $9 million in capital projects. We believe that we will continue to see our investments in capital projects return to historical levels in the future. Excess capital generated by the business is then allocated to the highest return alternatives. We don’t anticipate any brand or product acquisitions. We are in the business of acquiring new users and…

Thanks, Sara. Now you have a summary of FY 2022 and our financial expectations for FY 2023. Let’s spend a few minutes on the longer term view. We have a simple strategy, a practical business model and a significant and realistic opportunity to drive revenue growth well beyond the 2025 targets over the longer term. Sara and I are absolutely committed to our 2025 revenue growth target, which is to drive net sales to between $650 million and $700 million by the end of fiscal year 2025. We will strive to do so while following our 55/30/25 aspirational business model. Looking beyond 2025, I believe there is a huge runway for long-term revenue growth for our company. As Garry alluded to earlier, we will be evolving our communications over the next couple of quarters to better share how we will achieve this growth in the future. For now, I’d like to share with you my three strategic priorities for my tenure as CEO. They are, firstly, to pivot the company towards a sustainable future. I consider the environment to be a key stakeholder in making decisions that create and protect long-term value must take that key stakeholder into consideration. Secondly, to further leverage our capability as a global learning and teaching organization. I believe if we learn faster, we can grow faster. And thirdly, to realize a huge growth potential present in emerging markets. I believe the long-term global market growth opportunity for WD-40 Multi-Use Product is over $1 billion and that the fastest growth will be achieved in our emerging markets. I look forward to sharing more with you on these and other developing areas in the coming quarters. In summary, what did you hear from us on this call? You heard that this will be Garry and Jay’s…

[Operator Instructions] Your first question comes from the line of Linda Bolton Weiser with Davidson. Your line is now open.

Yes. Hello. Thank you. Well, farewell, Jay and Garry. We will miss you and welcome to the new management team. We look forward to working with you. So could I just ask you -- my first question is about your expectations around gross margin in the quarter. I think that you have been saying that you expected gross margin to be up sequentially and yet it was down a little bit. So what were the things that came out different in the quarter versus what you had been expecting to point to gross margin in the quarter being down?

Hi, Linda. This is Jay. Yes. If you recall, we had price increases going in in the third quarter in the U.S., in the Americas. We also had them going in in the fourth quarter in EMEA. What we found is those price increases took, while they didn’t generate a significant amount of resistance, we were able to -- it took us longer than we had anticipated. So the delay of price increases -- the delay of the implementation of price increases was the primary driver. We have also had some disconnection with respect to our petroleum distillates, the various components we use and their index is not necessarily tied to the directly to oil, and in the past, it’s tracked fairly closely to that. But what we did see is a significant variation from that and maintained itself at a fairly high level and continues to this day.

Okay. So, I guess, when you look at the maintenance product sales in the U.S., I think, you said, it was up 21%, so that’s really close to the 25% price increase, but not quite. So was -- did you experience volume declines as you were taking these price increases, some volume softness?

Hi, Linda. This is Steve. Overall, the volumes for the year, I mean, it’s a slightly different story for, obviously, Asia-Pacific where we continued strong volume growth. But, yes, in the United States, and sorry, the Americas totally and then in EMEA as well, our volumes were kind of flattish for the year. Obviously, in EMEA, we had the loss of half of year worth of Russian business. So that was a hit in EMEA. But, overall, in terms of MPMP, so multi-purpose maintenance products, our volumes were flat for the year. So there was some decline, all of our kind of volume, all of our price, all of our growth was price driven for the year when you look at it globally.

Well, but I guess I am not so much interested in the fiscal year. I am interested in the period during which you started to take these significant price increases. So did the volume declines get more significant as you were taking these price increases of 20%, 25%?

Yeah. So what happens? When you implement price increases of that kind of magnitude, you get quite a lot of disruption in the market. So there’s been lots of promotions and a lot of our volume is driven by lots of displays in home centers, in major retailers and so losing some of that momentum is what causes some of that volume loss. So, yes, in Q4, to answer your question specifically, there was some volume loss as we went through some of this disruption. We expect that to continue for the first part of FY 2023.

So what is -- for your local constant currency sales estimate for FY 2023 of up 10% to 15%, how does that very roughly break down between volume and price?

So going -- looking forward, overall, we would see volumes overall being flat to slightly negative for the year and so all of the price increases are basically globally. That’s all being driven by price and absorbing those price increases. So it’s slightly different again by trading blocs. So we haven’t had the same inflationary impact we have seen elsewhere in Asia-Pacific. So, but for Europe and for the Americas, and don’t forget in Europe, we have still got to absorb a half year of the Russia loss. So that’s out there as well in terms of the volume loss. So, yeah, volume expectations for FY 2023 are flat to slightly negative, recovering as we work our way through this disruption by the second half year.

Okay. Thank you. That’s very helpful. And then at the Analyst Meeting, I think you were kind of talking about getting to a 50 -- back to a 55% gross margin by the end of fiscal 2023. I mean, is that still kind of what you are expecting, but yet, it’s kind of sequentially going up slower than we thought or just what is the cadence that you are now thinking versus when you were talking in July?

Hi, Linda. This is Sara. So, yes, I think, we had hoped that we were going to be there by the end of fiscal 2023. But as Jay mentioned, the timing of these price increases coming in was a little bit later than we expected when we started to see them actually flow through the results, and so we will see a slower uptick and we are anticipating a slower uptick for the upcoming year. So at this point, we don’t think we will be able to get to the 55% by the end of this year, but I think there are still opportunities both with premiumization and other margin accretion activities that we are working on that we believe that we can get there at some point in FY 2024.

Okay. And then just one final one for me on, I mean, you talked about inventory and you are right, a lot of companies are carrying higher inventory and slower than expected at working it down, it seems like. Is this a permanent situation because of components availability and all that? In which case, you did sort of technically borrow to pay your dividend. Your free cash flow is lower than your dividend. So that’s not a great situation. So going forward, I mean, I guess, if inventory just doesn’t increase anymore, your cash flow will improve, but what’s the outlook for cash flow relative to your cash dividends in FY 2023?

Sorry, Linda. I was on mute. We would -- we certainly expected to cover it as we go into the -- in the next year. This was a year of outsized investment in inventory and one that we are -- we might see some incremental movement, but it certainly is not going to be of the similar magnitude as we go forward. So our view is that the inventory at some point will normalize back to the turns that we have historically had. It’s just that right now we can’t see when that will be, because of things like lead time, availability of certain components, et cetera, et cetera.

Okay. Well, that’s fair enough. Thank you so much for answering my questions. Best of luck.

Thank you, Linda.

Your next question comes from the line of Daniel Rizzo with Jefferies. Your line is now open.

Hi, everyone. Thanks for taking my questions. Just for clarification, there is, I think you said, there was sales -- there was FX headwinds expected in sales, I think, it was, I think, 500 basis points. Did you -- have you clarified what you expect FX to mean to EBITDA or EPS?

No. We have not quantified that, but we have built in those expectations into our guidance.

Oh! You have. Okay. And then, I think, North America was fairly strong. I don’t know if I missed this, but did you indicate that there was some pre-buying in North America, because of -- in anticipation of the price hikes in the Q4?

Hey, Daniel. This is Steve. So in Latin America, there was some pre -- some limited pre-buying. So it’s not overly material, but in Latin America with our distributor markets, we did have some pre-buy on pricing, yeah, correct.

But not North America?

Yeah. North American…

All right.

… increases were in Q3.

All right. Thank you very much.

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. Thank you.