Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Second Quarter 2023 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.

Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-40 Company’s President and Chief Executive Officer, Steve Brass; and Vice President and 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-Q for the period ending February 28, 2023. 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 6, 2023. 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 Steve.

Thanks, Wendy, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing our sales results for the second fiscal quarter of 2023. I will also provide you with an update on our must-win battles and the results from an internal diversity, equity inclusion and belonging survey we recently completed. Sara will review some financial topics with you, including our updated guidance for FY ‘23. As Wendy mentioned earlier, we have prepared a presentation covering our second quarter results and have posted it to our investor website. We invite you to refer to that document for the duration of our call. Let's discuss our sales results. Today, we reported net sales of $130.2 million for the second quarter of fiscal year 2023, which was relatively constant compared to the same period of last year. There are several things obscuring top line performance this quarter. Sales volumes are down year-over-year as expected due to the severe disruptions caused by the price increases we put into place over the last 12 months. We estimate that the disruptions caused by price increases impacted our sales by about $15 million in the second quarter. Translation of our subsidiaries results into the U.S. dollar had an unfavorable impact of about $5.5 million on our consolidated net sales in the second quarter. On a constant currency basis, net sales would have increased by 4% year-over-year. Also impacting our top line results this quarter is our values guided decision to suspend sales of our products to our marketing distributor customers in Russia and Belarus, which negatively impacted our sales, purchased over $3 million. So now let's take a closer look at second quarter results in our trade blocks starting with the Americas. Sales in the Americas, which includes the United States, Latin…

Thanks, Steve. Thank you for that overview of our sales results. While our top line results this quarter were lighter than we had expected, we continue to believe that most of our top line growth this year will be weighted towards the second half of the year. Currency continues to be a headwind for us. On a constant currency basis, net sales would have increased 4% compared to the second quarter of last year. Let's start with a discussion about our business model and the long-term targets we use to guide our business. We target our gross margin to be at or above 55% of net sales. Our goal is to drive our cost of doing business which is our total operating expenses, excluding depreciation and amortization, toward 30% of net sales over time. Finally, we target EBITDA to be at 25% over time. The model has been under pressure lately due to the inflationary environment we continue to operate in. The first phase of our margin restoration plan, which was driven by tactical price increases is working. We saw 860 basis points of lift due to price increases last quarter and 910 basis points this quarter. Last quarter, I shared with you that we believe we would continue to see sequential margin improvement coming into the second quarter. Our gross margin declined slightly from the first quarter by 60 basis points, which is a disappointment but progress is seldom linear, and many factors impact gross margin changes quarter-to-quarter. We still believe our full year gross margin will be above 51% but have narrowed the top end of the range down to 52%. We know we still have a lot of work to do to return our margins to our targeted levels. The good news is we are making fantastic…

In summary, what did you hear from us on this call? You heard that foreign currency exchange headwinds continue to negatively impact sales results and in constant currency sales grew 4% in the second quarter. You heard that we've experienced solid sales of WD-40 Multi-Use Product in many priority markets year-to-date. You heard that sales of WD-40 Specialist were up 13% year-to-date. You heard that we continue to make outstanding progress in digital and e-commerce and that our e-commerce sales have grown 34% year-to-date. You heard that 84% of our tribe mates believe our company actively promotes and values diversity, 78% agreed that WD-40 Company is an equitable place to work, 89% believe our culture is an inclusive one and 92% of our tribe mates experience a sense of belonging here. You heard that although we continue to experience pressure on gross margin, we're making progress in our margin restoration plan and remain committed to restoring margins to our target of 55% plus. You heard that we continue to return capital to investors through regular dividends. You heard that it's looking like the month of March, though not yet fully finalized from an accounting perspective will be a new record sales month for the company. And you heard that for the remainder of the year, we expect strong top and bottom line growth. Sales growth in constant currency is expected to be between 6.5% and 11.5%. In closing today, I'd like to share with you a quote from Buzz Aldrin. Keep in mind that progress is not always linear. It takes constant course correcting and often a lot as exacting. Thank you for joining our call today. We would now be pleased to take your questions.

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

Good afternoon, everyone. Thank you for taking my call -- my questions. If we just think about inventory for a second. I guess how should we think about inventory turnover for -- I guess, for 2023 and over the longer term? What's kind of the goal versus where we kind of are now?

Hi, Daniel/ Good to hear from you. This is Sara. So inventory is starting to turn, which we're very pleased to see. I think we had anticipated it starting to turn this quarter, and we do expect it to continue to turn towards the back half of the year in the right direction. We've always targeted close to around three months of inventory pre-COVID. The reality is, I think we're well north of -- it is dependent by region. So certain regions are closer to the three months. And in the Americas, we are well beyond the three months. I think it's six to nine months depending on product lines. So we are well north of our historical targets. We are working back to those. And I don't think we'll get there before the end of the year, but we are trending in the right direction.

Is there something about the Americas that makes it, I guess, tougher logistically than the other regions? I don't know if it's just your -- go ahead.

Yeah. No. So most of it comes to just the supply chain recovery efforts that the -- that we put in place last year and the expansion of the filler network. So any time we're expanding that filler network, you want to make sure you have enough inventory on hand, and with just the difficulty in getting the right components in place and making sure we have the right raw materials and components to take advantage of line time when it was becoming available, we did intentionally build up that inventory to both support the Americas in the supply chain recovery efforts last year. So that was intentional.

Okay. And then it seems that almost all of the volume or the price hikes that caused some volume declines was in Europe, but the other regions were kind of okay or am I not thinking about that right? And if I am thinking about it right, why is that, I guess? Why would it occur there as opposed to the Americas or APAC?

Yeah. So, hi. Dan, it's Steve. So in terms of volume, the volume versus price situation, so it has been improving. So we started the year with a kind of a loss of volume. If you look back to September, we were at like 23% volume loss overall. And we've recovered to about 17% by the end of February. It's linked to the price increase timing of the execution of the price increases. So the Americas having gone first in the third quarter of last fiscal year, they've been the first to drive improved volume. So you can see that pretty clearly in the mix. Americas volumes have recovered quickest. EMEA has obviously got the loss of the Russian business still in there. Recall that the Russian business is about 7% or 8% of EMEA volume. So that's why EMEA volumes look higher. And then we did indicate in our comments that EMEA has been recovering and in March had a very, very strong recovery. So we do see that turning around quite quickly now.

Thank you very much. A – Steve Brass: Thank you.

Your next question comes from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

Yes. Hi. So another question I have on the volume versus price. I think you disclosed in the 10-Q last quarter, what that was for the full quarter globally. Can you just give it to us for the full quarter globally what the breakdown volume versus price was?

So that's the total down there.

Yeah, Linda, so we didn't have that in the 10-Q when it comes out. So the increase -- year-to-date increase in selling price has been $50 million. And then the total decrease in volume has been -- so we've got $8 million from Russia and all of the markets of $36 million. And then you obviously have $15 million of currency impact as well.

Okay. And -- so maybe you could just give us like a better number. Like you said volume by the end of February was down 17%. But what does that look like in the U.S. or in the Americas? Because I think you said last quarter in U.S. is down 7% or something. So like can you just kind of tell us how the U.S. or Americas compares to the global volume?

Sure. So the U.S. is just into double digits about 12%, if I recall exactly. Americas overall was about 16%, just below 16% year-to-date. Asia Pacific is positive. We have volume growth in Asia Pacific of around 6% year-to-date and EMEA at 28%, but don't forget that Russia was 7% or 8% of that number.

So sorry, the U.S. year-to-date is down 12% of volume?

Yes, 12%, so yes.

Okay. So I mean, again, like I guess I can do the math, but if it was down 7% in last quarter, the first quarter, it was down less now in the second quarter or is that the case?

No. I think it distinguish. We spoke about market share, so POS data is different. In the first quarter, we did speak to POS data. And so our POS data, which -- so these numbers here reflect sales and overall volumes right to the market. Our POS data represents a substantial chunk of our overall business. It's hard to track overall because we're active in so many different channels, right? And so our volume in terms of the latest read in terms of market share POS data in the U.S. Our category sales, I believe were up like 17% and volumes are down just into double digits. So that's the latest status in the U.S.

Okay. And again, sorry, that year-to-date or in the quarter?

Well, that is actually -- those numbers I gave you on POS are actually the last three months, last three months.

Okay. So I think the previous analyst asked this too, but I'm still having a hard time understanding why if the Americas is recovering volume quicker and your sales were actually strong. Why is the gross margin most disappointing in that region where it's recovering the quickest. That's what I'm having a hard time understanding.

That's a fair question. So I'll start with that, and maybe Sara can add to it. I think we're still cycling through because of the high inventory levels we have in the Americas, and that was done purposely for us to build up and be able to service demand. So we've now got to a situation in Americas where we're at 99% fill rates on our core products and 98% on time in full delivery. So we're servicing fully -- almost fully all of our needs. But those inventories will purchase six to nine months ago, and so they purchased at those cost prices at that time. So it's taking longer for inventories to push through. And also, I think there is a certain element looking forward of the Americas driving volume, particularly the U.S. And so driving volume, getting back with promotions in store also may have some margin implications.

Okay. And then so just longer term, obviously, you always historically have had promos come and go each period, but historically, when you've taken pricing like this, have you ever given back or reversed on the list prices or do you the always set the pricing…

No, we've...

Yeah, go ahead.

No, we've never. So I've been here 32 years. We've never gone down with pricing once we've gone up. What we tend to do is, if the situation changes with commodities over time, then we may promote to the end user and give the end user extra value with something like an extra ounce as promotional or something. So we have done that historically yet.

Okay. Thank you. And then I guess the pricing benefit in gross margin in the quarter was very close to what we had projected, but the impact of the higher petroleum-based input and tin can cost was more negative. So I'm just wondering, like, I know it's hard for us to know what you're pulling through these things. But OYO has wrapped, so why is it that that was still such a negative? And do you think there will be neutral to gross margin in third quarter those inputs or annual fourth quarter? Thanks.

Hi, Linda. It's Sara. So it is challenging to compare some of the decreases in the spot prices that we're seeing to exactly what we're seeing from what we're paying for our commodity pricing currently. We are seeing some benefits, but they're not as significant as what we're seeing in the spot pricing because of the offset to labor and energy costs are kind of offsetting the benefits that we could be seeing in the future on the spot pricing. But for the quarter, part of that is just again, working through the levels of the inventory. So what we had anticipated to work through this quarter, while volumes are improving, they were not improving as fast as we had hoped. And so that's partly why the margin didn't pick up as much as we had hoped during the quarter.

Yeah. Okay. And then sorry to tilt (ph) recent volume issues that you had said previously that for the year, you had baked in kind of volume flat to down slightly. So what would be baked in right now to the guidance that you've given now for volume for the year?

Yeah. So it's hard to call, there's certainly different variables. So probably at the start of the year, we did say that we thought that volumes were going to be kind of flat to slightly negative. You have to factor out the kind of Russian loss as a one-off kind of loss right, which was 4% of our overall volumes, but we have a half year of that. I think we kind of see it as a little bit higher than kind of low-single digits. It's probably going to be more towards the kind of low single – double-digits to high-single digits. But there's a lot of variables out there, right? So you do have a lot of markets around the world where footfall is a little lighter than we would like, footfall in retail stores has fallen off by maybe 10% to 15%. So that's a variable that's out there and where that goes in the future. So yes, I think we're looking at negative high-single digits to low double-digits.

Okay. Thank you. And then finally, one last thing. Just on the interest expense. I mean it was kind of higher than we had modeled in the quarter. Do you have a guidance [indiscernible] for the year that we can put in our models for that?

Sure. Yeah. So we are -- I'm happy to -- let me just give me two seconds, and I can pull that up. I would guide to a little bit north of $5 million, Linda.

Okay. Thank you very much. Thanks.

Thank you.

Your next question comes from the line of Rosemarie Morbelli with Gabelli Funds. Please proceed with your question.

Thank you. Good afternoon, everyone.

Hi, Rosemarie.

Steve, I was wondering, when you are talking about March being a record top line quarter, if I understood probably, is that still mostly priced or are you beginning to see some volume in the March quarter -- I mean, in March month?

Yeah. So we're seeing -- well, again, without results being fully final, so this is directional. We're seeing a big improvement in volumes. And that's particularly been noticeable in Europe. And so Europe went through the same kind of disruption at the U.S. They're just a quarter behind the Americas. So the recovery in Europe is really starting to happen now as we emerge from kind of six months or so post price increases. We have much greater promotional activity in market. And so yes, in particular, in Europe, you're seeing a strong volume recovery.

Okay. Thanks. And then when we look at inflation, you touched on the higher cost of labor and the higher cost of cans even though some of your raw materials are coming down. Can you put a number on the inflation -- in the inflation increase that you are seeing? And do you have enough price to cover it or you need to raise prices some more?

So if we're -- obviously, the can is made up of a few different components, but if we were to break that down a little bit, the can, so the physical can itself I think what we're looking at this year versus last year is going to be relatively flat globally. We have some regions that are slightly up, in some regions that are slightly down. So while the tin plate spot prices coming down, the cost to convert that into our physical can is higher when you compare it to prior year. So there are some offsets that are happening there. As far as the specialty chemicals, I mean, what we're buying at today versus what we were buying at around this time last year. Those are going to be around the high-single digits, maybe low double-digits depending on the region. So we are seeing some benefit of what we're actually buying there. But again, then just last week, those prices started to go back up. So those can be pretty volatile month-to-month depending on what's happening out there. So those are just that maybe helps give some ranges. It is very different depending on kind of the makeup of the different components of the can. We're seeing differences between those buckets.

Okay. So you said that if your overall cost come down, okay, you may give an extra ounce per can or something like that, you will not reduce pricing. But if some of those costs are going up, and we know that labor is going up, I am not too sure what is happening with freight, but probably nothing terribly positive. Do you need to raise prices some more and therefore, could we see a second bout of volume decline because of that?

So in terms of overall price increases, we believe we're through most of the significant price increases. And so for the rest of this fiscal year, it's about driving the volume now that we have the higher gross margin. So that's kind of the balance that we need to strike going forward for the remainder of the fiscal year. There are some limited price actions, for example, Australia had increased at the beginning of March. So they're still flushing through. There are limited incremental price actions planned in places like Latin America, but it's not overly material in the overall business. And it's about now, like I say, driving back those volumes in store after all of this disruption we faced for the last six months.

Okay. And lastly, if I may, Steve. You have mentioned weak economic environment, weak demand and so on, based on what you see out there, we are already in a recession. And as one CEO mentioned this morning, the economist will mention in October that we are in a recession and by the way, it started in February. Do you think that this is the case?

Well, I think whatever is going on in the economy and if you look back at WD-40 performance. And so last quarter, we put out our 20-year track record constant currency for multi-purpose maintenance products. And if you recall, we showed growth every single year apart from 2020 where we had a small decline. And so I think whatever happens out there in the economy, and we are a global business and different things are happening in different economies at different times. And whatever happens, we tend to stand off better than most, and we are -- we're not recession proof, but we are a very resilient business. And so we expect the kind of forecast we've given for the remainder of the year involved strong growth in the back half. We believe they have the programs in there to drive that volume, and we see better times ahead over the next couple of quarters.

Okay. Thank you very much. Good luck.

Thank you.

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.