WD-40 Company (WDFC) Q4 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good day and Welcome to the WD-40 Company Fourth 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 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 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-K for the period ending August 31st, 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 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 the earnings documents posted on our Investor Relations website. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. 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 19th, 2023. The company disclaims any duty or obligation to update any forward-looking information 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. It's been a privilege and honor to lead our great company over the last year and even more special as my first year as CEO coincides with our 70th-year anniversary. I've taken time over the last year to meet with our employees across the business and around the world and it was truly a pleasure to have the chance to listen to their personal stories. While it is not surprising to me, it has been exceptional to see and feel the depth of engagement and commitment across the organization, witnessing their inspired energy reinforced my own commitment and responsibility to nurture and build on our unique culture. I want to thank each of them for their dedication to drive superior results and the execution of our strategy. Looking at fiscal year 2023, for us, it was essentially a tale of two halves. Our first half saw disruption resulting from general economic uncertainty, higher costs, the loss of our Russian business, and price increases that were implemented. In the second half of the year, we saw volumes recover and we're also pleased with the recovery we experienced in EMEA, where we delivered double-digit constant currency growth for the last two quarters. Despite a difficult first half and the negative impact of currency of nearly $18 million, we still grew revenue by 4% over prior year. Excluding the impact of currency, revenue grew 7% which is in line with our long-term growth projections. We are encouraged by the improvement in trends we experienced through the second half of the fiscal year as we enter fiscal year 2024. Now turning to our fourth quarter 2023 results, today I'll begin by discussing our sales results, I'll then walk you through our new Four-by-Four strategic framework, including an update on our full-year results and the progress we've made as it relates to our Must-Win Battles. Sara will provide further details on our fourth quarter results, and update on our business model and our outlook for fiscal year 2024 and then we'll take your questions. Turning to our fourth quarter sales results, today I'm happy to share with you that we reported net sales of $140.5 million, up nearly 8% over the fourth quarter of last fiscal year. Translation of our subsidiary's results into the US dollar had a favorable impact on our consolidated net sales in the fourth quarter on a non-GAAP constant currency basis, fourth quarter sales would have been $139.2 million, up 7% compared to the fourth quarter of last year. Now let's take a closer look at the fourth quarter sales results in our trade blocks, starting with the Americas. Sales in the Americas, which includes the United States, Latin America, and Canada were up 10% in the fourth quarter to $74.7 million. Maintenance product sales in the United States increased 18% driven by double-digit growth of both WD-40 Multi-Use Product and WD-40 Specialist. We're seeing solid improvements in volume now that we've lapped the impact of the price increases that we put into place last fiscal year. In the fourth quarter, we experienced double-digit volume and sales increases in the US. As a reminder, the US was the first region to implement price increases and therefore have been the first region to recover from the related disruptions. Maintenance product sales in Latin America were down 12% against a strong comparative period in the prior year. As you may recall, the fourth quarter of last fiscal year was the strongest sales quarter in the region's history where sales grew 80% largely as a result of many of our marketing distributor customers purchasing product in advance of price increases that went into effect near that time. Sales in maintenance products in Canada decreased slightly down 3% period over period as the favorable impact of sales price increases was completely offset by lower sales volumes due to weaker economic conditions in the region. We continue to experience positive momentum in our direct market in Mexico from the shift we made in 2020 from a distributor model. Maintenance product sales in our direct market in Mexico decreased 19% in the fourth quarter as we continue to add new points of distribution, making our maintenance products available in more places for more people who find more uses more frequently. Sales of our homecare and cleaning products in the Americas were down 4% in the fourth quarter compared to the fourth quarter of last year. We consider our homecare and cleaning products as harvest brands that continue to generate consistent contributions in cash flows, but are generally expected to become a smaller part of the business over time. We shared with investors last quarter that we are currently exploring options to further de-emphasize our homecare and cleaning brands. We are currently conducting a global strategic review about the future of our homecare and cleaning brands. The result of this strategic review could mean many things, but no decision has yet been made. We look forward to providing an update in the future. In total, our Americas segment made up 53% of our global business in the fourth quarter. Now let's take a look at our sales results in EMEA, which includes, Europe, India, the Middle East, and Africa. I'm happy to share with you that the recovery will begin to experience in EMEA last quarter, continued into the fourth quarter. Sales in EMEA were up 16% to $50.7 million. We saw strong sales in the UK, Italy, and Benelux, which have all turned in their best quarters performance for the year. Currency fluctuations positively impacted our sales in EMEA on a constant currency basis, sales would have increased 13% compared to the fourth quarter of last year, marking the second consecutive quarter of double-digit sales growth in constant currency. As you know, we sell into EMEA through a combination of direct operations, as well as through marketing distributors. Sales in our EMEA direct markets which accounted for 73% of the region's sales in the fourth quarter increased by 19% compared to last year. Maintenance product sales in the EMEA direct markets increased in the fourth quarter, driven primarily by double-digit growth of both WD-40 Multi-Use Product and WD-40 Specialist in the United Kingdom, Italy, and Spain, mainly duty impact of price increases, which is partially offset by slightly lower demand, which resulted in decreased sales volume. The increase in sales was also driven by the timing of promotional programs, particularly in the wholesale and trade channels. Sales in our EMEA distributor markets which accounted for 27% of the region's sales in the fourth quarter increased by 9% compared to last year. This increase in sales was primarily driven by higher sales of maintenance products in many distributor markets. In total, our EMEA segment made up 36% of our global business in the fourth quarter. And on to Asia-Pacific, sales in Asia-Pacific, which includes Australia, China, and other countries in the Asia region were down 20% in the fourth quarter to $50 million. In Australia, sales were down 1% in the fourth quarter primarily due to the impact of foreign currency exchange rates. On a constant currency basis, sales for Australia would have increased by 5% compared to last year, primarily due to higher sales of the homecare and cleaning products as a result of successful promotional programs. In our Asia-Pacific distributor markets, sales were down 38% in the fourth quarter against a tough prior-year comparison. As you may recall from last year, severe lockdown restrictions from earlier in the year were lifted and we resumed shipping products to the area, resulting in strong sales during the fourth quarter. In China, sales were down 4% in the fourth quarter primarily due to the impact of foreign currency exchange rates. On a constant currency basis, sales for China would have increased by 2%. In total, our Asia-Pacific segment made up 11% of our global business in the fourth quarter. Now, let's talk about our long-term growth aspirations. At WD-40 Company we're privileged to have one of the world's best-known and most iconic brands. We have a strong competitive moat that allows us to capture the tremendous runway of opportunity before us. As we enter fiscal year 2024, I'm proud to introduce you to our new Four-by-Four strategic framework, which is tied to our purpose and values and will guide our future performance. Our Four-by-Four strategic framework was developed to drive profitable growth for sustainable value creation. There are two main elements of our strategic framework. The first element, which we refer to as our Must-Win Battles, focuses on what we do to increase sales of our maintenance products. This is an area of focus we discussed with investors for several years. Our Must-Win battles include growing WD-40 Multi-Use product sales, through geographic expansion, growing sales and gross margin through the premiumization of WD-40 Multi-Use product, growing WD-40 Specialist product line through category leadership and accelerating our capabilities in building our brand digitally and maximizing our global digital commerce presence. Today, we're also introducing the second element of our strategic framework, which we refer to as our strategic enablers. These four strategic enablers focus on operational excellence and support how we will achieve our Must-Win Battles and include ensuring a people-first mindset where we can attract, develop, and engage outstanding employees, building a sustainable business for the future, achieving operational excellence and supply chain and driving productivity by our enhanced systems. These are the primary areas that make up our Four-By-Four strategic framework and where we will continue to focus our time, talent, and treasure to be successful in achieving our long-term financial and operational goals. Let's reflect on the progress we've made against our Must-Win Battles for fiscal year 2023. Starting with Must-Win Battle number one, lead geographic expansion, our largest growth opportunity and first Must-Win Battle is a geographic expansion of the blue and yellow can with a little red top. We estimate the potential global growth opportunity for WD-40 Multi-Use Product to be approximately $1 billion and we are laser-focused on delivering long-term growth in our top 20 growth markets around the world. In fiscal year 2023, global sales of WD-40 Multi-Use Product grew 2% over prior year. So this growth is not in line with our long-term expectations. We ended the year strong and expect to see growth return to historic levels. For the year, we made good progress in several key markets on this Must-Win Battle with strong sales growth of 14% in the UK, 14% in Mexico, 10% in China, and 17% in the US. Next is Must-Win Battle number two, accelerating premiumization. Our Smart Straw delivery system has been our most successful innovation in the company's 70-year history and is loved by end users around the world. Our EZ-Reach delivery system provides our end users with even more options to solve problems in factories, workshops and homes. For us, premiumization is a major contributor to our revenue growth, as well as gross margin expansion and also delights our end users. Over the last five years, we've achieved a compound annual growth rate for net sales of premiumized products of 7.3% in reported currency and 8.2% on a constant currency basis. We are on track to fully implement the WD-40 Smart Straw Next Generation capacity within the Americas and EMEA in the first quarter of fiscal year 2024, which we expect to accelerate the sales of WD-40 Multi-Use premiumized products. On a go-forward basis, we will be targeting a compound annual growth rate for net sales of premiumized products of greater than 10% in reported currency. Our third Must-Win Battle is to drive WD-40 Specialist growth. However, we see this as much more than an incremental revenue opportunity. Driving WD-40 Specialist growth focuses on achieving category leadership by leveraging our core brand equity and taking advantage of our strong moat. It's about taking competitors off the shelf, and increasing our market share. I'm happy to report that our efforts to drive brand awareness, maximize store placement, and increase shelf space are paying off. For fiscal year 2023, sales of WD-40 Specialist products were just under $67 million, up 11%. We saw growth in WD-40 Specialist products across all three trade blocks with growth of 18% in the Americas, 7% in EMEA, and 3% in Asia-Pacific. Over the last five years, we've achieved a compound annual growth rate for net sales of WD-40 Specialist of 14.4% in reported currency and 15.4% on a constant currency basis. On a go-forward basis, we'll be targeting a compound annual growth rate for net sales of WD-40 Specialist of greater than 15% in reported currency. Our final Must-Win Battle number four is to turbocharge digital commerce. Our ambition here is to engage with end users at scale and become the global leader in our category within the digital commerce platform. Must-Win Battle number four is about much more than selling products online, we view it as the accelerator for all other Must-Win Battles. Digital commerce is about brand building, it drives awareness of our brands by leveraging digital media to teach end users how to use our solutions in addition to driving online sales. For fiscal year 2023, e-commerce sales were up over 35% for the year, largely due to strong growth in the Americas. We believe the greatest benefit of this Must-Win Battle is to increase brand awareness and engagement online, which will lead to an improved shopping experience and higher sales across all channels, both in-store and online. As part of our digital commerce strategy in 2023, we launched our first global online marketing campaign, Repair, Don't Replace. This campaign further expands our opportunity to inspire millions of doers, makers, fixers, and builders to use our solutions, not only to extend the lifespan of their tools or equipment, but also support global efforts to reduce waste resources and leave a positive handprint for future generations. And now turning to the second element of our strategic framework, our four strategic enablers which collectively underpin our Must-Win Battles. We view these as the how we will achieve our drivers for success. Starting with strategic enabler number one, ensuring a people-first mindset, at WD-40 Company, we know our people make us great. You will not find the greatest asset, we have on our balance sheet because it's comprised of our 613 employees. We strive to be an employer of choice where all employees can bring their best and genuine selves to work. We are committed to fostering a culture of belonging recognition rewards and resiliency while attracting, developing, and engaging talent, which will drive our sustainable forward momentum. We will measure ourselves against this enabler via three quantitative metrics, Employee Engagement, our Better Together scores, and our Employee Retention Rates. Next is strategic enabler number two, building a business for the future. Simply put, we are committed to operating our business in a manner that will have a positive, environmental and societal impact and one that will continue to create and protect the long-term stakeholder value. We've shared with you in the past that we are philosophically aligned with the vision to reach net zero greenhouse gas emissions by 2050. The term sustainability is increasingly perceived as a climate-related matter but we see it as more than that. We define sustainability as the ability of the business to exist for a long period of time, perhaps indefinitely. A sustainable enterprise should ensure a balance between economic growth, environmental care, and social well-being. We believe that taking an integrated approach to environmental, social, and governance issues enhances the long-term sustainability and resilience of our business and protects the long-term interests of our stakeholders. We're in the process of setting further targets to reduce greenhouse gas emissions, which we will share in our 2024 ESG report. Strategic enabler number three is achieving operational excellence in the supply chain. Operational excellence has always been an important part of our strategy at WD-40 Company. Our supply chain was tested during the pandemic and we learned a lot. The advances made by our employees to production capacity and product availability not only helped to recover our supply chain, but also uncovered a myriad of ways to make it better than it is today. This strategic enabler is meant to continue that quest for operational excellence. We believe that a resilient and high-performing supply chain enabled by people, capacity, and capabilities will secure the long-term success of our company. Our goal under this enabler is to achieve on-time delivery of greater than 95% and manage our inventory on hand to less than 90 days. Finally, strategic enabler number four, driving productivity via our enhanced systems. We will identify and implement productivity solutions by using secure technologies to improve processes, provide effective access to critical analytics, and deliver the highest value investments through effective project and program management. This will drive profitability improvements to enhance productivity, controlled IT spending, increased employee satisfaction, as well as access to timely and accurate data that drives better decision-making. The first project identified under this strategic enabler is our new cloud-based enterprise resource planning system, which the company is in the process of implementing and Sara will discuss with you in a moment. To summarize our Four-by-Four Strategic Framework is designed to help us deliver on our long-term revenue compound annual growth rate for maintenance products in the mid-to-high single-digits on a non-GAAP constant currency basis. This is supported by the growth outlook for each trade block where we anticipate the Americas to grow between 5% to 8%, EMEA to grow 8% to 11% and Asia-Pacific to grow 10% to 13%. In addition, our Four-by-Four Strategic Framework will drive EBITDA margin expansion as we improve our gross margins and invest across the business, to gain efficiencies and productivity improvements. With that, I will now turn it over to Sara.

Thank you, Steve, and thank you for that overview of our sales results. As I approach my one-year anniversary as CFO for WD-40 Company, I reflect on the strong bench of leaders across this organization that have supported me in my transition as well as all our global employees that I've had the pleasure of working with for the past two years. This past year has been a year of transition, not just for me but for the Company, and as Steve noted fiscal year 2023 has been somewhat a tale of two halves where the first half was met with volatility and uncertainty especially as we've worked through implementing price changes across markets, currency fluctuations and the cycle the exit of our Russia business. However, we started to see signs of recovery in demand and volumes in the second half of fiscal year 2023 giving us conviction as we head into fiscal year 2024. We turned in a strong performance in the fourth quarter resulting in a solid fiscal year 2023. I'm happy to report that we grew our top line for the year despite the headwinds we faced due to currency. Furthermore, each of our financial results performed within the targeted guidance ranges that we provided mid-year, even as we continue to invest across the business. Now, let me walk you through our fourth quarter results and provide an update on our capital deployment. I will close by providing an updated view on our 55-30-25 business model and providing fiscal year 2024 guidance. Turning first to our fourth quarter gross margin performance. Once again, we experienced strong gross margin growth over the prior year fourth quarter. Our fourth quarter gross margin of 51.4% performed within the expected range we communicated. This margin performance reflects a 400 basis point improvement compared to the prior year fourth quarter and a sequential improvement of 80 basis points compared to the third quarter of this fiscal year. A 400 basis point improvement from prior year fourth quarter was driven by continued actions we've taken throughout the course of the year, including price increases across all our markets and geographies, which positively impacted gross margin by 460 basis points. These positive impacts were partially offset by changes in major input costs. Higher costs associated with specialty chemical costs and aerosol cans when combined negatively impacted our margin by 90 basis points. Finally, we recognized marginal benefit from lower costs associated with warehousing, distribution, freight, and other miscellaneous input costs, which were offset by higher filling fees. Now, let's take a deeper dive into margin for the fourth quarter by trade block as we continue to focus on our margin improvement plans. Each trading block is at a different stage in recovery in our gross margins and I'm happy to see improvements in all three trading blocks this quarter over the prior year fourth quarter. Within the Americas, gross margin was 49%, an improvement of 110 basis points. EMEA's gross margin was 53.6%, an improvement of 860 basis points. Finally, Asia-Pac's gross margin was 55.7%, an improvement of 460 basis points. We are incredibly pleased with the improvements we have made to gross margin over our fiscal year 2023. Recovering our margin continues to be a priority for us, but we continue to believe returning our gross margin to our 55% target will be a multi-year task. Turning to our cost of doing business, which we define as total operating expenses, excluding depreciation and amortization, and measure as a percentage of net sales. At WD-40 Company, cost of doing business is primarily comprised of three areas, investments in our employees, investments in building our brand, and freight expense to get our products to our customers. For the fourth quarter, our cost of doing business was 34% which increased from 31% in the comparable quarter of last year. This increase was largely due to higher employee-related expenses associated with our earned incentive compensation, increased professional service fees, and higher travel and meeting expenses as we continue to get back to our normal travel schedules in a post-pandemic world. We also continue to incur higher costs associated with implementation and licensing of our new cloud-based enterprise resource planning software system. Net sales growth is the most important factor in managing our cost of business towards our long-term target of 30%. We are making deliberate investments in the business to support growth, but we expect to see improvements in the cost of doing business over time as net sales growth. Turning now to EBITDA. For the fourth quarter, EBITDA margin, which we measure as a percentage of net sales was 18%, which improved from 16% in the comparable quarter of the previous year. This is the result of the improvement in net sales as volumes recovered in the back half of the fiscal year and stronger gross margin performance, partially offset by an increase in our cost of doing business as I previously noted. Before fiscal year 2022, we consistently delivered EBITDA margins of between 20% and 22%. However, EBITDA margins continue to be under pressure due to the current inflationary environment and the intentional investments we have made to support our new Four-by-Four Strategic Framework. These investments are important growth accelerators for our future. Getting EBITDA above 20% remains a priority as we are laser-focused on improving sales volumes, rebuilding gross margins, and disciplined cost management. Once we are consistently back at our historic 20% to 22% level, then we will look to leverage scale and returns on our investments across the business as we target 25% EBITDA margins over the longer term. Now, let me discuss some items that fall below the EBITDA line. Net income improved to $16.6 million in the fourth quarter, which was an increase of 12% over the previous year's fourth quarter. On a constant currency basis, net income would have improved 10% compared to the fourth quarter last year. Our net income reflects the rate of 25.4% for the provision of income taxes. Diluted earnings per common share for the quarter were $1.21 compared to $1.8 for the fourth quarter last year, which reflects an increase of 12%. Our diluted EPS reflects 13.6 million weighted average shares outstanding. Now let's look at our balance sheet and capital allocation strategy. Our resilient and asset-light business model, coupled with actions we have taken to grow our topline while improving gross margin are all contributors to maintaining a strong balance sheet and liquidity position. Maintaining a disciplined and balanced capital allocation approach is a priority for us. We will make the necessary near-term investments to drive long-term profitable growth while also providing strong returns to our shareholders. This year we saw liquidity from operations improve, as we made considerable progress in lowering our inventory levels, which we had invested in to stabilize our US supply chain in prior years. Our inventory levels peaked in the first quarter of fiscal year 2023 and since then, we have reduced inventory by $32.5 million or 27%. We will continue to make progress on our inventory levels in conjunction with our strategic enabler number three that Steve shared with you earlier. Our cash flow from operations in fiscal year 2023 was $98.4 million and we elected to use $28.4 million of that cash to pay down a portion of our short-term higher interest rate borrowings. During the fiscal year, we invested $6.6 million in capital projects, which is in line with our asset-light strategy of investing between 1% and 2% of sales. In addition to investments made in capital projects, since fiscal year 2021, we have been investing in a new cloud-based enterprise resource planning system, which is expected to go live in the first half of fiscal year 2024. Our investments to date include approximately $9 million in costs, which have been capitalized and will begin to amortize once we go live with the new system. As part of this project, we have incurred and will continue to incur costs that need not qualify for capitalization. We expect to incur these costs through the first and second wave of implementation over the upcoming year. This is a significant project for the company that is necessary as we continue to grow and support our business. For the foreseeable future, we expect maintenance CapEx of between 1% and 2% of net sales per fiscal year, which is in line with our asset-light strategy. In addition, we continue to return capital to our shareholders through regular dividends and buybacks. On October 6th, our Board of Directors declared a quarterly cash dividend of $0.83 per share payable on October 31st to stockholders of record at the close of business on October 20th. During the fourth quarter, we repurchased approximately 14,000 shares of our stock at a total cost of approximately $3 million under our current share repurchase plan. This concludes my discussion on our reported results. Before I share fiscal year 2024 guidance with you, I would like to discuss an updated view on our 55-30-25 business model. As Steve shared earlier today, we introduced our new Four-by-Four Strategic Framework which is designed to help us achieve our expected long-term revenue and profitability objectives. We see significant opportunities for sustainable growth which over time will align with our 55-30-25 business model objectives. Steve and I think about our 55-30-25 business model as a long-term beacon that we will move toward and align with over time. In the short to mid-term, we think about each critical component of the model in a range. Near term, we're targeting a range of 50% to 55% for gross margin, 30% to 35% for cost of doing business and 20% to 25% for EBITDA. We believe these ranges represent a more realistic short-term view of the business in the current economic environment and they will also allow us to make the necessary investments to support our new Four-by-Four Strategic Framework. Strategic investments we made this year around ESG, information technology, innovation, and organizational design. These investments were significant year-over-year, but are not anticipated to grow at the same level going forward now that we have the right people in the right roles to drive our strategy forward. We believe these investments were necessary to jumpstart our Four-by-Four Strategy. As we move forward, we will use the myriad of strategic levers at our disposal to move each component in the correct direction over time. Ultimately, we are focused on long-term value creation. We know that when we consistently grow our top line, manage our 55-30-25 business model for EBITDA growth and leverage our asset-light model, we can continue to drive an ROIC of greater than 25%. That will generate continued strong and stable free cash flow, which we will continue to optimize for our best return on investments and to our stockholders. Looking more closely at our outlook for fiscal year 2024. Net sales growth is projected to be between 6% and 12% with net sales between $570 million and $600 million in constant currency. We also expect gross margin to be between 51% and 53%. Advertising and promotion investment is projected to be between 5% and 6% of net sales. The provision for income tax is expected to be between 24% and 25%. Net income is expected to be between $65 million and $70 million and diluted earnings per share is expected to be between $4.78 and $5.15 which is based on an estimated 13.6 million weighted average shares outstanding. Also as a reminder this guidance assumes no major changes to the current economic environment, unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2024. That completes the financial overview. Now, I would like to turn it back to Steve.

Thank you, Sara. If we've learned anything over the last 70 years is that WD-40 Company is a resilient business. I'm proud of what we've accomplished over the last year. Once again, I want to thank our employees as they are our most powerful assets and continue to be the real magic formula that drives our company forward. In summary, what did you hear from us on this call. You heard that despite a difficult first half and the negative impact from currency of nearly $18 million we grew revenue by 4% over prior year; excluding the impact of currency, revenue grew 7% which is in line with our long-term revenue growth target. You heard that we saw improvements in volumes and sales in the second half of fiscal year 2023 and are encouraged by these trends as we enter fiscal year 2024. You heard that we've introduced our new 4/4 strategic framework, which is tied to our purpose and values and will guide our future performance, investments, and drive long-term value creation. You heard that we're making investments across our organization and our people, products, processes, productivity, and planet and that we will continue to make the necessary investments to capture the tremendous runway for revenue growth and margin expansion in front of us. You heard that we saw liquidity from operations return as we made considerable progress in lowering our inventory levels over the fiscal year. You heard that our asset-light model provides a cash flow for us to invest in the business, whilst also providing returns to our stockholders. You heard that we consider our 55-30-25 business model, a long-term beacon that we will move toward and align with over time, but that our short-to-medium-term focus is on driving EBITDA margins back above 20%. And you heard that we issued guidance for fiscal year 2024 and that we expect revenue growth of 6% to 12% on a constant currency basis, which equates to net sales of $570 million to $600 million. Thank you for joining our call today, we'd now be pleased to answer your questions.

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

Hi, guys. Thank you for taking my questions. If we look out into 2024 with what you're expecting, are you assuming input and filling costs decrease or kind of flatten out from here, just given kind of the different dynamics within the environment?

Hi Daniel, this is Sara. So, from an input cost standpoint when we're looking at the guidance that we put out there, we're not seeing a significant pullback in input costs or the filling fees. So they are -- the filling fees are slightly up over prior year and I think that trend, you know, is not substantial, but we are -- we are forecasting those to be a little higher going into next fiscal year than what we're sitting at right now.

Okay. And then I think you mentioned the 55-30-25 framework, that's not changed, right. I mean, I'm just misremembering I think, but I think that's kind of what you guys were always kind of pushing towards, correct?

The 55-30-25 framework is not changed and it continues to be our longer-term beacon as to what we're striving for long-term.

Okay. And then just in terms of revenue, I think for -- geographic expansion, you said I think a $1 billion in sales opportunity. I think that's, I assume, the addressable market. But that's or maybe I misremembered the number, but that's like double what your -- roughly double what your sales are now. I was just wondering how you're going to attack that, I mean, how viable that is kind of.

Yeah, thanks Daniel, this is Steve. And so the $1 billion growth opportunities are long-term growth aspiration based upon our internal benchmark in terms of what's possible. So it's not a number we're going to put out there in terms of achieving within three or five years, it's a long-term growth opportunity, it's based on benchmarked opportunity for all countries we're operating at a similar level to the US. So, it is aspirational, but what it does do is give us a prioritized list of geographies for us to target and where to invest in.

Okay. And final question, you mentioned getting inventories on hand, I think below -- I think the goal is below 90 days. I was just wondering where we are now and where we were historically speaking.

So, we currently are a little over -- just shy of four months actually globally. So, the trading block, it does differ by trading block. When you look at -- between the Americas, EMEA, and Asia-Pacific, the place that we've had the biggest headwinds from our inventory levels has been in the Americas and we are still just -- just shy of about six months of inventory there. So, that's really where our opportunity is to continue to pull back our inventory levels and get that below -- get that closer to our three-month target.

Okay. Thank you very much.

Thank you, Daniel.

Our next question comes from Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Yes, hi. Thank you. So, sorry if I missed this, but did you say what the volume and price change was respectively in the quarter for sales?

Hi, Linda. This is Sara, so I can go through that. So in our deck, you will see it at the consolidated level. So from a fourth-quarter perspective, the impact of price had an 8% impact globally and the volume was slightly down just about 1%.

Okay, great. And then I'm just curious a little bit about the sales guidance for the next fiscal year. It's a pretty wide range. You know, I'm just wondering what represents the situation at the low and the high ends of the range. Like, what are the variables there that are making that range be that wide?

Thank you, Linda. So, you know, we're still facing as we recover our volumes. So you've seen we're just tracing back the US being the first market to execute the price increases. We saw, you know, the same kind of six months, this is back in May of the prior year, we saw six months of disruption then we saw a recovery and now we're seeing double-digit volume growth in the US market. In terms of our POS sales for the fourth quarter, we were up 13% in units and up 19% in dollars in the US market. So we take a great deal of encouragement from the US market, which went first with the price increases and a strong volume recovery, we've now got into double digits. So, the next biggest piece of our business to recover is EMEA, you saw some recovery in the second half in terms of volumes, but we now expect those in FY'24 to become positive, maybe not out of the gate, but over time they will build and we're already seeing patches in our September results from the new fiscal year where we have pockets of really outstanding volume recovery in Europe as well. So, we, you know, as expected the guidance range is really, you know, between the low end and the high end, Europe is quite a factor in terms of how strongly Europe can recover, the other region being Latin America, we expect a strong recovery in Latin America as well in volumes.

Okay. And then I think, well, let's see, Sara talked about these different factors that increased your SG&A expense, the different investment areas in FY'23 and I think Sara, you said that it would be less growth of SG&A. Maybe you could just clarify, do you mean like in dollar growth, the SG&A will grow less as a percentage growth rate or is the ratio expected to come down or be flat or, I mean, can you just give a little more color on the quantification of that?

Sure. Linda. So yes, we have been investing in those areas that I mentioned and a lot of the investment outside of the IT investments relate to people, right, when we look at ESG and we look at innovation, a lot of those investments over FY'23 were we're hiring, we have a ESG team that's now fully dedicated to looking at sustainable products, looking at different ways for us to ship our products holistically, so there is investments that began in FY'22 and now we're going to have a full year essentially of a lot of those individuals from an SG&A perspective. So my comment on it not continuing at the same pace is really around once we get through this fiscal year and I don't expect the percentage increase of our SG&A to be at the same pace that we've seen in the last two years, if that makes sense.

Okay. And I was just wondering about your -- well, I mean, Sara you usually have some quantification of like maybe the FX effect on the topline growth, do you have a rough projection for that for FY'24?

So for FY'24, we are using the average rate that we had in FY'23 and so right now it's apples-to-apples. When we start to get out into the Q1, Q2, and we have currency that starts to impact the comparable period. This year we are going to guide our revenue guidance is going to stick with our constant currency guidance. So, we'll probably -- starting in Q1, we will give both actuals and then a constant currency. So that number right now is apples-to-apples, on an average FX rate and then going into the year, we will be updating that and guiding to a constant currency revenue number.

So, you mean you're 6% to 12% growth that's in constant currency?

Yes, yes.

Okay. Okay. And maybe also you -- do you have an oil price assumption that is kind of built-in for FY'24?

We do. And as you are aware, oil has been bouncing all over the place the last month or so, but we have an estimate in the plan of between $80 and $100.

Okay. And I guess this is more of a longer-term question, a big picture question, it seems like for all the years, I've been following you that the cost of doing business ratio has always been the struggle for you guys. I mean, your gross margin has progressed upward and you had sales growth and everything else, but it seems to be stubbornly high and you do need to invest, there's all these areas that you need investment to continue to grow. So, you know, that's understandable. But I just kind of wonder is it as a small company with relatively small size that you're just -- it's more of a struggle to gain scale economies or, you know, I just -- I guess I'm wondering like, you know, where is beef, so to speak, in terms of that ratio ever coming down, do you have thoughts on that?

So I think the -- I mean, Sara, you can add to this, but from my point of view, it's all about, you know, we are laser-focused on these Must-Win Battles like never before and I think, you know, we put out our historic rates in terms of what we've achieved, we put out our forward rates by each of the battles in terms of what we want to achieve with the big ones being geographic expansion, premiumization of WD 40 Specialist. And so it's really about accelerating revenue growth to gain scale, you know, having a higher sales base to leverage the cost base over. So if you take things like our ESG investments, that's a team of three people, you know, in five years' time that team will still be a team of three people, but we had to put it in place for various reasons. So, you know, I think going forward, it's about, you know, driving faster revenue growth via laser-focused execution on those battles and just accelerating the pace at which we execute our strategy.

Okay, sounds good. Thank you very much.

Thanks, Linda.

Thank you.

Our next question comes from Rosemarie Morbelli with Gabelli Funds. Please proceed with your question.

Thank you. Good afternoon, everyone.

Hey, Rosemarie.

Hi. I think that you and Sara, Steve kind of talked about what you are expecting for 2024, but I was wondering if you could give us a little more details, you are expecting topline growth of 6% to 12%, you are expecting a higher gross margin, advertising and sales seems to be similar to what you have been experiencing on a percentage of sales. So but we are looking at the low end and potentially lower EPS year-over-year. So I understand that you are spending more on that operating -- cost of operation, but what should -- will go wrong for you to have actually a down year, that is a part that I'm struggling with, why $4.78, why not a flat year? What -- what is the main factors that would create that?

So there are a couple of things happening below the operating line. So, we've talked already about the increase in SG&A costs. So, yes, there is less leverage being dropped to the bottom line this year versus prior year but below the operations line, when we do go live in our new ERP system, we are going to have additional non-cash amortization expenses hitting. So that is going to be increasing and then in addition, our tax rate is going up, so it is going up 200 basis points as a result of increased statutory rates in the UK. So, essentially increased foreign taxes, year-over-year with statutory rate increases along with increased interest rates on our uncertain tax positions in the US. So, the impact on our tax line is not inconsequential. And obviously, that's having a pretty decent impact on our EPS number.

And if I can just add in terms of the kind of the drivers of the business in terms of revenue, so this volume recovery, particularly in Europe, right? So, for the fiscal year, $37 million of volume loss this year. You know, the big question is, how much of that can we recover? We think we're likely to recover somewhere between 50% and 80% for the year of that, but that's dependent largely upon Europe and Latin America recovering. And then on the gross margin as Europe becomes a bigger part of our business, there is -- there are mixed benefits, right, our -- our gross margin in many of our continental European businesses in particular, which suffered last year is very, very strong. And so, as we do more business in Europe and Asia-Pacific that country mix on gross margin is positive and then also just simply, you know, from a gross margin point of view, selling more products, more of our highest gross margin product. So, Smart Straw, EZ-Reach, premium formats, WD-40 Specialist and selling less of our lowest gross margin products, household products, is a big driver of our gross margin going forward as well.

So, there is -- I am still confused about one thing. Wouldn't the cost of the ERP system that will now be expensed instead of capitalized, wouldn't that be part of the SG&A? Why is it below the line, I am confused about that?

So I look at – so when I say below the line, I meant below our EBITDA margin, but yes, amortization is sitting up in SG&A, so apologies for that comment.

No, it's okay. Listen, I should use all of the different lines. Okay. Then you are working on supply chains -- supply chain changes, what do you think you need to improve there? I mean, everyone was hit with an increasing, you know, inventory level after the pandemic and difficulties in getting raw materials. Then it was de-stocking. So what do you think needs to be changed for you to do better should these circumstances, which I hope is not the case but, come back?

So we've spent tremendous amount of time, the last year and a half stabilizing our supply chain particularly in the US and we are actually pretty much done at this point with expanding our filler network in the US. We've also expanded our filler network in Europe. We also have expanded our suppliers. So we have multiple suppliers now for our cans and have continued to expand our supplier base as well. So we're feeling very good about where we're at from a supply chain standpoint. So from here, it's really about optimizing and volume solves a lot of those problems, right? As we start to have volume continues to come back, we're able to push more volume across the broader filler base and when we can push more volume into our filler network, we get better unit pricing, we're able to turn inventory quicker, so there's a lot of things that we're looking at from an optimization standpoint. But at this point, we don't see any full-scale changes to our supplier network. We're always looking at kind of what's the next, you know, longer-term change for us, but in the near term, we feel very good about where we're at with our -- with our overall network on the supply chain side. Steve anything to add?

No, I think that's it's. I think it's about optimizing the next stage, particularly within the Americas, right. So when you look at our gross margin by trading block, you know, you can see that. So the Americas having re-established their supply chain, there are optimization opportunities there. You look at our gross margin within the Asia-Pacific region, we're already back up at 55, Europe is heading that way in terms of 52, 53, it's really the Americas where we need to extract those optimizations now.

Isn't the reason for the lower margin -- the lower gross margin in the Americas well, no, I guess I am wrong, I was going to ask if it is because you have your headquarters here, but I guess that would affect the SG&A, it should not affect the gross margin, correct?

No, our US gross margins are pretty healthy. It's really been about Latin America gross margins and getting those back on track.

Okay. And if I -- Thank you. And if I may ask one last question, any potential acquisitions you are looking at of new product line which would fit with your existing product lines?

So we spoke in terms of, you know, kind of M&A, in terms of last quarter we spoke about, you know, about the strategic review of the household brands that's ongoing. We have had no further kind of decisions being made there, so watch this space for more information in future quarters. In terms of, you know, acquisitions, I mean, we say that we are in the business of acquiring new points of distribution, new users every day and that's where our focus needs to be going forward. Having said that, there may be ways for us in future to accelerate the growth, particularly in geographic expansion by, you know, different ways of partnering or making moves that would accelerate geographic expansion. So that would be where if anywhere, we might do something in the future, but nothing in the plans to report as of this quarter.

Thank you very much. I really appreciate all the help. Good luck next quarter.

Thank you, Rosemarie. 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.