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…

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…

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.