Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Second Quarter Fiscal Year 2024 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, Ross Cooling, Communications Manager, Investor Relations and Stakeholder 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, Finance 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 February 29, 2024. 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 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 9, 2024. 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.

Thank you, Ross, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing several strategic actions we've taken to support our 4x4 strategic framework, followed by an overview of our sales results for the second fiscal quarter of 2024. I'll also provide you with an update on our must-win battles and some of our strategic enablers. Sara will provide further details on our second quarter results and update on our business model and our outlook for the remainder of fiscal year '24, and then we will take your questions. Over the last few months, I'm proud of the significant progress we've made on our 4x4 strategic framework. In March, we acquired our Brazilian marketing distributor and longtime business partner, Theron Marketing for approximately $7 million in an all cash transaction. This transaction directly supports our first must-win battle to lead geographic expansion of WD-40 multiuse product. Strategically, this allows us to have a direct market presence in Brazil to drive faster growth versus building up a direct market from the ground up. As you may recall, we successfully shifted from a distributor model to a direct market in Mexico in May 2020, and our revenues in Mexico have virtually tripled since making that shift. Taking Brazil direct through an acquisition presents a similar growth opportunity and we are well positioned to capture that growth. Our prior agreement with Theron Marketing was based on a royalty model and moving to a direct market provides us with an immediate benefit to our top line. We expect the Brazil market to drive revenue growth in excess of $10 million over the next year as a result of transitioning to this new business model. This is a substantial increase over the growth expected under the old royalty based…

Thanks, Steve, and good afternoon. As Steve mentioned, we have had a productive few months and continue to make notable progress against our 4x4 strategic framework. I am proud that our team continues to turn in solid results that continue to align with our long-term 55/30/25 business model. As Steve discussed, we went live with the first phase of our ERP system during the second quarter. To add some additional color, the new system is now in place over a substantial portion of our business including the U.S. business, our Latin America distributor business and our sales in our Asia regional office, which combined make up just under 50% of our revenues. This was a significant first step for the company as we move towards a more streamlined system footprint globally. Given the scale and scope of this implementation, even with those disruptions that Steve mentioned, we ultimately view the implementation as a success with lessons learned. I look forward to taking the learnings from this first implementation and applying those into the next phase of the project. I'll begin today with the discussion about our second quarter results, followed by an update on our full year 2024 guidance before turning it back over to Steve for his final thoughts. Turning to our second quarter gross margin performance. I am particularly proud that we continue to expand margins from prior year and perform within our target range of 50% to 55%. For the second quarter, gross margin improved 160 basis points over prior year to 52.4%. Gross margin benefited 130 basis points from favorable sales mix and other miscellaneous mix. This quarter, we saw a benefit from sales mix in EIMEA, which had a strong top line growth. Lower costs associated with Specialty Chemicals also positively impacted gross margin by…

Thank you, Sara. In closing, we are proud of the progress we've made this quarter, particularly as it relates to our strategic framework and our longer term goals. In summary, what did you hear today from us on this call? You heard that we saw top line growth in all 3 trade blocks for the second consecutive quarter. You heard that we continue to execute non must-win battles, sales of WD-40 Multi-Use Product and WD-40 Specialist were both up 10% year-to-date. Sales of premiumized products were up 13% and digital commerce sales were up 24% year-to-date. You heard that we're incredibly pleased with how gross margin is holding up and our first half performance has positioned us to increase the bottom end of our full year guidance range. You heard that we're also increasing our annual net income and adjusted EPS guidance for the full fiscal year 2024. You heard that we've made notable progress against our 4x4 strategic framework with the announced acquisition of our Brazilian marketing distributor, our decision to pursue a sale of our U.S. and UK home care and cleaning products portfolio and the successful go live with the first phase of our new ERP system. You heard the loss of revenue from the prospective sale of our home care and cleaning products portfolio will be partially offset from the Brazil marketing distributor acquisition in the short-term. Over the longer term, we will fully offset this revenue loss by increasing investments to accelerate growth in our identified high potential markets. And you heard that we've been able to maintain our employee engagement score of around 93%, reflecting our passionate and resilient team, which is a strong competitive advantage for us. Thank you for joining our call today. We'd now be pleased to answer your questions.

[Operator Instructions] We'll take our first question from Daniel Rizzo with Jefferies.

I guess to start with and maybe I missed this, but I was just wondering what if the softness in Canada was just due to timing issues or what specifically was going down there, because I think it was down 24% year-over-year in the quarter?

Hey, Daniel. So, we're in the middle of a hard conversion of our Smart Straw product in Canada. So, what you saw was the withdrawal of the current formats and the moving to Smart Straw. And so that did have a negative impact in the quarter. But looking forward, as we premiumize with quite a hard conversion in the Canadian market, you will see significant revenue growth as a result of that in the back half of the year.

So the hard conversion is over as of now?

It is being completed. It is mostly through and we are executing as we speak. And so in the second half, you should see that uplift from more premium formats within Canada market, yes.

Okay. And then you mentioned the potential sale of the home care products. Have you ever said what they contribute to EBITDA on an annual basis? How much?

We haven't, Daniel, no. But I mean, if you look at it in terms of the revenues, if you take FY '23 revenues from last year, it was about $26 million combined between the U.S. and the UK it represents about 5% of our overall sales revenue. And obviously, those products are sold at slightly lower gross margins. So, we've spoken about those products having a margin of about low-40s, 41%, 42%. And so, you should be able to do that from there.

So with the distributor acquisition in Brazil to kind of, I guess, kind of boost things in terms of growing through distribution. I was wondering if there's other opportunities like that or this is just a one off thing, because you haven't really done too many deals in the past, but I was wondering if that's a new way you're looking at things or this just appeared.

So, we're very transparent about where we believe our biggest top of growth opportunities are around the world with our geographic expansion. We put out our top 20 growth market opportunities. And so, we're very clear where those are. How we execute, I mean, the question we ask ourselves is, how did we grow the quickest in those opportunities. And so the answer to each market is different. As you know, we're heavily invested in China with 60 people in China and that's growing very nicely for us. And so, how we invest to accelerate growth is something that's very much on our mind, particularly as we think now about potentially reinvesting some of the proceeds from the sale to further accelerate growth in those key areas.

And final question, with the amortization cost from the $10 million for the ERP transition, I was wondering if that's, I assume that's going to linger to the back half of the year, but I was wondering if it's going to last until next year? I think I might have asked for this past, but I forget the answer.

The amortization cost in particular, Daniel? This is Sara.

Yes.

Yes. So we did start amortizing. We had about $10 million very specifically to the ERP project that started in Q2, middle of Q2 and we are amortizing that over 10 years. So you will – pretty easy to do the math there. You'll see about $1 million a year, just under $1 million a year with the first phase. And then as we continue to roll-out at new locations, we'll be adding to that bucket and then every time we go live, we'll be able to disclose what those amounts are.

And we'll take our next question from Linda Bolton Weiser with D.A. Davidson.

So, I think, well, you did mention that there was some – a little bit of disruption or something challenges related to the ERP implementation in the U.S. Is there any way to quantify that impact on the quarter?

We are estimating about a top-line volume reduction of about $2.4 million from the disruption for the quarter, and that really all is in the U.S. We had some disruption in Latin America and ARO, but we were able to make that up before the end of the quarter. So that's the estimate that we have for the ERP disruption.

And so is that, like, shipments that just couldn't be made and it'll be kind of be pushed into the next, into the third quarter or is it just kind of lost revenue that won't be regained?

So. at this point, the estimate of the $2.5 million is what we believe is lost revenue and the team is obviously working hard on trying to make that up, but it really was around disruption of related to processing, fulfilling and shipping orders. And ultimately, there was some short stock at some of our customers during a few weeks during the go live.

And then, I was just curious on the Brazilian business. When you mentioned $10 million I think Steve you said a revenue opportunity in the next year. Can you clarify is that like incremental or is that just total versus what it was? And then I mean, some of that is just accounting for removing the distributor margin from the equation. So, I'm just kind of wondering how much of a kind of real step up in revenue that represents. Can you explain that a little bit?

Sure. So, if you look at the basic model that we had is we had a royalty model in Brazil and so that was a $2 million revenue stream and that was, I mean, it's almost when you have a royalty model, it's almost all gross margin minus a few costs, right? So it's a different model. I mean you have to say that Brazil is one of our, in terms of units sold, it's actually even bigger than Mexico was when we took over the Mexico market. And so, we're very confident in our ability to be able to given the experience we've had in Mexico to be able to transform that and realize the incremental value as a direct market. And so in our first year as we said, so in the back half of this year that will be $5 million of increment on top of the $1 million we would have done last year. And then for the first 6 months of next year, we'll have a further $5 million plus then whatever we can put on top. And so in the medium-term, we see a $20 million plus market in Brazil, which is exactly what we achieved in Mexico over a 3.5-year period and opportunities for growth well beyond that in the long-term.

And then, I was just wondering, sorry, switching back for a minute to the Americas. I know it's in your queue, but I was curious if you could give volume and pricing for the whole company and then what it was in the quarter for the Americas?

Sure. Linda, I'll start with the whole company. So volume, just for the quarter was up 2% and impact of price was an impact of 3% for the full year and then currency had an impact of 2%.

Okay. So sorry, that's the pricing of 3% was for the quarter or for the half?

For the quarter. And for the year-to-date, we're right at 3% as well. So, for the halfway through the year, we're at 3% for impact of selling price and then the increase in the sales volume is 4%. Yes, that's based on the growth, a growth of 10%. So that's how the 10% is being. If you look at halfway through the year, we're up 10%. Of the 10%, 3% is related to selling price and 4% is related to volume.

Okay. And I guess so the 3% pricing in the quarter I mean, I just it's a little bit more than I would have thought because your anniversaring I don't know. I guess I just thought it would have kind of flattened out sooner. So I don't know. Is there any way you can give us some color on how we should expect that cadence to go for the pricing line?

Yes. So we do expect that to come down, not run at that rate for the second half of the year. We are continuing to lap price, so we're predominantly through most of the larger price increases now in both the Americas and EIMEA markets. Asia-Pac, we are still lapping some more recent price increases related to Australia. The timing of the inflationary environment in Australia was a little bit later and so there's some price activities that we implemented really the later half of last year and really even into this year in Australia through a couple of different price changes or price increases. So there's still some lapping, but we're through the most we're through the biggest pieces of it.

And then, finally, just on Asia, I guess that was one region that kind of was a little bit lower growth than I thought. And then I noticed you said specialists was down. I know that's small in that region. But is there any particular thing that was going on?

So I think where overall in Asia is, if you look, it's been masked a little bit by currency so constant currency rate, our growth overall, I believe, were up 5% year-to-date. China is up in local currency 12% year-to-date and so we maintained double digit growth in China and all the other regions are up, but perhaps not as high as we thought. So we see a very strong back half against prior year for Asia Pacific. So there's nothing to be worried about. I think by the end of the year, we'll have caught up and well, all 3 trading blocs we see operating within our guidance range. So 5% to 8% for the Americas, 10% to 13% for Asia Pac and 8% to 11% for EIMEA. So, we're very optimistic about the second half of the year.

And then just one final one. I was trying to figure out the math here on your EPS increase for the guidance. And it's the tax rate, I don't think it was more than like $0.05 or $0.10, and yet you raised the midpoint of the range by $0.18. So is it fair to say that the rest of that is operational rooted in the gross margin being better?

Yes Most of the change is as we're just getting we're halfway through the year now. We have more visibility as to how we believe margin will play out for the second half of the year. So that's really the biggest change and the narrowing of the EPS range. There's obviously a little play in there on the income tax line as well, but those are the biggest two drivers for the change in the guidance.

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.