Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Third Quarter Fiscal Year 2024 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] I would now like to turn the presentation over to the host for today's call, Wendy Kelley, Vice President, Stakeholder and Investor Engagement. Please proceed.

Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-40 Company's President and Chief Executive Officer, Steve Brass; and Vice President and Chief Financial Officer, Sara Hyzer. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending May 31, 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 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, July 10, 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, Wendy, and thanks to all of you for joining us this afternoon. Today, I'll provide you with an overview of our sales results for the third fiscal quarter of 2024, an update on our Must-Win Battles, and progress we've made on certain strategic enablers. After that, Sara will provide you a brief update on the divestiture of our home care and cleaning business, an update on our business model, and an outlook for the remainder of fiscal year 2024. We'll then take your questions. I'm happy to share with you that for the third consecutive quarter, we saw sales growth across all three of our trade blocks. Today, we reported net sales of $155 million, an increase of over 9% and a new record quarter for the company. Excluding the favorable impact of currency revenue, grew 8%. In addition, sales of maintenance products grew over 10% for both the third quarter and year-to-date, which is in line with our long-term growth targets. We remain encouraged that the improvement in trends we experienced in the first half of fiscal year 2024 have carried into the third quarter. Sales volumes continue to improve and in the third quarter nearly all our sales growth was driven by volume, with currency and price impacts nearly canceling one another out. In addition, we're pleased to report that gross margin continues to improve and is moving closer to our long-term target of 55%. In the third quarter, we reported gross margin of 53.1%, which is an improvement of 70 basis points sequentially and 250 basis points compared to the third quarter of last fiscal year. Driving improvements to gross margin enables us to invest in critical areas of our business like our 4x4 strategic framework, which will help us to continue to drive faster…

Thanks, Steve. I have several updates for you today, including some additional thoughts around the sale of the home care and cleaning business. But before I begin, I would like to provide an update on our ERP implementation, which has been a significant investment under our strategic enabler number four, which is to drive productivity via enhanced systems. In the second quarter, we went live with the first phase of our ERP system, which is now in place over a substantial portion of our business, including the U.S., Latin America, and Asia regional distributor businesses. Each month that goes by, we experience fewer and fewer issues, and although we did experience some minor disruptions in the third quarter, I am pleased to share that most of the critical issues have subsided by the end of the quarter. We are currently phasing some of our functional teams out of hypercare, which is an indication of the stability of the system. This is a very positive sign and a significant milestone for our ERP team. We know there is still work to do and have several enhancements that are already being worked on, which is not unexpected at this phase of the project. Most importantly, we have gained numerous learning moments from this implementation, allowing us to make process improvements and become more proactive. I want to acknowledge and thank our employees for their ongoing diligence in managing through this implementation. Our strategic enabler, number four is much more than an ERP system. We are making foundational investments in systems and data that will allow us to grow faster. For example, we have rolled out Salesforce in the U.S. and will be expanding that further in the near term, driving sales efficiencies and effectiveness and helping us reduce operating costs. We also…

Thank you Sara for that update. I'm pleased with both the top-line and the bottom-line results we've experienced this quarter. While I'm always happy to see a strong quarter, what's more important is long-term trends. As a reminder, our long-term growth target is to increase maintenance product sales within the Americas by 5% to 8%, within EIMEA by 8% to 11%, and within Asia-Pacific by 10% to 13%. For the full fiscal year 2024, all three of our trade blocks are expected to perform at or above these levels. In summary, what did you hear from us on this call? You heard that for the third quarter we reported consolidated net sales of $155 million, an increase of over 9% over prior year and a new record for the company. You heard that volumes continued to improve and in the third quarter nearly all our sales growth was driven by volume. You heard that sales of maintenance products grew over 10% in both the third quarter and year-to-date, which is in line with our long-term growth targets. You heard that we're making good progress on the sale of our U.S. and U.K. home care and cleaning product brands. You heard that we continue to execute our Must-Win Battles, sales of WD-40 Multi-Use Product, and WD-40 Specialists were both up 11% year-to-date, premiumization sales grew by 14% and that year-to-date digital commerce sales grew by 18%. You heard that our newest direct market in Brazil is off to a strong start and that we believe the acquisition of the Brazil market was a game-changing opportunity for us. You heard that gross margin continues to improve and that we believe we'll come in closer to the high end of the guidance range for gross margin this fiscal year. You heard that we continue to make progress in lowering our inventory levels and that we have reduced them by nearly 36% since peak levels. You heard that for the full fiscal year 2024, all three of our trade blocks are expected to perform at or above our long-term growth targets for maintenance product sales. And you heard that we're reiterating our guidance for fiscal year 2024. 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 Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Hello. Congratulations on a nice quarter. So I was wondering if you could just give us a little bit of color on the gross margin outlook. I guess in the shorter term, would it be fair to say that for FY '25, it would continue on at least at the point at which gross margin ends FY '24? So if you end over 53% gross margin, that would carry over at least at that level. Is that the right way to think about it for FY '25?

Hi, Linda, this is Sara. So yes, we are right now tracking towards the high end of our range for FY '24. We haven't really given -- we don't really give guidance on FY '25 until we get to the end of the year. But I think as we've indicated, we are targeting to get back up to the 55% by the end of FY '26. And so, obviously, we have to make some of that up in FY '24. And we have a number of initiatives that we're working towards to help move the needle from where we believe we will end the year, which is going to be at the high end of the range to the 55% at the end of FY '26.

So I'm just curious on that slightly longer-term target. What gives you confidence that you can project that? Because you do have a lot of moving pieces that affect your gross margin, in particular the input costs. Is it just that you have so many things in the pipeline of different initiatives you can do? Can you give us a flavor for just a couple touch on maybe a few of those things that give you confidence?

Sure. So when we look at the roadmap to getting back to the 55%, it's really breaks down into about three buckets. The first one is what we've talked about in the past around premiumization and sales mix. So selling more and are growing faster in our markets, where we are -- where we earn a higher margin is part of that and also expanding on our premiumization. So selling more Smart Straw, EZ-REACH and Specialist in many regions. So that's the first bucket. The second bucket is really driven by operational efficiency in the supply chain. So there are a number of smaller projects that we have in the pipeline that we believe are going to help decrease our costs over time and that will take, those projects do expand over the next couple of years. And then the third is there still will be some movement on price. So we haven't moved on price this year and we don't really have any immediate intentions to move on price in the near term, but there will be some pockets. We believe as we get out into the later half of FY '25, maybe, and into FY '26 of just more targeted tactical price increases at a much smaller scale, but that will also help us get back up to the 55%. You are correct, input costs can fluctuate and we don't necessarily have control over those, but we believe, based on the current cost environment that the initiatives we have in place will get us back to the 55%.

Okay. And then I was just wondering about, I mean, it sort of looks from the numbers that your prior year comparison on sales growth was much harder in the third quarter and easier in the fourth quarter. But I think that has to do with -- some of the cadence having to do with the impacts from stuff in China or the pandemic or something. So, like, maybe you can just give us some color on like, is that fourth quarter, prior year comp really easier or is it just normal? And how do you feel about like, where along that range for the sales for the year? Like, are you most comfortable toward the lower end, middle, higher end, is there any color you can give? Thank you.

So in terms of the third, the kind of phasing by quarter. So what you've seen this year, Linda, that's kind of been kind of abnormal recovery, right. It has been the volume recovery in Europe and in Latin America. So we talked about it at the start of the year. So where you saw that really strong volume recovery in the Americas, certainly in the U.S. last year, you've seen that continue through. There is a specific dynamic in Q4 with Asia-Pacific, which had a very weak quarter last year. So I think the number last year in Asia-Pacific is $15 million or something. And so we have a very soft comparable number for Q4 in Asia-Pacific. But I think the reason you're seeing such good -- continued strong growth, what was driving the entire company has been Latin America, come back if you like and then EIMEA a very, very strong volume recoveries, especially in those direct markets we highlighted.

Okay, so then just following up on what you said about the Asia-Pacific comparison, I mean, if it is indeed easy in the fourth quarter, then growth should be sort of strong in the fourth quarter of '24, is that the way to think about it?

Well, so we guided towards Asia-Pacific being within the traditional range of growth between 10% and 13%, and it's not there today. So, yes, we're expecting a strong Q4 in Asia-Pacific.

Okay. Thank you. And then again, I know you don't want to get too much into the next fiscal, of course, but I'm just wondering if you could -- if there's any quantification of maybe some unusual costs that were related to ERP implementation or some other projects that might dissipate in the next fiscal year that would create a favorable comparison? Is there anything like that you're kind of aware of in a general sense?

I mean, we have been spending higher this year as a result of the timing of the go-live for the ERP. So if we look at our general IT investments for this year, they are going to be trending higher than they have compared to the prior years. We are in the current budget cycle right now. So we're working on taking a look at where are we going to land next year from an IT investments standpoint and other investments. But that's probably the biggest area that, when you look at the past few years, that has trended up as a result of us getting closer to our go-live date. We are continuing to invest in IT, though I mean, we do have that wave two coming around, but we don't believe the cost of the wave two is going to be at the same level as the current wave that we just pushed out earlier in the year.

Okay. I think that's probably all I have. Thank you very much.

Thanks, Linda.

Our next question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question.

Good afternoon, and thanks for taking my questions. I may have missed this, but you mentioned the ERP rollout in the Americas and Asia. I was wondering, did it already occur in Europe or is that something that's going to be doing -- you'd be doing over the next several quarters?

So it did not incur -- it did not happen in Europe. So we went live, impacting our U.S. business, our Latin America business, and our Asia regional distributors, which represents about 50% of our revenues. So we still have about 50% of our revenues. The majority of that is in Europe. That's on another system. And then we have two other really small systems for a couple of our other international locations.

So you're going to be merging the European system with this system, is that -- I mean, ultimately, is that the goal?

So our wave two right now is targeted towards two of our smaller locations that are still on the old system that we just came off of. So our first priority is to get off of that old system. These other two locations are individually less than 5% of our revenue, so they're much smaller implementations. And then we are working on, obviously, bringing Brazil in through the acquisition. So that's a priority for us. And then we are looking at our roadmap beyond those next -- that next phase, but that next phase is our immediate priority. And then we are, Daniel, looking at what are we -- is it appropriate for us to bring everybody else onto the one system.

Okay. Thanks for that. And then just kind of following up on the questions that were just asked. I mean, you can gift the 55% if things stay the same, is there a certain band that -- that oil, tin plate, and plastic has to stay in for you to hit that? I mean, if there's a spike, then that kind of changes the dynamics, correct? Particularly the - go ahead.

Yes. I would say if there's a spike and it's temporary, right, that's what we just ride that wave. If there is a spike of, let's say, $20 to $25 to $30 and it stays there for an extended period of time, that's when we would have to take a look and see if we want to do, if there are other levers that we would want to pull to try to offset that. But usually if it fluctuates within $20 directionally one way or the other, and we tend to ride that wave over time.

Okay. And then -- and my final question is just kind of from maintenance, if I look at like, unallocated expenses, I think it's been a little bit higher than what had been previously and maybe higher than when I was modeling. I was wondering if what you're doing now is kind of the run rate going forward for the next couple of years, which is roughly, I don't know, call it, I think, what $40 -- $48 million?

Yes. The unallocated expenses, so one of the biggest drivers of that, that's ticked up is associated with the ERP. So we funded that out of the corporate expenses and so that's sitting in the unallocated corporate. So that's probably been the biggest driver, Daniel, that you'll see there from a trend perspective.

And that's going to be rolling off, I mean, as we spoke now on smaller systems than on Brazil, that's going to be that, let's assume it would be less than, correct?

So I think our trajectory is not going to be the same trajectory that it was this year, but it will not drop down to nothing. I mean, we will still be investing as we have to roll out those other waves.

Got you. Okay, thank you very much.

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

Thank you. Good afternoon, everyone. Following up on Linda and actually Dan's question regarding IT spending, are you sharing the amount you have spent towards that new ERP system? What was your IT spending in 2023? What is it in 2024? And what are we looking at for '25 and '26, if you can share those numbers?

Hello, Rosemarie, how are you? We have not disclosed the individual year that we've -- within the individual years, how much we have been spending on IT. We did disclose that the total cost of what we went live and what we placed in -- what we went live with in Q2 was approximately $10 million. And we will be amortizing that over 10 years. And so we did disclose the total cost of that first wave that was sitting on the balance sheet, but there were other costs that did not qualify for capitalization and we really incurred those costs over roughly about four, maybe 4.5 years, to give some perspective.

So if we look at -- if we don't look at IT spending specifically, but look at your CapEx level, so is it in CapEx? And what for -- what do you expect the CapEx to be this year and then next year?

So there is a nuance about the cloud-based costs that were capitalized. Those are actually not in CapEx. So those costs are sitting on our balance sheet and other long-term assets and do not show up in our investing cash flow line items. And so there is accounting rules that require us to present the cost that we capitalize for the new system because it's cloud-based differently than normal capital expenditures. So our normal capital expenditure, we are right now in maintenance mode. We expect that to be between our normal 1% to 2% of our revenue levels. And that's what we're trending at this year. So the place to really look on our balance sheet, to look at the capital, to look at the ERP costs specifically is the increase in our long-term asset over time.

Okay, thanks. And then, if I may, you are showing good growth on the -- for the Specialist category, which obviously is one of your must-win category. Within that category, are there specific product lines applications that are growing faster than others? And by the same token, are there some which you don't think are going to do very well and you might consider eliminating them from the bucket of Specialist products?

Thank you, Rosemarie. So, I mean, yes, we have around six SKUs, six products around the world. They're pretty consistent. We haven't disclosed what those products are, but those products account for around 80% of WD-40 Specialist sales. And so as a global learning organization, we share. We have teams that get together and share best practice approaches to building those brands across the world. And so, yes, very much focused on those core products within the Specialist range. And that's what's driving expanding distribution and then putting samples in the right people's hands around the world is what's driving the growth -- the double-digit growth of WD-40 Specialists. And then on the other side, yes, if products were not perfect, and so if products come out that don't perform, they get called and replaced with more promising options.

Okay. Eventually you will give us a better feel for the different categories?

So, I mean, if you look at the longest -- the longest kind of running products in our portfolio, then that's because they've been around the longest. We started most places, the likes of silicones, pellet, penetrants, white lithium, greases, et cetera, that's kind of where we started with WD-40 Specialists, and they're some of the key sellers.

All right. Thank you very much. Good luck and congratulations.

Thank you.

Thank you, Rosemarie.

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.