Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Second Quarter Fiscal Year 2022 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, Ms. Wendy Kelley, Vice President of Stakeholder and Investor Engagement. Please go ahead.

Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-40 Company’s Chairman and Chief Executive Officer, Garry Ridge; Vice President and Chief Financial Officer, Jay Rembolt; and President, Chief Operating Officer and Incoming Chief Executive Officer, Steve Brass. In addition to the financial information presented on today’s call, we encourage investors to review our earnings presentation, earnings press release and Form 10-Q for the period ending February 28, 2022. These documents are available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today’s call will also be made available at that location shortly after this call. On today’s call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as our earnings presentation. As a reminder, today’s call includes forward-looking statements about our expectations for the company’s future performance. Of course, actual results could differ materially. The company’s expectations, beliefs and projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today’s date, April 7, 2022. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise. With that, I would now like to turn the call over to Garry.

Thank you, Wendy. Good day, and thanks for joining us for today’s conference call. We have a lot to cover today, but I’d like to start with the big news since last quarter’s call. We shared last month that effective September 1, 2022, Steve Brass is going to be the next CEO of WD-40 Company. We are also excited for Steve and the reception so far from our investors and our tribe has been very positive. Steve is going to be the fifth CEO in our company’s 69-year history. As you know, Steve is someone I have worked very closely with for over three decades and I feel extremely fortunate to hand the reins over to this capable leader. I know he is going to accomplish great things and I’m looking forward to watching this happen. I remain in the CEO seat until the end of this fiscal year and I will continue to be with you on earnings call until our fourth quarter earnings call. For now, let’s talk about the second quarter of fiscal 2022. Today, we reported net sales of $130 million for the second quarter of fiscal year 2022, which was an increase of 16% compared to the same quarter last year. We are pleased with these top line results. However, we continue to face a challenging inflationary environment and second quarter gross margin came in at 50% reflecting a significant increase to our cost of goods and products sold. Jay will talk in greater detail in a few moments about what has impacted our margin and what we are doing to restore it. While we have work to do to restore our margin back to our target of 55%, I am happy to share with investors today that we reported net income of $19.5 million…

Thanks, Garry and good afternoon. To begin, I just want to share with you all that I’m humbled and excited to have been asked to serve as the next CEO of this amazing tribe and to be able to serve all our stakeholders. I also want to take this opportunity to thank Garry for his mentorship over the last 3 decades and in planning for this transition. He has set me up a success by ensuring I inherit a solid strategy for the company and an excellent team of senior leaders, many of whom I have worked with for many years. Now let’s take a closer look at what’s happening in our trade blocks, starting with the Americas. Sales in the Americas, which include The United States, Latin America and Canada, were up 18% in the second quarter to $54.5 million compared to last year. Sales of maintenance products increased 22% in the Americas due to increased sales in The United States and Latin America, which increased 26% and 18%, respectively. In the United States, we experienced strong sales of both WD-40 Multi-Use Product and WD-40 Specialist, which increased 19% and 125%, respectively. We have continued to experience a high demand for our maintenance products in The U.S. since the onset of the COVID-19 pandemic. In the comparable period of last year, we began experiencing significant supply chain disruptions and constraints in our U.S. supply chain. I’m happy to share with you today that we have made adjustments to our supply chain to increase the production capacity of our highest volume products and these changes have resulted in our ability to deliver a higher volume of products to our customers in the second quarter. Higher sales were also attributed to the price increases that went into effect beginning in the…

Thanks, Steve. This quarter, we delivered solid financial results despite the fact that the challenging inflationary environment is having a substantial impact on our business. We start with a discussion about our 55/30/25 business model, the long-term targets we use to guide our business. As you may recall, the 55 represents gross margin, which we target at or above 55% of net sales. The 30 represents our cost of doing business, which is our total operating expenses, excluding depreciation and amortization. Our goal is to drive our cost of doing business over time towards 30% of net sales. And finally, the 25 represents our long-term target for EBITDA. First, the 55 or gross margin, in the second quarter, our gross margin was 50.4% compared to 55.4% in the same period last year. This represents a decline of 500 basis points due primarily to the challenging inflationary environment we are in. Due to continuing challenges in the global supply chain, over the last six quarters, we have seen continued declines in our gross margin. Inflationary headwinds have impacted nearly all aspects of our cost of goods sold. Our opportunity this year is to start to reverse this trend and begin to drive gross margin back toward our targeted levels. In the second quarter, changes in specialty chemicals and aerosol cans were the primary drivers of this decline. When combined, they negatively impacted our gross margin by 410 basis points. Our petroleum-based specialty chemical costs negatively impacted gross margin by 370 basis points and the remaining 40 basis points came from higher costs associated with aerosol cans. As you know, crude oil is one of the primary feedstocks of our specialty chemicals. We have seen a steady increase in the price of crude oil the last 12 months, and it has accelerated…

Thanks, Jay. In summary, what did you hear from us on this call? You heard that Steve is going to be the next CEO of WD-40 Company effective September 1, 2022. You have heard that we have seen significant improvements in our supply chain, particularly in the United States. You heard that total net sales were up 16% in the second quarter. You heard that sales of WD-40 Multi-Use Product were up 18% in the second quarter. You heard that sales of WD-40 Specialist were up 40% in the second quarter, and that we will be launching an eco-friendly new Specialist product later this calendar year. Stay tuned. You heard that we made the values guided decision to suspend sales of our products to our marketing distributor customers in Russia and Belarus. You heard that we have been experiencing pressure on gross margin from the challenging inflationary environment. We have a solid restoration plan in place. And you heard that we have adjusted our guidance for fiscal year by approximately 2% and believe that earnings per share will be between $5.14 and $5.27. In closing today, I would like to share with you a quote from my friend, Simon Sinek. We can’t choose the game, we can’t choose the rules, we can only choose how we play. Thank you for joining us today, and we would be pleased to take your questions.

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

Hi guys. Thank you for taking my questions. So, you had a pretty strong sales quarter, and it looks like you are raising prices, but the sales outlook remained unchanged. I was wondering just kind of bridge that how – like how we should think about it? Was there a timing in the quarter, or I guess what’s offsetting it? I would have thought you would have raised it a little bit. Any color on that?

Yes. Thanks, Daniel. This is Garry. What we didn’t talk about was the impact of Russia, which if you look at the sales of Russia, which were about 3%, we had to factor those out of our full guidance, but they were offset by further growth in some of the pricing.

Okay. That actually makes sense. Thanks. And then so you mentioned expanding into different regions of the world, I think China, India, Mexico. I was wondering if – when you go into a new region now, do you lead with Smart Straw 2.0, or is it you introduced to the traditional product and that comes along later? I was just wondering if the dynamics change or how you think about that now given that you have this higher margin – I mean, better project – product. I don’t know, just any color on how the strategy works?

Thank you, Daniel. This is Steve. Yes. So, I mean it’s an interesting question you post. So typically, in new emerging markets, we would lead with the classic can. However, in certain markets, India being a great example, more recently, we have done trials, particularly in digital, we are leveraging this new Smart Straw system. The results are very, very positive. So, we are kind of learning as we go. And Smart Straw became very quickly one of our top-selling SKUs. So, I think our opinion is changing of that. Normally, we would lead with plastic can in these emerging markets, but we are finding increasing evidence of acceptance in emerging markets of the Smart Straw delivery system.

Okay. Thanks. And then final question, you mentioned having higher inventory to meet customer needs or customer – which makes sense. And I don’t know if I asked this on the last call, but I was just wondering if you are changing the way you think about holding inventory going forward, just given everything has happened worldwide to everybody for the last year. If you will be holding more inventory going forward or if it goes back to more of a just-in-time thing?

Daniel, this is Jay. Certainly, for the near-term and probably to the – through to the medium-term, we would expect to have higher levels of inventory for some period of time to ensure the robustness of our supply chain and the availability of our products to our customers. So, it’s really about serving our customers’ needs.

All right. Thank you very much.

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

Hi, everyone. How are you?

Hi, Linda. We are great.

Good. Well, congratulations again on the transition – CEO transition. Steve, you have big shoes to fill. But you have certainly prepared investors and analysts well ahead of time for the transition. So, thank you for that. So, I guess, sorry, I got cut off a little bit. I missed what you said the pricing effect on gross margin was. Can you just repeat that?

So, the overall global impact on revenues was about one-third pricing and about two-thirds volume of total growth.

Right. But you normally give like a pricing effect on gross margin. Did you not give that, or are you able to quantify that?

Yes, and that was about 200 basis points.

Okay. And then I went back and looked at the years that I have in my model. And the year – the last year with the biggest increases in pricing to offset inflationary pressures was FY ‘12. And I think it got as high as a 220 basis point effect on gross margin positive. So, do you think this cycle around that you are going to have like can you tell us if that’s where it’s going to peak out, or do you think like it’s going to require more to offset the inflation cost pressures?

Yes, it will definitely require more. As we said, that we have had a number of price increases already and anticipate more price increases through the – throughout part of the – or throughout the remainder of the year, and we will see what happens next year.

Okay. And then just on gross margin, yes, it was a little bit lower than expected in the quarter and further down sequentially. I mean are you able to kind of – I guess, I could do the math a little bit, but is this the trough in the second quarter, or will it still according to your guidance kind of go down a little bit more sequentially in the third quarter?

We were expecting this to be the trough. I think it’s probably pushed out a little bit to the third quarter. We could flatten out in the third quarter, but I – yes, there is a chance it will continue a little bit more erosion. But what we do see is some beginning of the uptick starting in Q4.

Okay. Thank you. That’s very helpful. And sorry, again, I missed a little bit on what you said on Asia. How is China? Can you just repeat that in the quarter? And did you experience any impact of lockdowns and things like that in China in the quarter?

So, China is doing extremely well. China for the quarter was a very nice growth. So, the quarter growth overall in China was 42% for the quarter revenues and then 53% year-to-date, so very strong. And we have major industrial sampling campaigns going on in China and they are working absolutely fantastically for us, and we are doing really well. The lockdowns have been more about really March going into April. So, yes, we are seeing lockdowns impacting availability of factory production, of shipping. So, that is going to impact us in the short-term over a couple of week period as is expected at the moment.

Thank you. And then, of course, with the stock market action and analysts that follow Home Depot and Lowe’s, they are talking about people being worried about potential impacts of like housing type recession on those home center retailers. Are you – I mean obviously, you are not seeing any weakness yet, but can you just kind of remind us, like in the last recession, what kind of decline you did see in revenue? I think it was a modest decline. But can you just kind of remind us of what kind of happened back then?

Yes. Linda, I was around then, so I will speak on that. And so it was Jay. Apart from currency, we actually went sideways or actually in their Multi-Use Product, we grew. So, again, one of the things that we have learned over the past years and more so in COVID is that our diversification across geographies and trade channels is really a true [indiscernible] strength for our company. We have never said we were recession proof, but we are somewhat recession-resistant in what we do. Whether that phase out or not, but the past is a reflection of the future. Again, we are probably stronger. We are now stronger than we have ever been as far as the spread of our business across geographies and trade channels, right, Steve?

Yes. And I think if you look at what’s happening already, there has already been a shift of challenge from e-commerce. Our industrial sales globally doing extremely well, we are up over 30% globally in industry. Our hardware channels picking up and doing very, very well of 24% year-to-date. So, that’s the WD-40 distribution system. When one channel is down, we make it up in other channels or geographies.

Okay. And then one final one just on modeling, I seem to recall here in my model, last year’s fiscal fourth quarter, it kind of had a big profit decline, and it was because you really seem to invest pretty heavily in advertising and promo in that quarter. It was a really big ratio. I can’t quite remember what that was all about. But are you expecting some kind of a similar big investment this year, or is that going to represent kind of an easy comparison in the fourth quarter?

Yes. Thank you. We don’t expect to repeat that level of incremental investments. That was a significant investment we made in our top 20 growth markets, and it was a one-off in nature.

And quite frankly a great investment, because it’s that investment that created the momentum that you are seeing in our top line revenue now. So, we are very, very happy that we made that decision. And it’s certainly showing us benefit now as we continue through the year.

Okay. It sounds good. Thank you very much. I appreciate it.

Okay. Thanks, Linda.

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.