Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company First 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 prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to your 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-Q for the period ending November 30, 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, January 9, 2023. 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’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 will begin by discussing our sales results for the first fiscal quarter of 2023. I will also provide you with an update on our growth ambition, our Must-Win Battles, and my strategic priorities. Sara will review some financial topics with you, including our guidance for FY 2023. As Wendy mentioned earlier, we prepared a presentation covering our first quarter results and have posted it to our Investor website. We invite you to refer to that document to review any numbers or results that we don't talk about on today's call. I'm happy to share with you that in the first quarter gross margin improved sequentially by 400 basis points, compared to the fourth quarter of fiscal year 2022. This is due to the pricing actions we've taken over the last several quarters. Sara talk with you in a few moments about gross margin in more detail, but we're confident that our plans to rebuild margin are working. Let's discuss our sales results. Today, we reported net sales of 124.9 million for the first quarter of fiscal year 2023, which was a decrease of 7%, compared to last year. There are several things obstructing top line performance this quarter. Sales volumes are down as expected due to the disruptions caused by the price increases we've put into place over the last few quarters. Changes in foreign currency exchange rates had an unfavorable impact of about $9.5 million on our consolidated net sales in the first quarter. On a constant currency basis, net sales would have decreased by less than 1%, compared to the first quarter of last year. Also impacting our top line results this quarter is our values guided decision to suspend sales of…

Thanks, Steve. Thank you for that overview of our sales results. While our top line results were challenged in the first quarter, you might recall we shared with you last quarter we expected much of our growth to be weighted toward the second half of fiscal year 2023 as we managed through disruptions in the market due to the pricing actions we have taken. This continues to be true. Currency is a significant headwind for us as well. On a constant currency basis, net sales would have decreased and significantly compared to the first quarter of last year. Let's start with the 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 to be 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 as a percentage of net sales. Our goal is to drive our cost of doing business over time toward 30%. Finally, the 25 represents our long-term target for EBITDA. The model is being tested right now due to the inflationary environment we continue to operate in. The good news is that we saw a strong margin recovery this quarter driven by actions we have taken as part of our margin restoration plan. Our gross margin target of 55% is a critical component of our business model and Steve and I remain committed to restoring gross margin to our target of 55%. First, the 55 or gross margin. In the first quarter, our gross margin was 51.4%, compared to 50.8% last year. This represents an improvement of 60 basis points year-over-year and more importantly, it represents a reversal of eight quarters of sequential margin declines.…

Thanks, Sara. I believe my primary responsibility as CEO is to build on the excellent foundations laid by Gary and Jay. There'll be no fundamental shifts in strategy as there is a very significant runway for growth by laser focusing on our global Must-Win Battles. However, investors will see an increased focus in three key areas. Firstly, we must pivot the company toward a more sustainable future. We see the planet as a key stakeholder and we will be putting the required infrastructure in place over the next 18 months or so to be able to set and then effectively measure progress against environmental targets. In support of this goal, we'll be adding a small number of dedicated tribe mates focused solely on this purpose. In addition, we will be procuring and implementing IT systems that will enable us to track and report our carbon footprint and progress on ESG initiatives to stakeholders. Second, we need to leverage our capability as a global learning and teaching organization. Being learners and teachers means taking every opportunity to make things better than they are today. We don't rest on our laurels. In that spirit, we recently completed a culture survey in partnership with Berkeley Haas School of Business where we identify the strengths and opportunities present within our culture. To address the opportunities we have identified, we've created a global culture squad, made up of tribe mates who are passionate about making our special culture even better than it is today. Finally, we need to realize a huge growth potential present in emerging markets. I believe the long-term global market growth opportunity for WD-40 Multi Use Product is over $1 billion and that the fastest growth will be achieved in our emerging markets. With this end in mind, the new dedicated emerging…

[Operator Instructions] Your first question comes from the line of Daniel Rizzo with Jefferies. Your line is open.

Hey, everyone. Thank you for taking my questions. I just had a question on the cash flow statement. I understand you, kind of went through why inventories are up and that makes sense, [indiscernible], but just wondering if these payables went down too, I was wondering shouldn't they be up as well? I'm just wondering why the difference there?

Hi, Daniel. This is Sara. So, payables partly is timing. And then the second piece of that is the payout of our incentive program happens in the fourth quarter. So, just depending on the timing of that along with our AP, just normal turns in AP is driving that. It's nothing really significant.

Okay. And then you mentioned I think China was up [32%] [ph] of some of that was shipment timing, was there some pull forward there? Because I know in past years it's been fairly lumpy. And I know you're not going to give quarterly guidance, but I was just wondering if you should expect similar scenarios to unfold where there's a strong first quarter if [indiscernible] and then kind of evened out over as we move forward?

Sorry, Daniel, I missed the beginning of that. What was up 23%?

China sales were up 22% in the quarter.

Okay. Thank you. I'll let Steve take that one.

Sure. Hey, Daniel. So, yes, China, I’d say at local currency, China was up 34%. Now, clearly, there's likely to be a little bit of disruption, kind of ahead in terms of COVID, but we don't see the same, kind of shutdowns that we've seen in past quarters unless things really worsened, situation really worsened. So, historically, I think in the past couple of years, the China business has been kind of front-end loaded a little bit and you've seen that play-out in the first quarter. I think we're being a little bit cautious in terms of how we see things for the next, kind of period of the quarter because of the situation. That situation might exist through until spring. But no, we don't really see any significant variations in the China in terms of volatility outside of further lockdowns or shutdowns. And as we get into the third quarter, obviously, we lap that situation last year where we had six weeks of shutdown and we're hoping we'll avoid that this year.

Okay. That's helpful. And then my final question, you also mentioned that there were some lost sales due to – from – disruptions due to price increases that should ease as the year progresses, but I was wondering if those lost sales will be recovered or are they just lost?

It depends. I would say that some of them are lost, it's just momentum. So, what happens, we've lost promotional momentum. And I think when you look at the first market to execute the price increases was in North America, and we're starting to see that recovery happen. So, North America is about a quarter ahead of Europe in terms of the price increases. So, yes, some promotional momentum has been lost, some business momentum, but that's roaring back. So, you're seeing that come back in – certainly in the United States, but we think that Europe is probably a quarter behind the U.S. in terms of the kind of the situation here.

Got it. Thank you very much.

Thank you.

Your next question is from the line of Christina Xue with D.A. Davidson. Your line is open.

Hi. This is Cristina Xue on for Linda Bolton Weiser from D.A. Davidson. Thank you for taking my question. So, maybe I'll follow-up from the previous question. Moving or going forward, do you think more pricing is needed to help to restore those gross margin going forward?

Hi, Christina. Thank you for the question. So, in terms of EMEA and Americas, which is 88%, 87% of our business, we think we've taken the necessary tactical price action to restore our gross margin. So, we have no further tactical pricing measures. And we revert back to our strategic gross margin enhancement strategies, such as our premiumization, our WD-40 Specialist Strategy, etcetera. We do have price increases planned in Q2 and Q3 within Asia Pacific. So, Asia Pacific hasn’t seen the same level of inflation that the Americas and EMEA have seen, but there are price increases planned within the Asian region, within our Q2 and Q3.

Okay. So, maybe one more follow-up question. Are you starting to regain the placement at the big-box retailers?

So yes, absolutely. Yes. So that was one of the things we spoke about last quarter was just this loss of momentum and that's the real driver of, kind of the volume loss. And so, if you look – if you start with the U.S. we've seen a significant recovery in volume loss. And we expect that to dissipate to virtually zero over a period of time going forward. I just can't tell you exactly when that's going to be, but we have seen a significant improvement as we've re-established our promotional programs with customers. We've already seen a significant enhancement in our volumes over the past couple of months in the U.S. particularly, that has now got to play out in Europe as a follow-on.

Okay. That's helpful. Thank you.

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 now disconnect.