Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Third 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 now would 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-Q for the period ending May 31, 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 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, July 10, 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.

Thanks, Wendy, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing our sales results for the third fiscal quarter of 2023. I will also provide you with an update on our Must-Win Battles. Sara will review some financial topics with you, including a review of our FY ‘23 guidance. I'm happy to share with you that after two-quarters of flat-to-down sales, we've returned to solid top-line growth in the third fiscal quarter. Today, we reported net sales of $141.7 million for the third quarter, which is up 15%, compared to the same period of last year and a new record for the company. Translation of our subsidiaries results into the U.S. dollar had an unfavorable impact on our consolidated net sales in the third quarter. On a constant currency basis, third quarter sales would have increased $21.9 million or 18%, compared to the third quarter of last year. Furthermore, we've seen bottom line growth, as well with net income of $18.9 million, compared to $14.5 million last year, reflecting an increase of 30% year-on-year. While we continue to experience some disruptions linked to the price increases that we put into place over the last 12-months, the impact is beginning to abate, and we saw volume-related sales growth this quarter at a consolidated level. We estimate sales volume declined about $1.5 million in the Americas, and $3.5 million in EMEA in the third quarter, but this was more than offset by sales volume increases in Asia Pacific a $5.5 million in the quarter. Year-to-date, we reported net sales of $396.8 million, which is up 2%, compared to the same period of last year. Translation of our subsidiaries results into the U.S. dollar, also had an unfavorable impact on our consolidated net sales year-to-date. On…

Thanks, Steve. Thank you for that overview of our sales results. I am pleased that we are once again experiencing topline growth. Although currency and pricing-related disruptions continued to be a headwind for us. We believe our topline graph will continue into the fourth quarter. And that we will end the fiscal year in growth mode. Let's start with a discussion about our business model and the long-term targets we use to guide our business. We target our gross margin to be at or above 55% of net sales. Our goal is to drive our cost of doing business, which is our total operating expenses, excluding depreciation and amortization toward 30% of net sales over time. Finally, we target EBITDA to be at 25% over time. We saw a strong period-over-period growth margin recovery this quarter driven by actions we have taken as part of our margin restoration plan. However, our gross margin has declined slightly sequentially. We know we still have a lot of work to do to return our margins to our targeted levels. Restoring our gross margin requires a systemic approach and we have focused our efforts on such an approach over the last several quarters. We continue to believe our full-year gross margin will be between 51% and 52%. Let's take a closer look at gross margin this quarter, as compared to the third quarter of last year. In the third quarter, our gross margin was 50.6%, compared to 47.7% last year. This represents an improvement of 290 basis points year-over-year. Price increases, which have been implemented over the last 12 months across all our markets and geographies positively impacted our gross margin by 740 basis points year-over-year. In addition, we experienced decreases in miscellaneous other input costs and changes in foreign currency exchange rates, which…

Thank you, Sara. In summary, what did you hear from us on this call? You heard that net sales and constant currency were up 18% for the quarter and 7% year-to-date. You heard that we saw volume-related sales growth this quarter at a consolidated level. You heard that sales of WD-40 Multi-Use Product for up 16% for the quarter, return to growth year-to-date. You heard that sales of WD-40 Specialist were up 7% for the quarter and 11% year-to-date. You heard that we continue to make outstanding progress in digital and e-commerce and that our e-commerce sales have grown 35% both the quarter and year-to-date. You heard that we recently launched our first-ever global online marketing campaign that unites 30-plus markets under one message Repair It, Don't Replace It. You heard that although we continue to experience pressure on gross margin, we're making progress on our margin restoration plan and remain committed to restoring margins to our target of 55% over the mid to long term. You heard that we continue to return capital to investors through regular dividends and buybacks but our Board of Directors recently approved a new share repurchase plan. You heard that inventory levels continue to improve and we anticipate that will continue to decline for the remainder of this fiscal year. You heard that long term we are targeting a compound annual growth rate of maintenance product revenues in the mid to high single-digits on a non-GAAP constant currency basis. And you heard that while we are reiterating our guidance today, we do continue to operate in a volatile environment, and we will likely come in at the lower end of our guidance range. Thank you for joining our call today. We'd now be pleased to answer your questions.

[Operator Instructions] Your first question comes from the line of Linda Bolton Weiser with D.A. Davidson. Your line is open.

Yes, hello. Congratulations on a strong quarter. So, I was wondering about how we should think about the next quarter in terms of -- you're starting to anniversary the first of the big price increases. So we had Americas sales up about 25% due to pricing in last year's fourth quarter. So, I'm kind of wondering how we should think about that? Are we still going to be expecting to see strong sales growth overall in the Americas, just for example, or is that going to really flatten out because of the hard comparison? Any color on that would be very helpful.

Hi, Linda. This is Sara. Can you hear me okay?

Yes, yes.

So, yes, we do. We are lapping the larger price increase in the Americas that started to affect the business in the fourth quarter of last year. But EMEA is a quarter behind. So we actually are anticipating there still to be some impact of price, not at the same levels globally that we've seen through the first three quarters. So we will, in the fourth quarter, believe that there will be price increase just not at the same level that we're seeing this quarter, offset by some of the volume declines that we have been guiding to, I think, for the full year, which is in the high single digits, really low double digits is where we think we'll end the year from a volume loss perspective, and that includes Russia.

And can you just, Sara -- I don't know if you said in the quarter, what was the core volume excluding Russia year-over-year and what was the price overall, year-over-year in the quarter?

Fair. So, during the quarter, year-over-year, price had a 17% impact, and volume was actually pretty close to flat. So, we had significant volume growth in our Asia-Pac region and then that was offset by volume losses in both the Americas and EMEA. But again at much lower levels than what we've seen in the first and second quarter. So, the trend kind of on that turnaround we're really starting to see this quarter.

Okay. So, then in the fourth quarter, it would seem like the price element will come down and the volumes will be better, is that the way to think about it?

Yes, I think, sorry -- go ahead, sorry.

Yes. Linda, I think -- it's just Steve. Yes, I think overall it's exactly what. So, I mean if you look at our U.S. market, which is our furthest market kind of ahead on the price increase gain. Our volumes in Q3 at point of sale, so, what's actually selling out in the market actually turned neutral and on Multi-Use Product they actually turned positive. They were up 3% for the quarter at point of sale level. So, we did absolutely begin to see a turnaround in our volumes and so we're cautiously optimistic that that will be reduced to a volume level loss in the high single digits for the full fiscal year.

Okay. And then just on the cost element, I think you renegotiate your can contracts towards the beginning of each calendar year. And I just would like to kind of backtracking. I mean, I would think negotiations for early 2023 was favorable and if that's the case, do we still have a quarter or something before that slowed then? I'm just wondering why we're still seeing such unfavorable can cost comparisons.

So, the can cost that was negotiated for this year on a global basis was actually pretty neutral. So, we saw two different things happening in different regions. And one region we had some small decreases in the can cost and the other region we had small increases, so they are offsetting. So, we are really globally seeing that much relief on the cost of the actual tinplate can for this fiscal year. And really, we won't see that until we get well into next calendar year assuming the spot prices stay where they are today, we'll have an opportunity to renegotiate those prices, but even at the spot prices, there are still the increase of the tinplate and the cost to convert that into our can is still running higher with labor and overhead costs. So, it's not, it's not a one-for-one decrease when you look at spot on its own. So, that's kind of the other piece of this inflationary environment that is hindering us and the recovery is just the overhead and labor cost to convert everything is higher and those are sticking.

Okay. And then I was a little bit interested to hear you say that something about your homecare and cleaning that you're sort of de-emphasizing it or I mean, are you thinking of actually divesting some product lines or something or can you give more color on that statement?

Yes. So, we have no firm plans to exit any of those brands under the household brand and kind of category. What we're saying is we're going to take a strategic look. And so, as we think out long-term and to our long-term kind of future, I mean those brands now are $33 million revenue stream, they were significantly more than that. And so, we kind of harvested them to the last few years. So, I think we're taking a look at the future of those now. And as we think about having to kind of innovate for sustainability in the future and we need to create more headspace within the organization to achieve that. So, no firm plans as of today, we're just signaling to investors that we are taking a strategic look at those brands.

Okay. And then one last one for me. I mean, I was trying to read your comments, you're tone about the debt pay down, are you kind of signaling that you did some and then so for now that's enough debt pay down and you're going to switch a little bit more back to share repurchase, or how should we read into that.

So we were very pleased with the cash flows that came in this quarter and really the $20 million flow was used to pay down just this quarter. We do anticipate, if you look at where our debt balance is today and compare it to where we were a year ago, we're still running about $10 million higher as a result of those investments that we made in the supply chain. So I would like to see us pay down a little bit more debt over the next quarter or two and then be able to increase and -- increase our share repurchases, assuming that's what we decide to do with our excess capital.

Okay, that sounds good. Thank you very much.

Okay. Thanks. Linda.

Your next question comes from the line of Daniel Rizzo with Jefferies. Your line is open.

Him, guys. Thank you for taking my question. So with all things being equal on the input cost front, if things don't get markedly worse. I just -- do we have a kind of a general idea when possibly you can get back to 55% gross margins? Is it two years, five years? I mean, is there anything kind of how do you think about that?

So we do believe the price has been the primary driver in the margin recovery to date. And at this point, we are moving into really optimizing our supply chain and those strategic drivers to move from where we are today to get back up to the 55% are going to take some time to execute on and then see results in the business. So we do not believe we'll be at 55% next fiscal year, but I do believe we will be making strides and step changes to get closer to that 55%. So we're not going to -- it's hard to pinpoint a time when we're looking out beyond the year. So I'm not going to commit to a date yet, but we will be making progress next year. And I think you're looking at longer than a year to get there.

And Daniel, if I can just add to that, this is Steve. Yes, if you look at it by trading block, it helps as well, right? So if you look at where our Asia Pacific trading block is, we're at 56% now. So we're already back up above that 55% target. So that's a strong increase of the load that they had in Q4 of last year of 500 basis points, I believe. EMEA has recovered very strongly, 700 basis points of their low in Q4 as Sara, kind of, highlighted. And so they're at 52% at the end of Q3. So it's really about the Americas and the real kind of drag in the Americas is the fact that we have these high inventory levels, which were purchased at higher cost prices between six and nine months ago, and so we're waiting for that to flow through. And so that's going to be a big kind of kicker to gross margin as is reverting to our more strategic gross margin strategy of premiumization, international expansion, WD-40 Specialist, et cetera.

Got it. That’s very helpful. And then -- so Asia was fairly strong. I know in the past, there's been some order timing that, kind of, made the quarter stand out. I was wondering if there was any benefit in Asia Pacific from order timing in the third quarter?

Well, yes, there was. So we had this strange, kind of, going on between last year with a lockdown in Shanghai, where we had a very poor third quarter. So the comparable kind of quarter performance this year looks better than it was because of the poor prior year. I know it was a strong performance all the same. So yes, there's -- that factor between Q3 and Q4 in Asia in terms of that whole lockdown dynamic when some of the business last year moved into Q4, right?

Okay, that’s helpful. And then I just noticed that there was some inventory -- a little bit of inventory write-down in the quarter. I don't know, is that something that's kind of ongoing or is that just a small thing that's kind of more usual?

So that's just a small thing. I wouldn't expect that to continue as we continue to expand our filler network, we do go through testing to bring those fillers online. And as you can imagine, sometimes you're going through testing and you need to work through the kinks in order to get the product to come out and pass all the quality test. So there was just a little bit of write-down associated with the final tests that we're running through our -- one of our third-party fillers in the Americas.

Okay, alright. Thank you very much.

You’re welcome.

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 to please disconnect your line.