WD-40 Company Reports Robust Sales Growth Across Regions

Snapshot of the Americas Segment

Last fiscal year, WD-40 Company saw growth of 16% in U.S. sales, while sales of maintenance products in Canada surged by 30%. A significant portion of this growth stemmed from increased sales of premiumized products and successful promotional programs. This robust performance catapulted the Americas segment to account for 45% of the company’s global business in the first quarter.

Encouraging Sales Results in EIMEA

The company continued to experience a positive momentum in the EIMEA region, consisting of Europe, India, the Middle East, and Africa, with a remarkable 20% increase in sales to 48.8 million. The outstanding growth was primarily attributed to higher sales of the WD-40 Multi-Use Product, which soared by 23%. Despite previous challenges relating to price adjustments and currency fluctuations, the region witnessed a commendable double-digit sales growth for the third consecutive quarter.

Focused Approach in Asia-Pacific

WD-40 Company reported a 6% sales growth in the Asia-Pacific region, driven by elevated sales of the WD-40 Multi-Use Product, which escalated by 4% compared to the prior year. Successful promotional programs and marketing activities in China further propelled the growth, with a notable 15% increase in sales of maintenance products. However, the company also observed a 4% decline in sales of its home care and cleaning products but looks forward to prioritizing higher-margin maintenance products in the future.

Strategic Framework for Growth

The company introduced a “Four-by-Four” strategic framework aimed at achieving mid to high single-digit growth in maintenance product revenue, along with specific growth targets for each trade bloc. The framework is also expected to drive adjusted EBITDA margin expansion through improved gross margins and ongoing business investments. Implementing this framework reflects the company’s steadfast commitment to sustainable value creation for its shareholders.

Progress and Update on Strategic Initiatives

The company showcased substantial progress in its “must-win battles,” such as leading geographic expansion and accelerating premiumization. Notably, sales of the WD-40 Multi-Use Product recorded significant growth across all three trade blocs, with impressive traction in key markets. Furthermore, the sales of premiumized products exhibited a notable 16% increase, reflecting a robust demand for these offerings globally. The company also reported commendable growth in sales of WD-40 Specialist products, particularly in the EIMEA and China regions.

The Ongoing Battle for Operational Excellence and Growth

Strategic Enablers for Growth

The WD-40 Company has made significant strides in its ongoing battle for operational excellence and growth, particularly emphasizing the importance of digital commerce as a driving force. The past year saw robust sales of WD-40 Specialist in the Americas, with a focus on increasing production capacity post-pandemic recovery.

Achieving Operational Excellence in Supply Chain

Emphasizing the pursuit of operational excellence, the company has prioritized strategic enabler three, aiming to enhance supply chain performance. The implementation of global supply chain KPIs and achieving over 95% customer OTIF scores underscores the company’s commitment to operational efficiency. Moreover, environmental sustainability awareness among major suppliers has been evaluated, aligning with changing regulatory requirements and evolving stakeholder expectations. The investment in refining forecasting and planning processes further complements this strategic enabler, fostering better-informed decisions on future demand and supply availability.

Driving Productivity via Enhanced Systems

WD-40 is on the cusp of deploying a new cloud-based enterprise resource planning system for its U.S. and Latin America businesses, signifying a pivotal organizational advancement. Notably, the company is amplifying its investment in IT systems and enhancements, ensuring that employees can operate more efficiently. The establishment of a global IT strategy role underscores the focus on streamlining tools and processes across regions, vital for sustained organizational growth. With a burgeoning emphasis on IT investments, WD-40 is poised to bolster its strategic enablers for long-term success.

Adapting the 55/30/25 Business Model

WD-40 is recalibrating its non-GAAP performance measures within the 55/30/25 business model to integrate the amortization of cloud computing implementation costs into its financial calculations. The company’s asset-light and dynamic business model remains a key strength, offering a steadfast financial foundation, exemplifying the company’s long-term trajectory aligning with its vital model.

Impressive Gross Margin Performance

The first quarter brought an impressive improvement in gross margin performance, with a notable surge to 53.8%, marking a 240 basis point increase from the prior year. This uptick stemmed from various factors, including lower costs in warehousing, distribution, and freight, alongside a reduction in inventory levels, further augmenting the U.S. supply chain. Additionally, favorable sales mix and tactical price increases contributed to the positive trajectory of the gross margin, underpinning the company’s resilient performance amidst challenging market dynamics.

Continued Emphasis on Margin Improvement

While the Americas demonstrated constant gross margin performance compared to the prior year’s first quarter, sequentially, there has been a notable 170 basis point improvement from the fourth quarter of fiscal year, showcasing the company’s unwavering commitment to enhancing margin performance across trade blocs.

Financial Performance and Future Outlook Report

Gross Margin Performance

In the first quarter of 2023, the EIMEA region’s gross margin surged to 54.9%, representing a remarkable enhancement of 430 basis points over the prior-year first quarter. Similarly, Asia-Pacific’s gross margin exhibited a significant uplift, reaching 59.2%, marking a 480 basis points improvement compared to the prior-year first quarter. The impressive progress in gross margin over the past few quarters positions the company favorably to potentially exceed the midpoint of its fiscal year 2024 gross margin guidance range. However, the management cautions that restoring the gross margin to the 55% target will be a prolonged endeavor.

Cost of Doing Business

The company defines the cost of doing business as total operating expenses less adjustments for certain noncash expenses. Despite the percentage of revenue for the cost of doing business remaining constant at 36% compared to the first quarter of the previous year, the absolute-dollar basis witnessed a notable increase of 13%. This surge was attributed to higher employee-related expenses, augmented travel and meeting-related costs, escalated professional services fees, and intensified investments in advertising and promotional activities.

Adjusted EBITDA Margin

The adjusted EBITDA margin for the first quarter of 2023 stood at 19%, reflecting an improvement from 17% in the comparable quarter of the previous year. The management expressed a steadfast commitment to escalate the adjusted EBITDA margins back to the historic 20% to 22% range over the midterm. Subsequently, the company aims to leverage scale and returns on its investments across the business to target 25% adjusted EBITDA margins over the longer term.

Net Income and Capital Allocation

Net income surged to 17.5 million in the first quarter of 2023, representing a significant increase of 25% over the previous year’s first quarter. The company plans to maintain a disciplined and balanced capital allocation approach, targeting maintenance capex of between 1% and 2% of sales per fiscal year, in line with its asset-light strategy. Additionally, the company emphasized its commitment to returning capital to shareholders through regular dividends and buybacks. This was evident when the board of directors approved a 6% increase in the quarterly cash dividend per share.

Guidance for Fiscal Year 2024

The company reiterated its outlook for fiscal year 2024, projecting net sales growth between 6% and 12%, with net sales between 570 million and 600 million in constant currency. Gross margin is forecasted to be between 51% and 53%, with advertising and promotion investment projected to be between 5% and 6% of net sales. The provision for income tax is anticipated to range between 24% and 25%, while net income is projected to be between $65 million and $70 million. Diluted earnings per share are expected to be between $4.78 and $5.15, subject to an estimated 13.6 million weighted average shares outstanding.

The guidance acknowledges the potential impact of unpredictable inflationary headwinds and unforeseen events on the company’s view of fiscal year 2024.

Overall, the company’s strong financial performance in the first quarter of 2023, coupled with its proactive approach to address challenges and capitalize on opportunities, underscores its commitment to long-term value creation for shareholders.

WD-40 Company Delivers Strong Performance in the First Quarter of Fiscal Year 2024

Steve Brass — President and Chief Executive Officer

Thank you, Sara. In closing, we’re proud of the progress we’ve made this quarter, which is a great start to our fiscal year and aligns with our longer-term goals. In summary, what did you hear from us on this call? You heard that this is the first time since fiscal year 2021 that our business has been firing on all cylinders when we saw top-line growth in all three trade blocs. You heard that we saw volume-related sales growth in all three trade blocs, and approximately 65% of our constant-currency sales increase this quarter was volume related.

You heard that sales of WD-40 Multi-Use Product were up 14% in the first quarter. You heard that sales of WD-40 Specialist were up 9% in the first quarter. You heard that our inventory levels peaked in the first quarter of fiscal year 2023, and since then, we have reduced inventory by 37.5 million, or 31%. You heard that we were incredibly pleased with the improvements we’ve made to gross margin, and that this progress has positioned us to likely deliver above the midpoint of our fiscal year 2024 gross margin guidance range. You heard that beginning this year, certain key senior leaders will have a portion of our incentive compensation tied to making progress to recovering our adjusted EBITDA margins initially back to 20% to 22% over the midterm.

You heard that we continue to return capital to investors through regular dividends and that we raised our dividend last month. And you heard that we reiterated our full fiscal year 2024 guidance and are proud of the progress we’ve made this quarter. Thank you for joining our call today. We’d now be pleased to answer your questions.

Analyst Inquiries and Company’s Responses

Operator

[Operator instructions] One moment for your first question. Your first question comes from the line of Linda Bolton-Weiser from D.A. Davidson. Please proceed with your question.

Linda Bolton-Weiser — D.A. Davidson — Analyst

Yes, hello. Congratulations on a strong quarter. So, I was wondering if you could comment on what the environment is regarding pricing because we’re actually starting to hear in certain areas of deflationary developments. Are you getting any, you know, pressures to actually roll back any prices? I know, historically, that wasn’t really the practice, but can you just sort of give a little bit more on the pricing front? Thank you.

Steve Brass — President and Chief Executive Officer

Hey, Linda, it’s Steve. So, on the pricing front, yeah, I mean, of course, with major retailers, as always, they are excellent negotiators. And of course, we’re having conversations about — about, you know, pricing going forward. I mean, I think the bottom line is that, you know, it’s hardly a situation where we’re profiteering. We are simply recovering our historic gross margin levels, and you know, we’re very pleased with the progress we’re making there.

So, in summary, you know, yes, we are beginning to have conversations with retailers. We train our people very very well to hold those conversations with our retail partners, but yes, those conversations are [Inaudible].

Linda Bolton-Weiser — D.A. Davidson — Analyst

OK. And then, I know when you took the price increases in Europe that there was some loss of distribution. Can you just update us on, you know, have you fully regained back that distribution and kind of what’s the status there?

Steve Brass — President and Chief Executive Officer

So, in terms of Europe and the — the minor distribution losses we have, we have pretty well recovered most all of those distribution losses. Some of those, however, will run into next fiscal year in terms of a full recovery of the volume concerns. So, yes, we have recovered just about, you know, all of the volume we lost from — from kind of delists, but some of that recovery will still play out in fiscal year 2025 in Europe.

Linda Bolton-Weiser — D.A. Davidson — Analyst

OK. And then, can you give some — well, I can’t remember, I don’t think you’ve exactly quantified the income statement effects of your ERP implementation cost. But can you give some idea of the cadence of when those will hit the income statement? Is it more in the first half or second half or just evenly across the quarters? Any color on that?

Sara Hyzer — Vice President, Chief Financial Officer

Yeah, Linda, I can — I can take that one. So, we are still on track to go live with the new system in — in Q2. So, we will expect some of that amortization begin to impact us in the next quarter and then going forward. So, the amortization, I think we disclosed that we have about $10 million on the books at the end of November, and we will start to amortize that through the P&L starting in Q2 as soon as the system goes live.

And we will — there’ll be some more transparency on the — the amount of that as we get into the second and third and fourth quarter of the year.

Linda Bolton-Weiser — D.A. Davidson — Analyst

OK. And then, finally, I guess I just was interested in your commentary on India. I didn’t catch exactly what you said, but it sounded like something, and then growth would resume more in the second half of the year. Can you give a little more on — on that issue? Thank you.

Steve Brass — President and Chief Executive Officer

So, Linda, as you’re aware on our long-term growth, but you know, trajectory on India has been very very positive over recent years. We have a wonderful partner and have a great long-term track record. And we’ve suffered, you know, the same kind of disruption that we’ve suffered pretty well everywhere else in India in terms of these pricing and changes over the past 18 months, and we’re still kind of going through that. We do expect to emerge from that in the second half of this fiscal year.

There was also some — just some shipments deferred between Q1 and — and Q2 as well. So, you should start to see the Indian situation improving. We were disappointed we were negative about 0.9 million, I believe, in the first quarter. But you should see that, over between Q2, begin to improve and then head back into growth in India in Q3 and Q4.

Linda Bolton-Weiser — D.A. Davidson — Analyst

OK, thank you very much. I appreciate it.

Steve Brass — President and Chief Executive Officer

Thank you.

Sara Hyzer — Vice President, Chief Financial Officer

Thanks, Linda.

Operator

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

Dan Rizzo — Jefferies — Analyst

Oh, good afternoon, everyone. Thank you for taking my call. Just given the strong performance in the first quarter in sales, I mean, you’re up over 12%, but the outlook is — for the year is largely unchanged. I was wondering if there’s order timing that’s involved that would suggest a slow — slowdown in the second quarter of the back half of the year.

Or how should we should think about it, again given the — everything’s still intact but you had a fairly strong first quarter?

Sara Hyzer — Vice President, Chief Financial Officer

So, I’ll take that one. Hi, Daniel. This is Sara. So, yes, we are very pleased with the results for the first quarter.

But it is just one quarter, and you know, there is still a lot of uncertainty as we look out for the back half of the year. And so, at this point in time, we felt that it was appropriate.

Unpacking WDFC’s Earnings Call: Navigating Fluctuations and Front-Loaded Revenue

Despite market volatility and cultural cadences affecting quarter-to-quarter performances in the Asian distributor market, WD-40 Co. executives navigate through discussion with analysts over first quarter earnings on recent conference call.

Understanding Market Fluctuations

On the conference call, analysts probed into the reasons behind the fluctuations evident in the financial reports. Steve Brass, President and CEO of WD-40 Co., acknowledged the company’s robust growth in Asia-Pacific, attributing it to a front-loaded fiscal year, which he claimed has become increasingly characteristic of their business activities within the region. Despite the challenges posed by the cultural nuances in market operations, the company highlighted a notable increase in their Asia-Pacific business, particularly in China which reported a substantial growth in local currency.

Volatility and Cost Dynamics

Analysts, seeking a deeper understanding of the impact of production volumes on margins, turned their attention to Sara Hyzer, Vice President and Chief Financial Officer of WD-40 Co. In response, Hyzer underscored the company’s efforts to capitalize on increased production volumes to enhance pricing through the filler network. However, she emphasized the persisting higher fill fees, primarily owing to labor and inflation issues encountered by third-party manufacturers, which have continued to challenge cost dynamics, thereby impacting margins.

Analyst Input

Analysts engaged in a brief but illuminating conversation, seeking insights into the company’s performance metrics and the drivers behind the reported financials. The discussions aimed to decipher the intricacies underlying the business model and the impact of regional market behaviors on WD-40 Co.’s financials.