Q2 2021 WD-40 Co Earnings Call

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Ladies and gentlemen, thank you for standing by.

Good day and welcome to the WD 40 company second quarter fiscal year 'twenty 'twenty One 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 to register a question at any time. During this call. Please press star one on your telephone keypad. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference you need to reach and operator.

Please press star zero on your telephone keypad.

I would now like to turn the presentation over to your host today, Neither Wendy Kelley director of Investor Relations and corporate Communications. Please proceed.

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 Remo, and President and Chief operating Officer, Keith grass and.

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 2021.

These documents are available on our Investor Relations website at Investor that WD 40 company and Dot com.

A replay and transcript of today's call will also be made available at that location. Shortly after this call on.

On today's call and who will discuss certain non-GAAP measures and descriptions and reconciliations of these non-GAAP measures are available and our SEC filings as well as our earnings presentation.

As a reminder, today's call includes forward looking statements about our expectations for the Companys 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.

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 eight 2021.

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 Gary. Thank.

Thank you Wendy and good day and.

Thanks for joining us for today's conference call, Jay, Steve Wendy and I once again dialing in from our respective homes and we hope that you and your families are staying safe and healthy.

Try it continues to work together through the challenges and opportunities associated with the COVID-19, and Debbie we continue to experience very high demand from maintenance products due to the renovation trade ins associated with the pandemic or what we call isolation renovation.

As a result today, we reported net sales of 111 9 million for the second quarter of fiscal year, 2021 up 12% compared to the second quarter of last year.

And installation of our foreign subsidiaries results from their functional currencies to the U S. Dollar had a favorable impact on sales and the second quarter.

On a constant currency basis sales would've been $192 million up 9% compared to the second quarter of last year.

Net income for the second quarter with $17 2 million compared to $14 3 million last year.

Diluted earnings per share for the second quarter was $1 and 24.

Compared to $1 and for Sage for the same period last year.

I do want to caution investors that due to the uncertainty the health crisis continues to present it is very difficult for us to estimate how our business will be impacted by the pandemic either the short to medium term.

We offer a variety of maintenance products that have been at very high demand due to renovation trends associated with the pandemic. However.

However, the pandemic has also caused some disruptions and constraints to add supply chain, primarily in the United States stable share. These puts and takes with you in greater detail and by that.

But first I'm going to share a quick update with you on our strategic initiatives as you know our growth aspirations are to drive consolidated net sales to approximately $700 million and to do so while following our 50 530 25 business model.

<unk> initiative number one is to grow WD 40, multi use products.

Goal and that this initiative is to make the blue and yellow can with the little Red top available to more people in more places who will find more uses more often and.

And the second quarter sales of WD 40, multi use products were $86 4 million up 14% compared to last year. This increase was driven primarily by increased sales in EMEA, and Asia Pacific, which increased 22% and 34% respectively.

The increase in WD 40, multi use products sales and EMA was driven primarily by increased and user demand linked to isolation and innovation trends throughout the trading block.

In Asia Pacific, we experienced significantly improved market conditions in China compared to the second quarter of last year, you'll recall that China market was materially impacted during the second quarter of fiscal 2020 due to the COVID-19 outbreak in the country, our long term growth ASP.

Operations for this strategic initiative is to grow WD 40, multi use products to approximately $530 million over the long term.

Strategic initiative number two is to grow the WD 40 specialist product line and.

And the second quarter sales of WD 40 specialist increased 4% globally to $9 2 million compared to the second quarter of last year.

This growth was driven by strong e-commerce sales as well as increased demand linked to renovation trends associated with the pandemic. These.

These trade and insulate to increase sales in EMEA, and Asia Pacific up, 30% and 102%, respectively, but were partially offset by a 36% sales.

<unk> declined in the Americas linked entirely to the pandemic related supply chain disruptions and the United States and user demand for WD 40 specialist products remains exceptionally high and all three trading blocks. Therefore, we are optimistic about the long term opportunities for WD 40 specialist.

And believe we can grow the product line to approximately $100 million and revenue over the long term strategic initiative number three is to broaden product and revenue price strategic initiative number three includes three and one WD 40 bike GT 85, 1001 spot shot <unk> volume.

And Novak global sales of the products included under this initiative with $13 $7 million and the second quarter up 7% compared to last year.

Global sales of WD 40 bike remained particularly strong on the second quarter up nearly 34% compared to last year as people are buying fixing and riding bicycles more often due to the pandemic.

We believe we are on track to reach a combined revenue for these products of approximately $70 million over the longer term strategic initiative number four is attract develop and retain outstanding tribe members. Our goal under this initiative is to attract develop and retain talented tribe members and to grow tribe member engagement.

And that to greater than 95%, we had lost measured tribe member engagement levels and immediately before the pandemic began at debt.

Time, our overall global employee engagement score was 93%.

I am not sure we would have thrived during the pandemic had we had not answered it with a highly engaged workforce.

As we approached the one year anniversary of the pandemic, we decided to conduct a brief tribal checking to measure the engagement level of that tribe, one year and to be in and almost entirely virtual work environment.

I'm happy to share with you that the results from that survey were very positive and we have been able to maintain our employee engagement levels in.

In addition, we've learned from the survey that 98% of our tribe is excited about WD 40 company's future direction. This metric improved four percentage points and Sellouts survey, which I believe has to do with trust and.

<unk> is more confident about our future because together, we successfully navigated a very turbulent year and we are emerging from its stronger and a more intact tribe than ever before.

I want to take a moment to thank the tribe to their hard work and.

Their dedication during these challenging times.

You have reinforced something to me that I already knew purpose driven passionate people guided by our values created amazing outcomes.

Strategic initiative number five is operational excellence.

Alcohol and on this initiative is best summarized by one of our core values here at WD 40 company and make it better than it is today.

Commitment to operational excellence continues to be the enormous assets as we continue to navigate the challenges associated with them head and Debbie.

Using a $55 30, 25 business model as a framework, we measure ourselves against this operational excellence initiatives.

That's it from my update I will now pass the call to Steve who will share an overview of our sales results with you and discuss some other developments.

Thanks, Garry and good afternoon, when we last spoke I shared with you that despite the many disruptions caused to our business by the pandemic, we were experiencing increasing demand for our products due to a change and and user behavior caused by the isolation renovation and phenomenon.

Today I'm happy to share with you that those trends continued throughout the duration of the second quarter and today. We are reporting total global sales growth of 12% for the quarter. However, we also encountered some challenges and the Americas related to keeping up with end user demand and a COVID-19 environment like many consumer goods companies we are experiencing.

<unk> disruptions and constraints within on our supply chain and certain geographies and the United States. Some of our third party manufacturers have been experiencing increased absenteeism and labor shortages, which have resulted in slower line speeds capacity constraints and increased competition and for line capacity within the aerosol and.

Industry and.

In addition, we've been managing raw material shortages, and transportation bottlenecks, which have impacted our ability to deliver products and meet some of our normal levels of service with our customers and some markets. These challenges mostly impacted on Americas trade block and it resulted in lower sales for the United States as well as increased cost of goods for the quarter.

Jay will talk in more detail about the gross margin impact and a moment.

Let's take a closer look at what's happening and I'll trade blocks, starting with the Americas.

Net sales and the Americas, which includes the United States, Latin America, and Canada were down 1% and the second quarter to $46 2 million sales and maintenance.

Maintenance products decreased 3% and the Americas due to decreased sales of WD 40 specialist and WD 40, multi use product and the U S, which declined 42% and 5% respectively.

Day sales declines were related to the supply chain constraints and disruptions I mentioned a moment ago.

In addition sales and the U S were also negatively impacted by the severe winter storms that took place during the second quarter. There was a supply chain recovery plan underway, which includes adding more shifts and third party manufacturers, bringing onboard new third party manufacturers and expanding our launch of next generation smart straw and to the U S.

Which is scheduled to be on store shelves during the fourth quarter of this fiscal year. We believe these issues will begin to resolve and the second half of our fiscal year 2021, but we expect continued volatility along the way due to the supply chain impacts of COVID-19, now the good news partially offsetting these declines was a 16% <unk>.

Kris and maintenance products sales in Canada, and a 28% increase and Latin America and Canada. This sales increase was driven by the isolation and renovation phenomenon and increased sales to the E Commerce channel during the pandemic.

Canada is also benefiting from the successful introduction of next generation Smart straw, which youre doing phenomenally well.

And Latin America, we saw increased sales during the second quarter, primarily due to strong sales and on U S direct market and Mexico, while we anticipate the continued successful build of our direct customer base and Mexico, we expected and maybe a bit of volatility along the way as we continue to develop this exciting new direct market.

In addition, and our other Latin American markets. We saw increased end user demand due to decreased COVID-19 restrictions and the region.

Sales of our homecare and cleaning products and the Americas increased 10% and the second quarter compared to the prior year largely due to higher sales of 2000, and pushes which increased 27%.

We have experienced a significant increase in sales of many of our homecare and cleaning products and the United States and Canada due to increased demand because of the pandemic. However, we continue to consider our homecare and cleaning products, except for those listed the strategic brands.

Harvest brands and continue to generate meaningful contributions and cash flows but are generally expected to become a smaller part of the business overtime and.

Total our Americas segment made up 41% of our global business and the second quarter.

And the long term, we anticipate sales within this segment will grow between 2% to 5% annually.

And I wanted to and that net sales in EMEA, which includes Europe, the Middle East Africa, and India were up 19% and the second quarter to $49 8 million. This represents an important milestone for EMEA segment for the second quarter and a row EMEA was our largest trading block in terms of net sales.

Changes in foreign currency exchange rates had a favorable impact on sales and a segment from period to period on a constant currency basis sales would have increased by 15% compared to last year.

Sales of maintenance products increased by 22% and EMEA and due to increased sales and both our EMEA direct and our EMEA distributor markets, which increased 17% and 35% respectively.

And our EMEA direct markets, we experienced a 14% increase and sales to be 40, multi use product and a 31% increase and sales of WD 40 specialist due to the isolation renovation phenomenon and increased sales to the E Commerce channel during the pandemic and.

And the second quarter, and net sales and our EMEA direct markets accounted for 67% of the region sales.

And our EMEA distributor markets, we experienced a 36% increase and sales of WD 40, multi use product and a 19% increase and WD 40 specialist sales primarily due to improved economic conditions.

Cost of reductions and COVID-19 related movement restrictions.

And particularly strong sales of 74 day multi use products in India, and middle East and Northern Europe areas, where we are experiencing strong recoveries and.

And the second quarter net sales and our EMEA distributor markets accounted for 33% of the region sales.

And total our EMEA segment made up 45% of our global business and the second quarter.

Over the long term, we anticipate sales within this segment will grow between 8% to 11% annually.

And wanted to Asia Pacific net sales in Asia Pacific, which includes Australia, China and other countries and the Asia region were up 13, 9% and the second quarter to $15 9 million.

Changes in foreign currency exchange rates had a favorable impact on net sales for the Asia Pacific segment from period to period.

On a constant currency basis sales would've increased by 32% compared to last year.

Sales of maintenance products increased by 40% and Asia Pacific Jay to increase sales in China, and Australia, which increased 227% and 45%, respectively, but were partially offset by a 4% decline in sales on our Asia distributor markets.

And China net sales were $4 7 million and the second quarter up 227% compared to last year, primarily due to improved market conditions.

And the second quarter of last fiscal year, the COVID-19 outbreak and its earliest stages and sales declined 17% during the quarter as compared to the prior year due to the health crisis with no comparable event occurring this year, China market is doing well, we're seeing accelerating growth and a steady return to normal.

However, it's important to remind investors that day, we remain optimistic about long term opportunities in China, we expect some lumpiness in the coming quarters.

And the third quarter of fiscal 2020, COVID-19, lockdown measures will reduce considerably and China and as a result sales were very strong and that began to resume normal operations and were able to ship. Some sizable orders that had been delayed due to COVID-19.

Since there will be no comparable event occur in this fiscal year third quarter sales for China. This year might be lower than last year. Overall, we expect strong sales growth for China for the full fiscal year.

And Australia, and net sales of $5 3 million and the second quarter up 39% compared to last year, driven by increased demand for both on maintenance and home care and cleaning products.

And the mall sales are to be 40, multi use product and there'll be 40 specialists were also up 37% and 92% respectively due to the isolation renovation phenomenon.

Sales at all on homecare and cleaning products were up 32% due to both.