WD-40 Company (WDFC) Earnings Call Transcript & Summary

Hello, and welcome to the WD-40 Company's 2022 Annual Meeting of Stockholders. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Garry Ridge, Chairman of WD-40 Company. Mr. Ridge, the floor is yours.

Thank you. Good day, and welcome to WD-40 Company's 2022 Annual Meeting of Stockholders. I am Garry Ridge, WD-40 Company's Board Chair. I'm happy to welcome you to this year's Annual Meeting of Stockholders. Today is my 25th Annual Shareholder Meeting at WD-40 Company. It's also my last as a Board member and Chairman. As I shared earlier this year, I formally handed the CEO reins to Steve on September 1 as part of our planned leadership transition. 25 years ago, we had a dream to take the blue and yellow can with a little red top to the world. Today, I'm extremely pleased to say that you can find WD-40 multi-use product in 176 countries and territories around the world. Indeed, the sun never sets on WD-40. As Marshall Goldsmith says, the best leaders understand that long-term results are created by all the great people doing the work, not just one person, who has the privilege of being at the top. I've had the honor of working with many exceptional people during my tenure at WD-40 Company. Many of whom remain on the global leadership to the team today and who will continue to work closely with Steve in the coming years. In addition to the leadership team, there are many talented people within the organization from all functions, trading blocks, countries and time zones, who committed to ensuring that millions of new people will meet the blue and yellow can with a little red top for the first time in years to come. Before calling the meeting to order, I'd like to introduce today's meeting participants. The following directors are in virtual attendance today. Daniel Carter, who served as Executive Vice President and Chief Financial Officer of BevMo! Inc. Dan is the Chair of our Audit Committee; Melissa Claassen, is Vice President, Finance, Emerging Markets for the Adidas Group stationed in Dubai; Eric Etchart served as Senior Vice President of The Manitowoc Company, Inc. Eric is Chair of our Corporate Governance Committee. Lara Lee served as Senior Vice President of Lowe's Company, Edward Magee was appointed to the Board in June. Ed served as Executive Vice President, Operations of Fender Musical Instruments Corporation. Trevor Mihalik is Executive Vice President and Chief Financial Officer at Sempra Energy. Trevor is the Chair of our Finance Committee. Graciela Monteagudo is served as President and CEO of LALA U.S. David Pendarvis is Chief Administrative Officer and Global General Counsel at ResMed Inc. Gregory Sandfort served as Chief Executive Officer of Tractor Supply. Greg is our Lead Independent Director. Anne Saunders served as President, U.S. of NakedWines.com and is Chair of our Compensation Committee. I would also like to take the opportunity to welcome and introduce you to Cynthia Burks, who is standing for election to our Board today. Cynthia served most recently as Chief People and Cultural Officer of Genentech Inc. Also participating on the call today are Steve Brass, our President and Chief Executive Officer, Phenix Kiamilev, our General Counsel and Corporate Secretary; Sara Hyzer, our Chief Financial Officer; and Wendy Kelley, our Vice President of Stakeholder and Investor Engagement. I would also like to introduce you to Steve Embry from PricewaterhouseCoopers LLP, the company's auditors. He will be available to answer questions during the question-and-answer session. So for the business matters to be conducted here today, I will act as the Chairman of this meeting. Phenix Kiamilev will act as Secretary of the meeting and will now officially start the meeting by confirming that proper notice of the meeting has been given and that we have a quorum.

Thank you. I'm pleased to announce that proper notice of the meeting has been given and at least 12,525,750 shares are represented in person or by proxy constituting a quorum.

Thank you. I now call this meeting to order. Following the Secretary's introduction of the matters to be acted upon by stockholder vote at this meeting, our management team will share a brief business update then we will take questions from the online audience and thereafter, the formal meeting of stockholders will adjourn.

There are 3 matters for stockholder consideration and voting at today's meeting: The election of directors; an advisory vote to approve executive compensation; and the ratification of the selection of our independent auditors. Stockholders have been encouraged to vote in advance of the meeting. However, if you've not yet voted or would like to change your vote, any stockholder attending the virtual meeting today, who has entered the meeting with a control number may vote any time prior to the adjournment of today's meeting. If you need a copy of the annual report or the proxy statement, the links are provided online as well. Instructions for voting and/or changing a previously submitted vote are provided on the Computershare meeting center website. The following matters are presented for stockholder approval. The first matter is the election of directors. I'm pleased to report that all the nominees have received sufficient votes to be elected to serve as directors until their successors are elected and qualified. With respect to the advisory vote to approve executive compensation, I'm pleased to announce that at least 10,668,593 shares have been voted to approve executive compensation. The third matter presented for stockholder approval is the ratification of the Audit Committee selection of PricewaterhouseCoopers LLP as the company's independent accountants for fiscal year 2023. A representative of PricewaterhouseCoopers is in attendance and has been offered the opportunity to make a statement and can respond to appropriate questions. If any questions from the auditors are submitted prior to adjournment of the meeting, a PricewaterhouseCoopers' representative will respond. I'm pleased to announce that at least 10,693,850 shares were voted in favor of ratification of the selection of PricewaterhouseCoopers LLP as the company's independent accountants for the current fiscal year.

Thank you, Phenix. I would like to thank all our stockholders for their continued support. Management will now share an update with you on the company and where it's headed in the future. Following management's presentation, we'll answer questions from stockholders in attendance. [Operator Instructions]. We will collect the appropriate questions for a response. Before we proceed, I'm going to ask Wendy to get us started on the business update and provide our required notices.

Thank you, Garry. Good morning, and thanks to everyone for joining us today. I would like to ask our virtual audience to please turn your attention to the slides being webcast simultaneously through the Computershare meeting center website. 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. 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. 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, December 13, 2022. In 2022, we completed a planned leadership transition. Our long tenured CEO and CFO, Garry Ridge and Jay Rembolt retired from their roles. Steve Brass was named as Garry's successor and became our CEO on September 1. Steve is new to the role as CEO, but not new to WD-40 Company. He has been working in various leadership capacities with our company for over 31 years. Most recently, he served as our Chief Operating Officer. Sara Hyzer was named as Jay's successor and became CFO on November 1. Sara has been an employee of WD-40 Company for just over a year. Most recently, she served as Vice President, Finance Strategy. Prior to her time at WD-40 Company, Sara was a partner at PwC. With that, I'd now like to turn the call over to Steve.

Thank you, Wendy, and good morning. It's very clear to Sara and I as your new CEO and CFO, that our task is one of sustaining success building on the wonderful legacy that Garry and Jay have left for us to build upon. Who we fundamentally are as a business doesn't change. Sara and I intend to build upon this wonderful culture of WD-40 company that has been built over decades and is a true source of competitive advantage. These are a culture of clearly articulated values that are led by our global tribe on a daily basis and to guide our decision-making. A culture of true serving leadership, leaders at WD-40 Company are here to serve all our stakeholders, not ourselves. It's a truly global culture, a United Nations melting pot of inputs that leads to diversity of thought and ultimately, better decision-making. A culture of commitment to develop our people, our tribe by offering opportunities for them to learn and grow and be part of something bigger than themselves. That commitment bridge a loyalty and drives engagement. It also facilitates our long-term focus and consistency of approach over time. This is a special place to work with low employee turnover and an exceptional global tribe of highly committed individuals. Sara and I intend to keep it that way. We have a simple business model. We sell a few things in many places, and we aren't overly dependent on any one geography, trade channel or customer. Sara and I are both highly committed to reestablishing our 55/30/25 aspirational business model metrics as one of our absolute top goals. Our WD-40 brand is one of the most iconic consistently executed and globally most widely distributed brands out there and another true source of competitive advantage. Sara will talk later to our financial metrics. For my part, all I see as your new CEO is a huge runway for growth and a hugely talented and highly engaged global tribe ready to deliver against that opportunity and to continue to deliver the sort of long-term performance investors have become accustomed to during Garry and Jay's tenure. Our focus very much remains in our multipurpose maintenance product brands that make up approximately 94% of global sales. Our home care and cleaning products represented approximately 6% of global sales in our FY '22 and are expected to become a smaller part of the business over time, but they do contribute to provide solid financial returns. Our extremely high levels of employee engagement are the envy of most companies, despite all the challenges of the pandemic, our engagement scores increased in 2022 to 93.5%. Over 98% of employees love to tell people they work at WD-40 Company and 97% feel that their personal values are a good fit with the WD-40 Company culture. These levels of exceptional engagement are a true multiplier of our effectiveness when it comes to executing our strategy. We recently published our second ESG report, which is available to stockholders on our corporate website. One of the important lessons we gained from our diversity, equity, inclusion and belonging work over the last 2 years is that belonging exists when diversity, equity and inclusion behaviors exist. This mindset must begin at the very top of the organization and to achieve this, management and Board level diversity are critical. We've made fabulous progress in this area as reflected by the makeup of our Board of Directors and senior leadership team, which we refer to internally as a Global Strategic Council. The Board nominees for election today reflect the most diverse Board composition in our company's history. In addition to gender and ethnic diversity, our Board is comprised of diverse nationalities, cultural backgrounds and world views. We're equally proud that our Global Strategic Council currently has 6 female members out of 14 management members and 4 nationalities are represented. We believe diversity in leadership fuels diversity of thought, which leads to better strategic decision-making. We have much work to do in FY '23 and '24 to create the foundations to become a more sustainable organization. We'll be making investments beginning in FY '23 to add a small number of dedicated tribe-mates focused solely on driving us to order more sustainable future. In addition, we're selecting and implementing systems that will enable us to track progress made against our identified long-term targets. Before we dive into our future growth aspirations, let's spend a moment reviewing past long-term performance. This chart shows our 20-year maintenance product sales at constant currency exchange rates. As you can see, we have continuously grown our focused multipurpose maintenance product sales at constant currency rates each and every year over the past 20 years with the sole exception of the pandemic year of 2020 where we suffered a modest decline. Following a modest decline in 2020, our sales rebounded extremely strongly in 2021 and 2022. At WD-40 Company, we do not claim to be recession-resistant, but we have demonstrated substantial resilience in the past including during the great recession of 2008, 2009, and that gives us confidence to face whatever uncertainty comes our way in the future. In terms of future growth aspirations, our goal remains to deliver $650 million to $700 million in net sales by 2025, growth of between $132 million and $182 million over the next 3 years. The bulk of that growth, $126 million or so is expected to come from WD-40 multi-use product as we expand distribution and growth penetration to grow from around $400 million in '22 to $525 million by FY '25. The second key driver of growth will be our WD-40 specialist brand extension, which is expected to grow by $65 million over the next 3 years from $60 million in FY '22, including WD-40 bike sales to $125 million in FY '25. We expect a decline of $10 million from $60 million in FY '22 to $50 million in FY '25 in all of the brands combined as we focus even more on growing our maintenance brands. In terms of long-term growth aspirations by segment, we've increased our expectations for growth from the Americas segment to between 5% to 8% annually. It was previously 3% to 5%. This increase in growth expectations is largely fueled by expectations for much faster growth in Latin America. In fiscal '22, we increased sales in Latin America by 35%, largely driven by a sales increase of 31% in our newest direct market of Mexico, and we see excellent prospects for strong continued growth across Latin America. Canada's growth prospects have also been significantly boosted as we roll out next-generation Smart Straw. Strong growth opportunities exist also within the U.S. market in e-commerce, on WD-40 Specialist brand and within the industrial channel. Our expectations for growth in our EMEA segment remain unchanged 8% to 11% and in Asia Pacific, our annual growth expectations are for growth of 11% to 13% per year. Globally, we're targeting revenue growth in the mid- to high single digits in order to deliver against our aspirational $650 million to $700 million 2025 goal. In order to deliver against our revenue aspirations, we're laser focused on delivering our 4 global must-win battles. Our largest growth opportunity and number one must win battle is a geographic expansion of the blue and yellow can with the little red top. We estimate the remaining global growth opportunity for WD-40 multi-use products to be approximately $1 billion. We're laser-focused on delivering long-term growth in our top 20 focus growth markets around the world. We increased our long-term marketing investments in these focused markets during the pandemic and have experienced explosive growth in key markets such as India, France and Mexico as a result. We've also continued our long-term investment in simple, but effective sampling strategies in China, which we expect to become our #2 market globally, with revenues in excess of $50 million plus within the medium term. Our second must-win battle is to grow WD-40 multi-use product through premiumization. Premiumization creates opportunities for revenue growth, gross margin expansion, and most importantly, it lights our end users. Our Smart Straw Next Generation delivery system is currently available in the Americas and will be rolled out globally in fiscal '23. Smart Straw Next Generation supports our objective to grow premium delivery system penetration to greater than 60% of our WD-40 multiuse product sales by 2025. Our third must-win battle is to grow WD-40 Specialist. We debuted the global rebrand of WD-40 Specialist in fiscal year 2020. Now for the first time ever, WD-40 Specialist is fully leveraging our most iconic asset, the blue and yellow can with a little red top. The WD-40 Specialist range aims to provide specialist solutions to complement our iconic multi-use product and make the WD-40 brand more relevant to more people in more places for more users. Sales have grown to $60 million since launch. And following the rebrand, we expect to see sales accelerate faster in the years ahead towards the $125 million goal we shared earlier. Our final must-win battle is focused on driving digital commerce. We believe we're well positioned to benefit from the significant shift to online behaviors in the post-pandemic world. We're focused on developing a data-driven marketing strategy that empowers us to engage directly with end users in meaningful ways online. E-commerce remains the fastest growing retail sales channel globally. And following a flat year in FY '22, we expect to resume the high growth rates in FY '23, we've seen over the past several years in e-commerce. We see a world where almost every transaction in the future will be influenced by a digital touch point, somewhere on the path to purchase, and we believe we are well equipped to thrive in that world. So the role of incoming leadership, is to continue to build on the excellent foundations laid by Garry and Jay. There will be no fundamental shifts in strategy as there is a very significant runway for growth by laser-focusing on our global must-win battles. Investors will see us, however, substantially increased focus in 3 key areas. Firstly, pivoting the company toward a more sustainable future. We see the planet as a key stakeholder and will be putting in the requested infrastructure over the next 18 months or so to be able to set and then effectively measure against progress against environmental targets. Second, as the only truly global brand in our category, we will be further increasing the level of global collaboration around key initiatives such as our global must-win battles in order to learn faster from each other and ultimately drive faster growth against each key initiative. Finally, we'll be doubling down on our focus in key emerging markets. A new dedicated team has been created to drive faster growth in the identified markets where the fastest growth is to be had by leveraging proven methods such as sampling. That concludes our overview of our growth aspirations and must-win battles. And with that, I'll hand over to our CFO, Sara Hyzer.

Thank you, Steve. Let us start with the results of FY '22 in comparison to the prior year. As you can see, revenue increased by 6% in FY '22, a growth of approximately $31 million, while net income decreased by 4% or $2.9 million. Throughout the year, we saw rising input costs and global supply chain challenges, which significantly impacted our gross margin, which fell 490 basis points to 41.1 -- 49.1%. While FY '22 was a challenging year, we believe that our key financial drivers still hold true. We have an asset-light business strategy with a strong balance sheet and a long runway for growth. Free cash flow for FY '22 was negatively impacted due to investments we made in our U.S. supply chain, which we view as temporary and expect those investments to begin to pull back in FY '23. Through all this, we continue to have adequate access to capital to support the overall growth of the business. We guide our business through the lens of our aspirational 55/30/25 business model. While this model is under pressure right now, it continues to play a vital role at our company as it helps us to focus on the few simple metrics that we see as the key to our long-term financial success. It all starts with our gross margin, which we target to be at 55% or above. Next is our cost of doing business, which we target at 35 -- 30% of net sales over time and is a metric we use to measure the effectiveness of our operating costs, excluding depreciation and amortization. Finally, that leaves us with our EBITDA target at 25% of net sales over time. If we are able to keep our gross margin above 55% and reduce our cost of doing business towards our 30% target, we'll be able to achieve our EBITDA margin of 25%. Here, we see the trend of our gross margin over the last several years as well as our tactical and strategic approach to expanding our gross margin over time. As previously mentioned, our gross margin in FY '22 was significantly impacted by inflation and other increased costs in our supply chain. The short-term tactical way to address cost increases is through price increases, which we have executed throughout FY '22 and has substantially completed in the first quarter of FY '23. Our number one focus for FY '23 is to recover our gross margin. And while that will take some time, we are committed to get there as it is the first move back to normalizing our business model. Beyond those tactical actions, we also have longer-term strategic levers to improve our gross margin by focusing on premiumization, product mix and market mix changes to drive gross margin back up to and above the 55% target. Many want to know it actually goes into the cost of a can of WD-40 multi-use product and this slide has a good depiction of that makeup. The 2 biggest drivers are the tinplate can itself and the specialty chemicals inside the can. After that, it's made up of the fees we pay our third-party manufacturers to fill the cans and the plastic associated with the little red top. All costs displayed here have been significantly impacted recently by inflationary headwinds, and we continue to navigate a volatile environment when it comes to our input costs. Over the last 3 years, the biggest impact to our 55/30/25 business model has been to our gross margin for reasons previously discussed, and that impact to margins then impacts our EBITDA results. Overall, our cost of doing business has fared fairly well, which is partially due to the way our employee incentive plans are structured. We've structured our reward program so that our tribe mates are rewarded handsomely in good times and protects the business during more challenging times. As we look forward and get closer to our 55% gross margin target, we expect to see improvements to our overall metrics. Now let's turn to our capital allocation strategy. In general, we first reviewed targets for overall growth, along with those for liquidity, cash and debt. Next, we look to our maintenance capital expenditure needs. We typically require maintenance capital expenditures of only 1% to 2% of net sales per fiscal year. Then we fund our dividend payments, which we target to be greater than 50% of earnings. Any excess capital is then allocated to alternatives with the highest return. Our capital allocation strategy works to both balance investing in long-term growth while providing strong returns to our shareholders. Our historical cash returns to shareholders have included regular dividends and share repurchases. On the top of this slide, you will see a history of our dividend payments over the last 5 years including the dividend payout ratios in each of those years. The company has a long history stretching back over 40 years of paying dividends without interruption. On the bottom of this slide, you will see the amount of share repurchases we've completed over that same period. You can see that share repurchases fluctuate in any given year because buybacks are a tool we use to provide returns while also managing other internal investments. I'll now turn the meeting back over to Garry to open up the call for Q&A.

Thank you, Sara. Wendy Kelley has been monitoring the online questions being submitted. We would now be pleased to answer any questions from our virtual audience at this time.

Thank you, Garry. Our first question comes from a shareholder who would like to know -- how much more with this annual meeting cost, if the decision was made to pay extra to enable the owners, who hold their shares in street name to attend this annual meeting as owners without having to submit letters of legal proxy to Computershare. I'd like to answer that question, if that's okay. So we're sorry that it takes extra steps for some shareholders to attend this meeting for purposes of voting and asking questions. We know that can be inconvenience. Due to the nature of beneficial ownership of shares through banks and brokers, our transfer agent Computershare, who is hosting our virtual meeting today must maintain proper control of voting rights to assure that votes are not counted twice. Most beneficial holders do not need to register in advance to fully participate using the control number received with their voting materials. Some do need to register in advance. I do understand that there's different platforms available. If we were to use an alternative vendor, it would cost nearly 7x more to execute this meeting, which because we're a small company would equal roughly 1/3 of my entire IR budget. And so that's the finances associated with why we have Computershare execute this meeting. Okay. Let me pull up the next question. The next question comes from a shareholder, who would like to know how did management treat our employees that didn't have the COVID vaccine during the period of time between when President Biden issued his COVID vaccine mandate in September of 2021 and when the Supreme Court ended up striking down the COVID vaccine mandate in January of 2022?

Thank you, Wendy. So to answer the question, for the duration of pandemic, the safety and well-being of our employees is really our top priority. Well-being also includes being mindful of individual choice. Therefore, we never implemented a vaccine requirement. We wanted to be respectful of our employees' choice on the particular matter.

Thank you, Steve. Mr. Chairman, we have no further questions from the virtual audience. Back to you.

Thank you. That concludes the WD-40 Company's 2022 Annual Shareholder Meeting of Stockholders. I'd like to thank everyone for their participation. The meeting is now adjourned.

This concludes the meeting. You may now disconnect your line.