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

Welcome, everyone. I'm Linda Bolton-Weiser, Senior Analyst at Water Tower Research, and I'm pleased to be hosting today the management team of WD-40, ticker symbol WDFC. And today, we have for our fireside chat, we have CEO, Steve Brass; and CFO, Sara Hyzer. Before we get started, I would like to point out that the company's safe harbor statements can be found at www.wd40company.com. Also, this fireside chat may not be reproduced or a written transcript distributed without the express written consent of Water Tower Research.

Now let's get started. So we'll start out with their long-term growth algorithm that the company -- so that long-term growth algorithm has a few key elements, including targeting maintenance product sales growth in the mid- to high single digits, gross margin above 55% and EBITDA to grow faster than sales. So to achieve these objectives, Steve and Sara and your team, your strategy has 4 must-win battles, and you've been very consistent with this strategy and what these are. So today, I thought we could frame our conversation around those 4 must-win battles to start out and how they support your growth algorithm. So why don't we start with must-win battle #1, which is to grow WD-40 Multi-Use Product through geographic expansion. Maybe you can tell us about your approach to global expansion and give us a little overview of some of your highest growth markets.

Sure. Thank you, Linda, and hello to everyone. It's great to be with you all today. So yes, I think it starts with a really strong position. We have a fortress position in our U.S. market. Our U.S. market is about 35% of our global sales. And so that provides us a stable platform from which to expand internationally. If you look at our U.S. market over the past 5 years, it's had a compound annual growth rate on maintenance products of in the order of 6% or 7%. And so the U.S. continues to grow. We still have growth opportunities in the U.S. And actually, in dollar terms, the U.S. has still been the fastest-growing market, growing about $55 million over the past 5 years heading into this fiscal year. Outside of the U.S., about 65% of our business is already international. We are truly a global business. Our brand, WD-40 brand, is available to buy in 176 countries and territories across the world. And so we're laser-focused on our top 20 growth opportunities around the world. So outside of the U.S., we have growth opportunities just about everywhere you can look. So a very strong track record already in Latin America, and we've pretty well tripled our business in Latin America over the past 5 or 6 years, but still strong growth in Latin America. And in Europe and Asia, we pretty well have growth everywhere we look. So -- the European direct markets, which I used to manage back in the days, are about a further 30% of our business. And so the U.K., the France, the Germany, the Spain, et cetera, the Italy. Those businesses are growing at very solid, predictable single to high digits, sometimes into the double-digit growth rates. And so that complements the U.S. market. And then looking kind of further afield at a lot of the emerging markets where we're consistently growing in places like China, which is our single largest growth opportunity, well into double digits. We have a great team. We have a direct business in China of about 60 people. It's now our third largest market globally after the U.S. and France and delivering very strong growth. And then our second largest opportunity being India, where we actually partner with a local company in India, a business called Pidilite, who are a fantastic strategic partner for us. And we've been achieving super strong rates of growth in India as well, over 20%. India is already our second largest market in unit terms, and so growing very, very quickly and a market one day that could rival the U.S. in terms of scale. And so you then overlay that with very strong growth opportunities in a lot of emerging markets. And so places like Indonesia and Turkey, which are growing in very high double-digit growth. And so overall, a mid- to high single-digit growth target, but with very fast growth available in a lot of these emerging markets.

Great. Thank you, Steve. So in terms of your must-win battle #2, this has to do with growing your sales and gross margin through the premiumization of WD-40 Multi-Use Product. Can you talk about what that is, what that entails and the economics of that premiumization? And how much opportunity do you still have here?

I'll go ahead and take that one, Linda. So for us, premiumization is really about improving the end user experience, and it also has the benefit of strengthening the economics of the business. These products, and of course, I brought products to show, the 2 products that we talk about when we talk about premiumization is the Smart Straw. So the biggest complaint -- end user complaint that we get is losing the straw on the classic can. So the Smart Straw solves that issue. So Smart Straw is one. And then the other one is the EZ-REACH. So the one with the flexible straw. Both of these products solve real user -- end user pain points and make the product, in this particular case, easier to get to a particular point and can save end users, particularly professionals, time and ultimately money. This allows us to offer these higher-value formats and stronger gross margins and also deepens our brand loyalty. So year-to-date, these 2 formats sales combined were up 19% over the prior year and represents about 50% of our WD-40 Multi-Use Product sales. So really seeing good traction in those formats. In unit sales, though, our premium formats make up 40% of our MUP sales globally. And so we have a meaningful runway ahead of us for growth there. For context, in a market -- a developed market like the U.S., we see about 80% of our sales in those premium formats. But then conversely, on the other side, in our emerging markets, the number is -- can be in the low single digits. We just recently unlocked or we are close to unlocking manufacturing capacity in China. And so really, that gives us the opportunity to bring the Smart Straw can into both China and our Asia marketing distributors, really in a region that has our lowest penetration of those formats. From a gross margin standpoint, from a revenue standpoint, these can -- this sells at a 30% uplift to the classic can and the EZ-REACH sells at a 45% uplift, and it doesn't cost us either 30% or 45% more to make. So both of these are great margin enhancers for us. We continue to target our annual growth rate for these formats at 10%, supported by expanding distribution. And so this opportunity is not just to trade customers up, but it's really to make the brand more relevant and really to bring a more useful can to our end users.

Great. Thank you, Sara. Yes, that's a really powerful part of your strategy. So in terms of your must-win battle #3, this has to do with your WD-40 Specialist product line. Can you kind of tell us all what those products are and what the growth opportunity is that you see with Specialist?

Sure. So the WD-40 Specialist line was conceived about what, 12, 13 years ago. And it was really leveraging the core brand equity that we've built now in many places around the world. And whereas the WD-40 core product, the multi-use product that most folks will be familiar with, which is really the kind of Swiss Army knife, if you like, of general purpose maintenance products. Specialist products are designed for professionals who seek a high degree of performance from Specialist products. And so things like high-performance penetrants or high-temperature lubricants, silicone sprays, cleaning and degreaser products, which a specialist or a professional would turn to, to solve more complex kind of maintenance problems. And so the Specialist range is currently our fastest-growing range as a sub-brand. It's been growing at a compound annual growth rate of about 14%. But we're only just really getting going. It's -- we have an identified opportunity of around $600 million of growth on the Specialist range. And we're only selling about 90% of our sales to 10 countries. And so we really have the opportunity to take the Specialist range around the world to many of the countries where we've already introduced and have built the WD-40 core brand successfully. And so that is a very, very fast driver of growth. It also performs extremely well online. And so it's really fueling strong e-commerce growth for us as well. And overall, between the 2, right, between the core product and the WD-40 Specialist range, it gives us an opportunity to take a category approach with our retail partners. And so protecting and maintaining the core strength of the core product, which typically accounts for perhaps 60% to 65% of the entire category sales, and surrounding and protecting the core brand, but also taking market share on those specific product areas from established competition around the world. So a very successful and fast-growing strategy.

That's a good segue into your fourth must-win battle, which has to do with digital capabilities. So your goal is to accelerate those capabilities in brand marketing and e-commerce, which is still relatively small for you, I believe, less than 10% of sales. Can you talk about that fourth must-win battle regarding digital capabilities?

Sure. So we do view digital as an accelerant across all of our other must-win battles, not necessarily as a stand-alone channel strategy. As you mentioned, Linda, e-commerce is less than 10% of our sales to date, but it is our fastest-growing channel. And year-to-date, we've seen our e-commerce sales up 22%, led by the U.S. and China. This must-win battle is both transactional, right, through the e-com and brand building. On the commerce side, we are improving our content quality, our search, our availability, our ratings and reviews and our execution with our key pure-play and omnichannel players. We do not sell direct to consumers. We do -- 100% of our sales are through retail or through these online pure-play and omnichannel partners. On the brand side, right, we work with a lot of the influencers. We work through social media, video and digital education helps us reach end users at scale all over the world. And it really allows us to show them new uses, new formats that I talked about with our premiumization strategy and the new solutions, really bringing in that Specialist line. As Steve mentioned, Specialist does extremely well online because you can really serve up a specific solution when people are searching for something specific. Digital also helps us premiumize because it gives us a better platform to explain why the Smart Straw and the EZ-REACH and the Specialist products are worth that trade-up. What people don't always appreciate is actually how digital the brand is online. For a 70-year-old brand, the amount of engagement that people have online around WD-40 is really not -- no other competitor can even touch the amount of online content that we have. Our end users love to share uses. They love to tell stories about how they use our products. And that peer-to-peer sharing is really invaluable. And again, no one else in our category has that. So we leverage our digital tools to really meet millions of users that are going online and now more -- and more than ever, they're going online in their path to purchase, and that's how we connect with our end users.

Great. Thanks, Sara. So switching a little bit more to immediate maybe issues that the company faces in the macro environment. You have several key input costs that go into the cost of the can of WD-40. Those include petroleum-based specialty chemicals, tin cans and plastic resin. So we've seen obviously a lot of volatility in oil that relates to a key input cost of yours. Can you explain how you manage through that and talk about your ability to take pricing where needed?

Sure. So let's talk about the cost of the can overall. So roughly 30% to 35% of the overall cost of our can is subject to that monthly spot pricing volatility that you mentioned. And it's tied to specialty chemicals, primarily solvents and base oils. We manage our input cost volatility usually within a range. We're usually comfortable within a range of it coming up a little bit, and it always comes back down. It usually flows within a range that's manageable. And so we don't -- we're not chasing price just by some within -- when those costs are within a band that we're comfortable with. On the flip side, the other part of our cost structure that is less volatile relates to tinplate cans and manufacturing fees, which are longer-term contracts. And so specialty chemicals is only one piece of the equation. Those specialty chemical costs can move differently than the headline oil prices that we typically point investors to monitor at least that subset of our input costs. And recently, we have seen those, we call it decoupling. And so the cost of our input -- the cost of our input costs have gone up slightly higher, I want to say slightly higher than the cost of what you've seen in those trading markets. In the near term, we are expecting there to be some pressure on our gross margin. We did reflect that in our most recent guidance that we put out between 54.5% and 55.5% is what we're expecting for the full year. So still in line with our 55-plus targets, but we will see it have an impact on us in the fourth quarter. We have taken price. We mentioned that as part of our third quarter earnings call. We have already taken some price actions in both Europe and Asia, and we are continuing to evaluate whether or not additional pricing actions are needed. From a pricing standpoint, the strength of the brand, our high awareness and really the value that we deliver to end users gives us the ability to take reasonable price when necessary. And given the stickiness that we expect in the near term, we did adjust -- we did move on those price actions because we do believe that the input costs will be sticky for a period of time. We are thoughtful about the timing and our customer partnerships, but we have been very clear that we will defend our gross margin. It took us a lot of time to get back to the 55%. And so we want to make sure that we are able to hold that going forward.

Great. That's a great explanation. So can you talk about where your products are manufactured? And you've taken a lot of actions and continue to take actions to further strengthen your supply chain. Can you talk about that, please?