WD-40 Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
January 10, 2025

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD Company First Quarter Fiscal Year 2025 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

I would now like to turn the presentation over to the host for today's call, Wendy Kelly, Vice President, Stakeholder and Investor Engagement. Please proceed.

Speaker 1

Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-forty Company's President and Chief Executive Officer, Steve Frass and Vice President and Chief Financial Officer, Sarah Heiser. 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 November 30, 2024. These documents will be made available on our Investor Relations website at investor.

Speaker 1

Wd40company.com. A replay and transcript of today's call will also be made available 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 documents that are posted on our Investor Relations website. As a reminder, today's call includes forward looking statements about our expectations for the company's future performance.

Speaker 1

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 web cast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, January 10, 2025. The company disclaims any duty or obligation to update any forward looking information as a result of new information, future events or otherwise.

Speaker 1

With that, I'd now like to turn the call over to Steve.

Speaker 2

Thanks, Wendy, and thanks to all of you for joining us this afternoon. Today, I'll begin by discussing our sales results for the 1st fiscal quarter of 2025. I will also provide you with an update on our must win battles and one of our strategic enablers. Following that, Sarah will share additional details on our Q1 results, provide updates on the anticipated divestiture of our Home Care and Cleaning business and our fifty fivethirtytwenty five business model and review our outlook for fiscal year 2025. We'll then take your questions.

Speaker 2

I'm happy to share with you that today we reported net sales of $153,500,000 for the Q1, which was an increase of 9% from the Q1 of last fiscal year. Furthermore, we reported net sales of maintenance products, our core strategic focus of £145,500,000 for the Q1, which was an increase of 10% from the Q1 of last fiscal year, marking the 3rd consecutive quarter of double digit growth in this category. Gross margin continues to improve and is moving closer to our target of 55%. In the Q1, we reported gross margin of 54.8%, which is an improvement of 70 basis points sequentially from the 4th quarter 100 basis points compared to the Q1 of last fiscal year. Gross margin excluding the impacts of the assets we currently have held for sale was 55.4%.

Speaker 2

This improvement of our gross margin is driving increased profitability at the bottom line. Net income for the Q1 was $18,900,000 an increase of 8% over prior year. We are pleased with the strong volume performance the business is currently experiencing. In the Q1, excluding the impact of currency, nearly 90% of our growth was driven by increased sales volume. Global sales volumes showed strong progress in 2 of our larger trading blocks, driving 10% sales growth over prior year within the Americas and 13% within EMEA.

Speaker 2

Asia Pacific is lapping a strong prior year quarter and was down 8% in the Q1. Now let's talk about Q1 sales results in dollars by segment starting with the Americas. Sales in the Americas, which includes the United States, Latin America and Canada increased 8% in the Q1 to $69,400,000 compared to the same period last year. Sales of maintenance products increased 9% in the Q1 to $65,400,000 compared to the same period last year. The bulk of this growth was driven by higher sales of WD-forty Multi Use Product, which increased 9% compared to the prior year quarter.

Speaker 2

A significant portion of this growth resulted from strong sales in the U. S. And Latin America, which increased $2,400,000 $2,300,000 respectively. In the United States, the increase is due to higher sales volume linked to successful promotional activities. Sales of W40 Multi Use Product in Latin America were favorably impacted by our transition to a direct market model in Brazil.

Speaker 2

This distribution model shift favorably impacted net sales in Brazil by approximately $3,100,000 in the Q1. These increases were partially offset by lower sales volumes in Mexico due to the timing of customer orders as well as the unfavorable impacts of foreign currency exchange rates. Higher sales in the U. S. And Latin America were partially offset by lower sales of WD-forty multiuse product in Canada, which decreased slightly by $200,000 compared to the prior year quarter due to the timing of customer orders.

Speaker 2

In the Americas, sales of WD-forty Specialist increased by $1,100,000 or 16% compared to the prior year period, primarily due to new distribution and successful promotional programs in the United States. Growth in maintenance products was partially offset by a 7% decline in home care and cleaning products. This drop is due to reduced advertising and promotional efforts for these brands as we shift our focus to boosting maintenance product sales in line with our 4x4 strategic framework. In total, our Americas segment made up 45% of our global business in the Q1. Now let's take a look at our sales in Haima, which includes Europe, India, the Middle East and Africa.

Speaker 2

Net sales in EIMEA increased 18% in the Q1 to $57,500,000 compared to the same period last year. Sales of maintenance products increased 19% in EIMEA in the Q1. The strong growth in EMEA was driven primarily by higher sales of the V40 multiuse product, which increased 21% due to higher sales volume across almost all regions compared to the prior year quarter. Sales increased most significantly in India, France, Benelux and Iberia, which were up $1,900,000 $1,900,000 $900,000 $900,000 respectively. In addition to the strong performance of our multiuse product, EMEA also saw strong growth of $1,200,000 or 17% for WD-forty Specialist during the quarter, primarily due to higher sales volume because of increased distribution and higher levels of demand, most significantly in Italy, the UK and Iberia.

Speaker 2

The growth in maintenance products was partly offset by a decline of 19% in home care and cleaning product brands sold in the UK. In total, our EMEA segment made up 38% of our global business in the Q1. Now on to Asia Pacific. Southern Asia Pacific, which includes Australia, China and other countries in the Asia region, decreased 4% in the Q1 to $26,600,000 compared to the same period last year. Despite a year over year decline in sales, the Q1 of fiscal year 2025 marks the 2nd highest sales quarter in the segment's history.

Speaker 2

The year over year decline was driven by lower sales of the B40 multiuse product in our Asia distributor markets, where sales decreased $2,600,000 compared to the prior year quarter. In the Q1, our Asia distributor markets experienced a decrease in sales volume due to timing of customer orders. You may recall our Asia distributor markets had a very strong 4th quarter and sales of W40 Multi Use Product in Q4 were up 51%. Marketing distributor customers, particularly in Indonesia, South Korea and Philippines, who placed large orders in the 4th quarter did not repeat those orders in the Q1. This is timing related, and we expect activity will pick up in the second half of the year.

Speaker 2

In China, sales of our WD-forty Multi Use product were up 13% or 1,000,000 in the Q1, primarily due to successful promotional programs and marketing activities that led to increased sales volume. In Asia Pacific, sales of WD-forty Specialist were up 2% in the Q1. In China, sales of WD-forty Specialist increased 24% compared to the prior year due primarily to new distribution. The decline in maintenance products is partly offset by an increase of $400,000 in sales of home care and cleaning product brands sold in Australia. In Australia, our home care portfolio boasts a robust brand presence, a solid competitive edge and significant growth opportunities and another up to sale.

Speaker 2

In total, our Asia Pacific segment made up 17% of our global business in the Q1. Now let's talk about our Musquin Battles. Our must win battles focus on what we do to increase sales and profitability. Starting with must win battle number 1, lead geographic expansion. In the Q1 of 2025, global sales of the V40 multiuse product were approximately $119,000,000 representing growth of 10% compared to the same period last year.

Speaker 2

We experienced 21% growth of our signature brand in EIMEA and 9% growth in the Americas. This growth was partially offset by lower sales in Asia Pacific. It's amazing to me that even after 71 years, the growth opportunity for W40 Multi Use product remains so significant. Using a proprietary algorithm, we've identified the global benchmark sales opportunity for W40 Multi Use Product to be approximately $1,600,000,000 Therefore, there remains approximately $1,200,000,000 of land and expand growth opportunity across the globe. This is where my management team and I primarily focus our efforts.

Speaker 2

Our job is to unlock opportunities that drive substantial value for stockholders. A W40 company will do that by accelerating our global expansion. Today, I'd like to spotlight a few of our priority markets, beginning with markets that are driving our growth in the Americas segment. In 2020, we took to Mexico market direct. And since doing so, we virtually quadrupled our Mexico business from 6,800,000 to nearly $26,000,000 in FY 2024 and we're not done as we see Mexico as a $30,000,000 to $40,000,000 market over the longer term.

Speaker 2

Despite short term fluctuations, our long term success in Mexico gave us confidence to convert Brazil to a direct market in March of 2024. So far, we're extremely pleased with the progress we've made in Brazil. In FY 2024, we grew Brazil by $7,000,000 and expect a further $7,000,000 to $9,000,000 of growth in FY 2025. We expect Brazil to be a $20,000,000 plus market within 3 to 5 years and ultimately to grow to be as large as Mexico over the coming 10 years or so. Moving over to Asia Pacific.

Speaker 2

We've identified several high potential markets in Asia Pacific including China, Japan and Indonesia. Indonesia is a fast growing market for us with a compound annual growth rate of over 7% over the past 5 years. Indonesia is now also one of our largest marketing distributor markets in the world. It's also unique because it's one of our first hybrid markets. This means we have both an outstanding local marketing distributor partner, but also a small team of WD-forty company personnel in market, a formula that's proven to be highly effective for us.

Speaker 2

Also in Asia Pacific, China has consistently delivered strong growth in recent years. We've been direct in China since 2006 and have a highly capable team of approximately 60 employees there. We use a simple but effective strategy in China. We expand distribution, targeting double digit growth in points of distribution, while sampling 20,000 plus factories each and every year. This strategy continues to deliver strong results for us.

Speaker 2

And finally, in EMEA, we've identified several hypertension markets in the region, including India. India is one of, if not the most attractive growth markets in the world right now. Since entering our strategic partnership with our local partner 6 or so years ago, we've more than doubled our sales in India, making it our 2nd largest market in terms of unit sales, and we see huge potential for further growth ahead. This increased focus on our key growth markets around the world continues to yield success. In fiscal year 2025.

Speaker 2

We'll continue to invest in building our flagship brand with end users around the world. Next is must win battle number 2 accelerating premiumization. Our second must win battle is to accelerate sales of premium formats of WD-forty Multi Use Product. For us, premiumization is a major contributor to our revenue growth as well as gross margin expansion and our premiumized products are loved by end users around the world. In the Q1, sales of WD-forty Smart Straw and Easy Reach when combined were up 17% compared to the prior year period.

Speaker 2

With premium formats representing only approximately 40% of global unit sales of W40 Multi Use Product, there is significant upside for growth. On a go forward basis, we'll be targeting a compound annual growth rate for net sales of premiumized products of greater than 10%. Our 3rd must win bad list to drive W40 Specialist Growth. In the Q1, sales of WD-forty Specialist Products were $19,000,000 up 14% compared to the same period last year. We saw growth of WD-forty Specialist Products across all three trade blocks with particularly strong growth in the Americas and EIMEA, where sales grew 16% 17%, respectively.

Speaker 2

We use a similar algorithm for W40 Specialist to the one we use for W40 Multi Use product. We've identified the global benchmark sales opportunity for W40 Specialist to be approximately $605,000,000 Therefore, there remains approximately $530,000,000 of land and expand growth opportunity across the globe for WD-forty Specialist. On a go forward basis, we'll be targeting a compound annual growth rate for net sales of the B40 Specialist of greater than 15% in reported currency. Our final must win battle is the turbocharged digital commerce. We view digital commerce as an accelerator for all our other must win battles.

Speaker 2

In the Q1, e commerce sales were up 22%, primarily due to strong growth in IMAIA. We believe the greatest benefit of this must win battle is to increase brand awareness and engagement online, which will lead to an improved shopping experience and higher sales across all channels, both in store and online. And now turning to the second element of our 4x4 strategic framework, our strategic enablers, which focus on operational excellence and collectively underpin our most win battles. I will not review all our strategic enablers today because we just shared a robust update with investors at our year end. However, we just published our 2024 ESG report at the end of November, so I want to provide an update on strategic enable number 2, which is to build an enduring business for the future.

Speaker 2

The B. Fulley company has long been committed to purpose driven growth. We're committed to operating our business in a manner which ensures a balance between economic growth, environmental impact and social well-being, which will help create and protect long term stakeholder value. I'm very proud that we've now gone public with our sustainability targets after a very in-depth process, putting together our science based roadmap for achieving carbon reduction. In our November ESG report, we pledged to achieve a 50% absolute reduction in Scope 1 and Scope 2 emissions along with a 10% to 20% absolute reduction in Scope 3 emissions by 2,030.

Speaker 2

We've also disclosed details about the Science Based Environment Impact Roadmap will use to meet these targets. Many of our employees are passionate about pivoting our organization to a more sustainable future, and I strongly believe that setting external targets will galvanize the organization to make significant progress in future proofing the organization. With that, I'll now turn the call over to Sarah.

Speaker 3

Thanks, Steve. Today, I will share an update on the anticipated divestiture of our Home Care and Cleaning business in the Americas and the U. K, provide insights into our business model and review some highlights from our Q1 results. While our full year 2025 guidance remains unchanged, I will provide some additional color on our outlook. But first, I want to talk about a new mantra that you are hearing in the halls here at WD-forty Company, few things, many places, bigger impact.

Speaker 3

This mantra has been born out of the company's long standing strength, focus. Few things, many places to drive a bigger impact has historically been an approach central to our product strategy. In fiscal year 2024, almost 90% of our revenue and growth came from sales of WD-forty multiple use product and WD-forty specialists. We see significant growth opportunities for those product lines. With approximately 650 employees, we want each one to wake up every morning thinking about how to grow the blue and yellow brand with a little red top.

Speaker 3

That kind of focus is hard to find and incredibly valuable and was the driving factor for us when we made the decision to pursue divesting our home care and cleaning brands in the Americas and the U. K. This quarter, we met all the criteria to classify the assets we intend to sell as held for sale on our balance sheet, indicating progress on this journey. While I do not have a detailed update for you today on the anticipated divestiture, I can share with you that we continue to make progress on the transaction. The investment bank we have engaged continue to have discussions with potential suitors on our behalf.

Speaker 3

While there are no certainties on identifying a buyer when going to the market, our expectation is that we will likely complete the divestiture of these brands over the upcoming months. We will provide further updates on the divestiture process as appropriate. Few things many places to drive a bigger impact is now being applied beyond our product strategy and is driving operational efficiencies throughout our business. We lean into this mantra by streamlining our systems and processes and fostering greater global collaboration. Later this year, we will be working towards bringing 2 more locations onto our new ERP system.

Speaker 3

We are focused on standardization and processes like project and portfolio management, along with streamlined approaches to solution driven decision making. Lastly, we've established the foundation to move with more intent toward productivity improvements by establishing global centers of excellence along key areas of IT. We are working on bringing once disparate teams together to harness their collective skills and capacity to focus on our long term growth objectives. Few things, many places, bigger impact can also have a tangible impact on our business model, and we continue to make significant strides in our gross margin recovery. Our fifty Fivethirtytwenty five business model continues to be a long term beacon that we will move toward and align with over time.

Speaker 3

In the short to mid term, we continue to think about each critical component of the model in a range. To begin, let's look at Q1 gross margin performance. We target a range of 50% to 55% for gross margin, and we have made significant progress to perform at the top end of this range. In the Q1, our gross margin was 54.8 percent compared to 53.8% last year. This represents an improvement of 100 basis points, driven primarily by the impact of favorable sales mix and other miscellaneous mix impacts, which positively impacted our gross margin by 140 basis points year over year.

Speaker 3

Lower costs associated with Specialty Chemicals also positively impacted gross margin by 60 basis points. These positive impacts to margin were partially offset by higher costs associated with warehousing, distribution and freight costs, primarily in the Americas, which negatively impacted our margin by 100 basis points. I'm also happy to share with you that this quarter gross margin continued to improve in both EMEA and Asia Pacific trading blocks. Within EMEA, gross margin improved 290 basis points compared to the same period last year to 57.8%. Asia Pacific also improved gross margin 130 basis points over the same period last year to 57.6%.

Speaker 3

In the Americas, gross margin declined slightly by 30 basis points to 50.4%. Considering our current trajectory, the current cost environment and macroeconomic factors, we continue to target achieving a gross margin of 55% by the end of fiscal year 2026 at the latest. However, depending on the cost landscape, timing of execution of supply chain cost initiatives and if we are successful in divesting of those home care and cleaning brands, we may achieve this goal even sooner, potentially by the end of fiscal year 2025 following the divestiture. New this fiscal year, gross margin recovery is a central focus for senior leadership, who will be incentivized to recover gross margin to 55% and beyond, excluding the impact of the assets held for sale. Now turning to our cost of doing business, which we define as total operating expenses plus adjustments for certain non cash expenses.

Speaker 3

Cost of doing business is how we measure how efficient we are at operating our business. It is primarily comprised of 3 areas: investments in our employees, investments in building our brand and freight expense to get our products to our customers. We target a range of 30% to 35% as a percentage of revenue for cost of doing business. This quarter, our cost of doing business was 37% compared to 36% in the same period last year. On an absolute dollar basis, our cost of doing business increased by $7,500,000 or 15% due to higher employee related expenses, increased professional service costs, higher credit losses due to a customer bankruptcy and increased freight costs.

Speaker 3

In addition, the investments we make in brand building activities increased period over period. As a percentage of sales, our A and P investment was 5.5% compared to 5% in the Q1 of the prior year, but is well in line with our fiscal year guidance. We expect to see improvements in the cost of doing business over time as sales grow, which is the most important factor in managing our cost of business towards our long term target of 30% to 35%. Turning now to adjusted EBITDA. In the Q1, our adjusted EBITDA margin was 18% compared to 19% in the same period of last year.

Speaker 3

However, EBITDA grew by nearly 4% over the prior year even after absorbing increased costs. As we've mentioned previously, if we successfully divest the Home Care and Cleaning brands that we are actively marketing, we know that we will need some time to digest the impacts. However, we continue to believe we can move adjusted EBITDA margin back to our mid term target range of 20% to 22% over the medium term. Now let us discuss operating income and EPS as well as a subsequent event that will impact our reported results beginning next quarter. Operating income improved to $25,100,000 in the first quarter, which was an increase of 4% over the previous year's Q1.

Speaker 3

Excluding the impacts of the assets currently held for sale, operating income would have been reduced by 1,500,000 dollars Diluted earnings per common share for the quarter were $1.39 compared to $1.28 for the Q1 last year, which was an increase of 9% over the previous year's Q1. Excluding the impacts of the assets held for sale, diluted EPS would have been reduced by $0.08 per share. Our diluted EPS reflects 13,600,000 weighted average shares outstanding. Now I'd like to update you on a non cash subsequent event that will materially impact both our Q2 and fiscal year 2025 net income and EPS. In fiscal year 2019, we took an uncertain tax position related to the Tax Cuts and Jobs Act, specifically for calculating the one time toll tax on unremitted foreign earnings.

Speaker 3

This resulted in a reduction in earnings in 2019. With the recent expiration of federal statutes in December, subsequent to our Q1, the company released the unrecognized tax benefit associated with this mandatory one time toll tax. The release of this tax benefit will result in a favorable income tax adjustment of $11,900,000 net of the federal benefit for fiscal year 2025. We will back this out as a non GAAP adjustment in the 2nd quarter. Now a brief reminder on changes we've made that will affect foreign currency impacts this year.

Speaker 3

The functional currency for our U. K. Subsidiary, which consolidates the results for the EMEA trade block, has long been the pound sterling. We reassess this on an annual basis. As we look out this year and beyond, the shifts in the operating landscape within our EMEA region, along with certain strategic actions we are taking, required a change in our functional currency.

Speaker 3

A few key factors influenced our decision, including a growing dependence on euro denominated inventory within our supply chain and an increase in sales and operational expenses tied to the euro. As a result, beginning this year, we changed the functional currency of our U. K. Subsidiary from pound sterling to euro, with the change being applied prospectively. As a result of this change, we are utilizing a methodology that is distinct from constant currency during fiscal year 2025 to estimate the translation impact of foreign currency exchange rates on current period U.

Speaker 3

S. Dollar net sales, specifically for our EIMEA segment. The Americas and Asia Pac segments were not impacted by this. Beginning fiscal year 2026, we expect to revert to our customary estimation methodology using constant currency figures. Now let's look at our capital allocation strategy.

Speaker 3

Our resilient and asset light business model coupled with actions we have taken to grow our top line while improving gross margin are all contributors to maintaining a strong balance sheet and liquidity position. Maintaining a disciplined and balanced capital allocation approach remains a priority for us. For the foreseeable future, we expect maintenance CapEx of between 1% 2% of sales per fiscal year, which is in line with our asset life strategy. We continue to return capital to our stockholders through regular dividends and buybacks. Annual dividends will continue to be our priority and are targeted at greater than 50% of earnings.

Speaker 3

On December 11, our Board of Directors approved a quarterly cash dividend of $0.94 per share, reflecting an increase of 7% over the previous quarter's dividend of $0.88 per share. During the Q1, we repurchased approximately 13,750 shares of our stock at a total cost of approximately $3,600,000 under our current share repurchase plan. In total, we returned approximately $16,000,000 to our stockholders in the Q1 of fiscal 2025 through share repurchases and dividends. Now let's turn to FY 2025 guidance. As a reminder, we issued this year's guidance on a pro form a basis, excluding the financial impact of the Home Care and Cleaning brands currently classified as assets held for sale.

Speaker 3

While the exact timing of the transaction remains uncertain, we believe this approach will provide investors with clarity on the direction of the core business and help minimize the noise surrounding the transaction. I encourage investors to review our Q1 fiscal year 2025 earnings presentation, which includes a pro form a view. Therefore, our guidance for fiscal year 2025 is unchanged, and we are estimating net sales growth for the pro form a 2024 results is projected to be between 6% 11%, with net sales between $600,000,000 $630,000,000 after adjusting for translation impacts of foreign currency. Gross margin is expected to be between 54% 55%. Advertising and promotion investment is projected to be around 6% of net sales.

Speaker 3

Operating income is expected to be between 95,000,000 100,000,000 dollars representing growth of between 6% to 12% over the pro form a 2024 results. The provision for income tax is expected to be around 24%. And diluted earnings per share is expected to be between $5.20 $5.45 which is based on an estimated 13,500,000 weighted average shares outstanding. This range represents growth of between 9% 14% over the pro form a 2024 results. This guidance assumes no major changes to the current economic environment.

Speaker 3

Unanticipated inflationary headwinds and other unforeseen events may affect our view of fiscal year 2025. In the event we are unsuccessful in divesting the assets currently held for sale, our guidance would be positively impacted by approximately $23,000,000 in net sales, $6,000,000 in operating income and $0.33 in diluted EPS on a full year basis. That completes the financial overview. Now I would like to turn the call back to Steve.

Speaker 2

Thank you, Sarah. 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 sales of maintenance products were up 10% in the Q1, marking the 3rd consecutive quarter of double digit growth in this category. You heard that sales of W40 Multi Use Product were up 10% in the Q1.

Speaker 2

You heard that sales of W40 Specialist were up 14% in the Q1. You heard that we are pleased with the strong volume performance the business is experiencing and that in the Q1 nearly 90% of our growth was driven by increased volume. You heard that management's job is to unlock opportunities that drive substantial value for stockholders, and that includes increased focus on our key growth markets around the globe. You heard that we've now gone public with our sustainability targets after a very in-depth process, putting together our science based road map for achieving carbon reduction. You heard about our company's new mantra, few things, many places, bigger impact, which is intended to result in operational efficiencies as we grow.

Speaker 2

You heard that we're incredibly pleased with the improvements we've made to gross margin, but it continues to move closer to our target of 55%. You heard that we continue to make progress in the sale of our Home Care and Cleaning business, currently held for sale and expect to complete the divestiture in the coming months. You heard that we raised our dividend last month and have returned approximately $16,000,000 to our stockholders in the Q1. And you heard that we reiterated our full fiscal year 2025 guidance. Thank you for joining our call today.

Speaker 2

We'd now be pleased to answer your questions.

Operator

Our first question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question.

Speaker 4

Hi, everyone. Thanks for taking my question. I was just looking at kind of through the Q and stuff like that. I was looking at operating income and noticed that the Americas was down 11% year over year and it's partially due to, I guess, to an EBITDA margin kind of contraction. I was wondering what that's attributed to, if there was something special there or just any color you can provide?

Speaker 3

Hi, Daniel. This is Sarah. So yes, there's a couple of things that are impacting that. First is the timing. If you look at the timing of the A and P spend in Q1 this year compared to last year, we are ahead of our pace in the Americas for Q1.

Speaker 3

In addition, I mentioned on my on the call that there was a bankruptcy with one of our customers and 100% of that, which was about $800,000 hit the Americas trading block. So, those 2 are the bigger items and then we also have a timing of our growth reward program accruing at a higher rate in Q1 compared to the prior year.

Speaker 4

Okay. That's helpful. And then, so you mentioned, I think, I forgot that right, 55% in gross margin by 2026, but you're already at 54.8%. And I understand we said we didn't know it could come faster, but I was wondering if your base case is suggesting that there will be some give back maybe because of higher logistical costs or warehousing costs? Or how should we think about it?

Speaker 4

Because I mean, it still seems that the end of 2026 is still far away.

Speaker 3

Yes. If we even just going back a year, our margin can fluctuate pretty dramatically quarter to quarter depending on our sales mix and our product mix. So even going back to Q1 of last year, we had a really strong quarter margin coming out of Q1, dropped down a little bit and then ticked our way back up. So it is a very good start. We are obviously seeing a little bit of higher cost on the freight and logistics side in the U.

Speaker 3

S, but we're cautiously optimistic on holding margin through the rest of this year. So that's why we're saying definitely by the end of next year, we're feeling confident on that, but we think we have a chance to get there before the end of this year.

Speaker 4

All right. Thank you very much.

Speaker 3

Okay.

Operator

Your next question comes from the line of Linda Bolton Weiser from WD-forty. Please proceed with your question.

Speaker 5

Yes. Hello. Happy New Year. So I was wondering, sorry, if you gave some of the details about your year over year increase in SG and A expense. I'm not sure I caught all the details, but it did seem like a big increase of 14% year over year.

Speaker 5

So I'm curious, is that the run rate to expect for the whole year? Or was there something in the quarter that's going to change and go away or something in the remaining quarters of the year? Thank you.

Speaker 3

Hi, Linda. So there was the bankruptcy that we had with one of our customers in the Americas. So that is a one time that's hitting the Q1. We are also accruing at a higher growth reward program going into this year than we were going into last year. So there is expected increased expenses in that, but that is built into our guidance for this year.

Speaker 5

Can you quantify the one time effect in 1,000,000 of dollars that bankruptcy had on the quarter?

Speaker 3

The bankruptcy for the quarter was approximately $800,000

Speaker 5

Okay. Thanks. And then, I believe you said that fact had a little bit of a positive effect on top line in the quarter. Can you update what your thoughts are for that? I guess, how does it work out in the remaining part of the year?

Speaker 5

Does that become negative? Like how has it changed in terms of your projection for that aspect of the sales line? Thanks.

Speaker 3

Yes. When we look at the Q1 rates right now compared to the Q1 rates last year, globally, it was trending positively for us. Although if you look at the individual trade blocks, specifically in the Americas with the Mexican peso and the Brazil real, it is negatively impacting us. So that was offset by positive impact on that currencies elsewhere. If you were to look at the rates today and kind of take a dramatic look at the rates today and forecast that out for the rest of the year, we do anticipate that it would take a turn globally, that it would then have a negative impact if we forecast it out for the remainder of the year at today's rates.

Speaker 3

When you compare them to it out for the remainder of the year at today's rates when you compare them to the full year rates from prior year.

Speaker 5

Okay. Thanks. And then I think there was some mention in your 10 Q of U. S. Promotion in the quarter.

Speaker 5

It sounded like maybe that benefited the multiuse product sales in the quarter. Can you give more color on that? And would you regard that as a shifting of some sales from the Q2 into the Q1? Thanks.

Speaker 2

Hey, Linda, it's Steve. So no, I don't think there's anything particular in terms of large volume promotions that have really boosted sales. It's really generally I think particularly the home center channel in the U. S. Has gone very, very strong.

Speaker 2

Our retail sales generally have picked up. Our unit sales at POS level were up around 4%, 5% in the Q1. And so, yes, we're very encouraged by the kind of switching in kind of retail foot traffic and DIY activity looks to be improving. And so we see that as a positive beyond the Q1.

Speaker 5

Okay. And then just in terms of the cadence, I know you don't want to get into quarterly type guidance at all. But the cadence, I mean, you actually have an easy seeming easier comparison prior to your comparison in the Q2. And I can't quite remember what that was because of, was that when you had the little bubble related to SAP implementation? I can't quite remember, but it does seem like there's an easier kind of comparison both on sales and a little bit on profit growth.

Speaker 5

Can you just remind us what that was?

Speaker 3

Yes. Linda, very good memory. So yes, it was the quarter that we went live with our ERP and we disclosed about a $2,500,000 impact, that we experienced in that quarter alone, for with disruption at the top line. So that's the majority of it.

Speaker 5

So then theoretically, you would have like a higher kind of like so if your U. S. Growth rate or I don't know your overall sales growth was what was in the quarter 9%. So theoretically it would be higher even in the Q2 because you have that easy comparison all else being equal. Is that the way to think about it?

Speaker 2

I think you have a couple of caveats. One is that we kind of disclosed last quarter the Asia distributor markets are off to a slow start. That was expected and so we expect that to pick up in the back half of the year. Europe is out the gate very strong. We expect that to continue.

Speaker 2

Although we do get up in the last half of the year in some quite tough comparables versus prior year. And then obviously the Brazil impact and so we have we had a very strong start in Brazil with over $3,000,000 of growth in Q1. We should get that versus prior year again something similar or better in Q2. And then obviously that begins to taper off then in Q3 and Q4 as we lap our taking Brazil direct in Q3 and Q4.

Speaker 5

Thank you. That's very helpful. And then just to clarify, if you do not sell the cleaning business by the end of the second quarter, will it be removed because you're restating to have it discontinued ops? Or is it going to be in there if you don't sell it?

Speaker 3

No, it'll still be in there if we don't sell it. So it's not a big enough of a strategic shift for us to qualify for discontinued ops. So, if it's still not sold by the end of the second quarter, it'll still be in our reported results. And we'll have we would have a similar reporting mechanism and we'll try to be very transparent with so you can do it with and without view.

Speaker 5

Great. Got you. And then, I think, yes, you did say strong demand in UK, Italy, you named a few regions there. Is that is there anything particular driving that market in Europe in terms of the strength that you're seeing there?

Speaker 2

So Europe just about everywhere was strong in performance all across Europe. I can't really think of anything that didn't really perform. The UK was a little flat compared to some of the other markets, but excellent performance and all of our must win battles being executed very strongly. There is in the 1st part of the year just a little bit of distribution where we had kind of distribution losses that are still coming back in the first half of the year. One client in perhaps which may be positively impacted the Q1 by just under $1,000,000 maybe and we'll continue to add that kind of small impact in terms of a boost in the first half of the year.

Speaker 2

But beyond that EMEA is back in growth mode just as it was back to where it was before the kind of loss of the Russian business and the inflation. So we see very, very strong growth out of Europe.

Speaker 5

Okay, then. Thank you. That's all for me. Thank you. Thanks, Linda.

Operator

Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for participating on today's conference call and ask that you please disconnect your lines.

Powered by Quartr

Key Takeaways

  • WD-40 Company reported Q1 net sales of $153.5 million, up 9% year-over-year, with maintenance products growing 10% and marking the third consecutive quarter of double-digit growth in that category.
  • Gross margin improved to 54.8% (55.4% excluding assets held for sale), up 70 bps sequentially and 100 bps versus last year, moving closer to the 55% target.
  • Nearly 90% of Q1 growth was driven by increased volume, with sales up 10% in the Americas and 13% in EMEA, while Asia Pacific lagged 8% due to timing of distributor orders.
  • All four “must-win battles” showed strong momentum: WD-40 Multi-Use was up 10%, Specialist products up 14%, premium formats combined up 17%, and e-commerce sales rose 22%.
  • The Home Care & Cleaning business has been classified as held for sale, with management expecting to complete the divestiture in the coming months.
A.I. generated. May contain errors.
Earnings Conference Call
WD-40 Q1 2025
00:00 / 00:00