Release Date: July 10, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- WD-40 Co (WDFC, Financial) reported net sales of $155 million for Q3 2024, marking a 9% increase and a new record for the company.
- Sales of maintenance products grew over 10% for both the third quarter and year-to-date, aligning with long-term growth targets.
- Gross margin improved to 53.1%, up 250 basis points compared to the same quarter last year.
- The company saw strong sales growth in Latin America, particularly due to the transition to a direct market model in Brazil.
- E-commerce sales increased by 18% year-to-date, with double-digit growth across all trade blocs.
Negative Points
- Sales in the United States decreased by 2% compared to the prior year quarter, driven by several factors including strong prior year performance and declines in nonstrategic household brands.
- Sales of WD-40 Multi-Use Product in Canada decreased by 13% due to phasing associated with the discontinuation of the classic can delivery system.
- The ERP implementation caused some disruptions, although these lessened as the quarter progressed.
- Home care and cleaning product brands, which are not a strategic focus, saw a decline of 19% in EIMEA.
- The company continues to face challenges with input cost fluctuations, which could impact gross margin targets if there are significant spikes.
Q & A Highlights
Q: Can you provide some color on the gross margin outlook for FY25? Will it continue at the level where FY24 ends?
A: We are tracking towards the high end of our range for FY24. While we don't provide specific guidance for FY25 yet, we are targeting to achieve a gross margin of 55% by the end of FY26. This will be driven by premiumization, operational efficiency in the supply chain, and some targeted price increases.
Q: What gives you confidence in achieving the 55% gross margin target by FY26?
A: The roadmap to 55% gross margin includes three main buckets: premiumization and sales mix, operational efficiency in the supply chain, and targeted price increases. We believe these initiatives, along with a stable cost environment, will help us achieve our target.
Q: Can you explain the sales growth comparison between Q3 and Q4? Is the Q4 prior year comp easier?
A: The strong growth in Q3 was driven by volume recovery in Europe and Latin America. For Q4, Asia Pacific had a very weak comparable number last year, so we expect strong growth in Q4 for that region.
Q: Are there any unusual costs related to ERP implementation that might dissipate in the next fiscal year?
A: We have been spending higher this year due to the ERP go-live. While we will continue to invest in IT, the costs for the next phase will not be at the same level as this year.
Q: Has the ERP rollout occurred in Europe, or is it planned for the next several quarters?
A: The ERP rollout has not yet occurred in Europe. We went live with the system in the US, Latin America, and Asia regional distributors. Our next phase will target smaller locations and Brazil.
Q: What is the impact of fluctuating input costs on achieving the 55% gross margin target?
A: If input costs fluctuate within $20 directionally, we tend to ride that wave. However, if there is a significant and sustained spike, we may need to consider other levers to offset the impact.
Q: Are you sharing the amount spent on the new ERP system? What were the IT spending levels in 2023 and 2024?
A: We have not disclosed individual year IT spending but mentioned that the total cost of the first wave of the ERP system was approximately $10 million, amortized over 10 years. Other costs incurred over roughly 4 to 4.5 years did not qualify for capitalization.
Q: Can you provide more details on the growth within the WD-40 Specialist category? Are there specific products growing faster than others?
A: Around six core products account for 80% of WD-40 Specialist sales. We focus on expanding distribution and targeted sampling for these products. Products that do not perform well are replaced with more promising options.
Q: Will the unallocated expenses related to ERP implementation decrease in the future?
A: The trajectory of unallocated expenses will not be at the same level as this year but will not drop to nothing. We will continue to invest as we roll out additional phases of the ERP system.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
