Yahoo Finance WD-40 Co (WDFC) Q2 2024 Earnings Call Transcript Highlights: A Mixed Bag of Growth and Challenges
Net Sales: $139 million, 7% increase over the prior year.
Gross Margin: Improved to 52.4%, up 160 basis points from the previous year.
Net Income: $15.5 million, a decrease of approximately $1 million or 6% from the prior year.
Diluted EPS: $1.14, compared to $1.21 in the prior year.
Adjusted EBITDA Margin: 17%, compared to 19% in the prior year.
Cost of Doing Business: Increased to 36% from 33% in the prior year.
Advertising and Promotion Investment: 4.8% of net sales, slightly up from 4.6% the previous year.
WD-40 Multi-Use Product Sales: $250 million, a 10% increase over the prior year.
WD-40 Specialist Sales: $34 million, up 10% over the prior year.
Digital Commerce Sales: Up 24% year-to-date.
Employee Engagement Score: Maintained at around 93%.
Dividend: Quarterly cash dividend of $0.88 per share.
Share Repurchase: Approximately 11,500 shares repurchased at a cost of $2.9 million.
Inventory Levels: Reduced by $41 million or 34% since peaking in the first quarter of fiscal 2023.
Full Year 2024 Guidance: Net sales growth between 6% and 12%, gross margin between 51.5% and 53%, net income between $67.7 million and $71.8 million, and diluted EPS between $5 and $5.30.
Release Date: April 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Net sales of $139 million, an increase of 7% over the prior year, with a 5% growth excluding the favorable impact of currency.
Sales growth across all trade blocks for the second consecutive quarter, with Americas at 1%, EIMEA at 16%, and Asia Pacific at 4%.
Gross margin improved to 52.4%, up 160-basis points over the prior year, benefiting from favorable sales mix and lower costs associated with Specialty Chemicals.
Year-to-date sales of WD-40 Multi-Use Product grew 10%, with strong growth in EIMEA at 19%, Americas at 6.5%, and Asia Pacific at 3%.
Year-to-date e-commerce sales are up 24%, with strong growth in both EMEA and the Americas trade blocks.
Negative Points
Short-term impacts from the ERP implementation had a minor unfavorable impact on the quarter's performance, particularly in the US.
Decline in home care and cleaning product sales, primarily due to lower volume in the US as a result of reduced demand.
The cost of doing business increased to 36% compared to 33% in the prior year, driven by increases in employee-related costs and professional services.
Adjusted EBITDA margin was under pressure at 17%, compared to 19% in the prior year, reflecting higher cost of business items.
Potential short-term setback from the sale of the homecare and cleaning products portfolio, although a longer-term benefit is expected as the company focuses on higher growth and higher margin maintenance products.
Q & A Highlights
Q: What was the cause of the softness in Canada, which saw a 24% year-over-year decline in the quarter? A: Steve Brass, President and CEO of WD-40 Company, explained that the decline was due to a hard conversion of their Smart Straw product in Canada. This involved withdrawing current formats and moving to Smart Straw, which negatively impacted the quarter. However, they expect to see significant revenue growth in the back half of the year as a result of this conversion.
Q: Can you provide details on the potential sale of the homecare products and their contribution to EBITDA? A: Steve Brass mentioned that they haven't disclosed the EBITDA contribution, but the FY23 revenues from the US and UK homecare products were about $26 million, representing about 5% of overall sales revenue. These products are sold at a lower gross margin, around 41%-42%.
Q: Is the acquisition of the Brazilian distributor indicative of a new strategy to grow through acquisitions, or was it a one-off? A: Steve Brass clarified that WD-40 Company is transparent about where they see the biggest top-line growth opportunities and that each market may require a different approach to accelerate growth. The acquisition in Brazil aligns with their strategy to grow quickly in key markets, similar to their successful investment in China.
Q: Will the amortization costs from the ERP transition continue into the next year? A: Sara Hyzer, Vice President, Finance, Treasurer & CFO, confirmed that the amortization of the $10 million investment in the ERP project started in Q2 and will be amortized over 10 years, resulting in about $1 million a year in costs. As they roll out new phases, these costs will continue.
Q: Was there any quantifiable impact on the quarter from the ERP implementation challenges in the US? A: Sara Hyzer estimated a top-line volume reduction of about $2.4 million from the disruption for the quarter, which is considered lost revenue.
Q: Can you clarify the $10 million revenue opportunity in Brazil mentioned for the next year? Is it incremental or total? A: Steve Brass clarified that the previous royalty model in Brazil generated $2 million in revenue. With the acquisition, they expect an incremental $5 million in the back half of this year and another $5 million in the first six months of the next year, with a medium-term view of a $20 million-plus market in Brazil.
Q: Can you provide volume and pricing details for the whole company and for the Americas in the quarter? A: Sara Hyzer reported that for the whole company, volume was up 2% and the impact of price was 3% for the quarter. For the Americas, gross margin improved by 130 basis points over the prior year to 49.4%.
Q: What is the expected cadence for the pricing line, given that pricing was up 3% in the quarter? A: Sara Hyzer expects the pricing impact to come down in the second half of the year as they are through most of the larger price increases. However, there are still some recent price increases in Australia due to the timing of the inflationary environment there.
Q: What was the reason for the lower growth in China and the decline in WD-40 Specialist in the Asia region? A: Steve Brass stated that growth in China is up 12% year-to-date in local currency, and they expect strong growth in the second half of the year across all regions. The lower growth in China was partly due to currency masking and there's no cause for concern.
Q: How does the increase in EPS guidance relate to operational improvements and the gross margin being better? A: Sara Hyzer attributed the increase in EPS guidance to better visibility on how they believe margin will play out for the second half of the year, as well as a slight impact from the income tax line.
This article first appeared on GuruFocus.
