WD-40 Co Q3 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Linda Bolton Weiser - D.A. Davidson & Co. - Analyst : Hello, congratulations on a nice quarter. So I was wondering if you could just give us a little bit of color on the gross margin outlook. I guess in the shorter term, would it be fair to say that for FY25, it would continue on at least at the point at which gross margin ends FY24? So if you end over 53% gross margin that would carry over at least at that level. Is that the right way to think about it for FY25? Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer Hi, Linda. This is Sara. So yes, we are right now tracking towards the high end of our range for FY24. We haven't really given -- we don't really give guidance on FY25 until we get to the end of the year. But I think as we've indicated, we are targeting to get back up to the 55% by the end of FY26. And so obviously, we have to make some of that up in FY24, and we have a number of initiatives that we're working towards to help move the needle from where we believe we will end the year, which is going to be at the high end of the range to the 55% at the end of FY26.

Question: Linda Bolton Weiser - D.A. Davidson & Co. - Analyst : Okay. And then I was just wondering about -- I mean, it sort of looks from the numbers that your prior year comparison on sales growth was much harder in the third quarter and easier in the fourth quarter. But I think that has to do with some of the cadence having to do with the impacts from stuff in China or the pandemic or something. So like maybe you can just give us some color on like is that fourth quarter prior year comp really easier? Or is it just normal? And how do you feel about like where along that range for the sales for the year? Like are you most comfortable toward the lower end, middle, higher end? Is there any color you can give? Thank you.

Question: Linda Bolton Weiser - D.A. Davidson & Co. - Analyst : Okay. So then just following up on what you said about the Asia Pacific comparison, I mean, if it is indeed easy in the fourth quarter then growth should be sort of strong in the fourth quarter of '24. Is that the way to think about it?

Question: Linda Bolton Weiser - D.A. Davidson & Co. - Analyst : Okay, thank you. And then again, I know you don't want to get too much into the next fiscal, of course, but I'm just wondering if you could -- if there's any quantification of maybe some unusual costs that were related to ERP implementation or some other projects that might dissipate in the next fiscal year that would create a favorable comparison. Is there anything like that, that your kind of aware of in a general sense? Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer I mean, we have been spending higher this year as a result of the timing of the go-live for the ERP. So if we look at our general IT investments for this year, they are going to be trending higher than they have compared to the prior years. We are in the current budget cycle right now. So we're working on taking a look at where are we going to land next year from an IT investments standpoint and other investments. But that's probably the biggest area that when you look at the past few years, that has trended up as a result of us getting closer to our go-live date. We are continuing to invest in IT, though. I mean we do have that wave two coming around, but we don't believe the cost of the wave two is going to be at the same level as this current -- the current wave that we just pushed out earlier in the year.

Question: Daniel Rizzo - Jefferies - Analyst : Good afternoon and thanks for taking my questions. I may have missed this, but you mentioned the ERP rollout in the Americas and Asia. I was wondering if did it already occur in Europe? Or is that something that's going to be doing -- you're going to be doing over the next several quarters? Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer So it did not incur, and this did not happen in Europe. So we went live impacting our US business, our Latin America business, and our Asia regional distributors, which represents about 50% of our revenues. So we still have about 50% of our revenues. The majority of that is in Europe. That's on another system. And then we have two other really small systems for a couple of our other international locations.

Question: Daniel Rizzo - Jefferies - Analyst : Okay. Thanks for that. And then just kind of following up on the questions that were just asked. With -- I mean, you can get to 55% if things stay the same. Is there a certain band that oil, tinplate, and plastic has sustained for you to hit that? I mean if there's a spike, then that kind of changes the dynamics, correct? Particularly the (multiple speakers). Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer I would say if there's a spike and it's temporary, right? That's what we just ride, that wave. If there is a spike of, let's say, $20 to $25 to $30 and it stays there for an extended period of time, that's when we would have to take a look and see if we want to do -- if there are other levers that we would want to pull to try to offset that. But usually, if it fluctuates within $20 directionally one way or the other, and we tend to ride that wave over time. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Daniel Rizzo - Jefferies - Analyst : Okay. And then -- and my final question is just kind of for maintenance. If I look at like unallocated expenses, I think it's been a little bit higher than what had been previously and maybe higher than what I was modeling. I was wondering if what you're doing now is kind of the run rate going forward for the next couple of years, which is roughly, I don't know, call it, I think, what, $48 million? Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer Yeah. The unallocated expenses. So one of the biggest drivers of that, that's ticked up is associated with the ERP. So we funded that out of the corporate expenses. And so that's sitting in the unallocated corporate. So that's probably been the biggest driver, Daniel, that you'll see there from a trend perspective.

Question: Daniel Rizzo - Jefferies - Analyst : Got you. Okay. Thank you very much.

Question: Rosemarie Morbelli - Gabelli & Company - Analyst : Thank you. Good afternoon, everyone. Following up on Linda and actually Dan's question regarding IT spending, are you sharing the amount you have spent towards that new ERP system. What was your IT spending in 2023? What is it in 2024? And what are we looking at for '25 and '26, if you can share those numbers? Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer Hello, Rosemarie, how are you? We have not disclosed the individual year that we've -- within the individual years, how much we have been spending on IT. We did disclose that the total cost of what we went live and what we placed in -- what we went live with in Q2 was approximately $10 million, and we will be amortizing that over 10 years. And so we did disclose the total cost of that first wave that was sitting on the balance sheet. But there were other costs that did not qualify for capitalization. And we really incurred those costs over roughly about 4, maybe 4.5 years to give some perspective. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Rosemarie Morbelli - Gabelli & Company - Analyst : So if we look at -- if we don't look at IT spending specifically but look at your CapEx level. So is it in CapEx? And what were -- what do you expect the CapEx to be this year and then next year? Sara Hyzer - WD-40 Co - Chief Financial Officer, Vice President - Finance, Treasurer So there is a nuance about the cloud-based costs that were capitalized. Those are actually not in CapEx. So those costs are sitting on our balance sheet and other long-term assets and do not show up in our investing cash flow line items. And so there's accounting rules that require us to present the cost that we capitalize for the new system because it's cloud-based differently than normal capital expenditures. So our normal capital expenditure, where we are right now in maintenance mode. We expect that to be between our normal 1% to 2% of our revenue levels, and that's what we're trending at this year. So the place to really look on our balance sheet to look at the capital -- to look at the ERP costs specifically is the increase in our long-term asset over time.

Question: Rosemarie Morbelli - Gabelli & Company - Analyst : Okay. Eventually, you will give us a better feel for the different categories?

Question: Rosemarie Morbelli - Gabelli & Company - Analyst : All right. Thank you very much. Good luck and congratulations.