Earnings Call Transcript - WDFC Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for being here. Good day and welcome to the WD-40 Company Third Quarter Fiscal Year 2022 Earnings Conference Call. This call is being recorded. All participants are currently in a listen-only mode. After the prepared remarks, we will have a question-and-answer session. I would now like to turn the presentation over to our host for today’s call, Ms. Wendy Kelley, Vice President of Stakeholder and Investor Engagement. Please proceed.

Wendy Kelley, Vice President of Stakeholder and Investor Engagement

Thank you. Good afternoon and thanks to everyone for joining us today. Joining us on our call today are WD-40 Company’s Chairman and Chief Executive Officer, Garry Ridge; Vice President and Chief Financial Officer, Jay Rembolt; and President and Chief Operating Officer, and incoming Chief Executive Officer, Steve Brass. Also joining us for today’s call is our Vice President, Global Finance Strategy and Incoming Chief Financial Officer, Sara Hyzer. 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 May 31, 2022. These documents are available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today’s call will also be made available at that location 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 presentation. As a reminder, today’s call includes forward-looking statements about our expectations for the company’s future performance. Of course, 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 webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today’s date, July 7, 2022. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events or otherwise. With that, I’d now like to turn the call over to Garry.

Garry Ridge, CEO

Thank you, Wendy. Good day and thanks for joining us for today’s conference call. Before we begin, I’d like to take a moment to welcome Sara Hyzer to our call today. We shared with investors yesterday that Sara will become Vice President, Finance, Treasurer and Chief Financial Officer effective November 1, 2022, once we have completed the filing of our fiscal year 2022 10-K. Sara joined our tribe in 2021 in the global finance and accounting teams as a financial strategist for this last year. We are thrilled that she has accepted this opportunity within our tribe. Sara will be available during the question-and-answer portion of today’s call to answer any questions you have for her. As you may know, Jay announced his planned retirement late in 2020. Jay has been our Chief Financial Officer since 2008 and his impact on our company has been immeasurable. Jay will be with us on the next quarter call, and then he will sail off into retirement. Now let’s turn to our results. Today, we reported net sales of $123.7 million for the third quarter of fiscal 2022, which was a decrease of 9% compared to the same quarter last year. As a reminder, in the third quarter of last year, we reported record sales, driven by robust demand for our maintenance products, coupled with strong operating performance. Against such a comparable, the bar was high. In addition, you have heard me say for 25 years not to follow us quarter to quarter. If you follow our business closely, you will know that fluctuations in performance quarter to quarter are not unusual. This has been especially true since the COVID-19 pandemic began. Although the sales results we are reporting today are down, we believe we are positioned to achieve sales growth for the full fiscal year, which will result in record sales results for our tribe. Steve will talk in greater detail in a few moments about the sales results in our trade blocks and what our expectations for the remainder of the year are. Unfortunately, we continue to face a challenging inflationary environment and our third quarter gross margin came in at 48%, reflecting significant increases to our cost of products sold. Inflationary cost pressures are broad-based and continue to increase with little sign of near-term relief. These operational challenges are not unique to WD-40 Company. However, we think that the strategies we have chosen will position us to manage through these challenges over time. Jay will talk in greater detail in a few moments about what the impact has been on our margin and what we are doing to restore it. We continue to be a business with a strong moat, diversified across many trade channels and countries around the world. We had a strong balance sheet, generate steady cash flows and continue to return capital to our investors with regular dividends. In addition, the WD-40 brand is strong and robust brands like ours are great assets in turbulent times. Most critical role we have is a tribe of passionate and committed employees who are dedicated to our company purpose. Let’s talk for a minute about our strategic initiatives. Our strategic initiatives are the continuing plan we have in place to achieve the company’s long-term aspirations. Our strategic initiatives support our long-term revenue growth target, which is to drive net sales to between $650 million and $700 million by the end of fiscal 2025. We strive to do so while following our 55/30/25 business model. Steve and the tribe remain committed to the company’s long-term aspirations and strategies we have in place to get there. Strategic initiative number one is to build a business for the future. Our goal under this initiative is to build an enduring business that we will be proud to pass on to the next generation. The desired outcome for this strategic initiative is to fully integrate our core values into the heart of our strategic planning process. We are making great progress in setting our ESG priorities and we expect to file our next ESG report early in fiscal 2023. In that report, we will be articulating our position and our progress on key ESG matters. We are in the early stages of determining what we need to do to reduce our greenhouse gas emissions to be in line with the Paris agreement. We will also provide stakeholders with an update on the progress we have made on our diversity, equity, inclusion and belonging efforts. One of the biggest desires we have as human beings is to belong, which is why we have added and created our own acronym for this critical area, DEI&B. Strategic initiative number two is to attract, develop, and engage outstanding tribe members. We believe that by building and nurturing an inclusive and diverse purpose-driven learning and teaching organization, our tribe members will succeed together. Recently, we have added some new tribe members at the Board level. Last month, Eddie Magee was appointed to our Board and will serve as a member of our Audit and Finance Committee. Ed currently serves as Executive Vice President Operations at Fender Musical Instruments. He has significant senior leadership experience in manufacturing, sustainability, supply chain, and logistics. Additionally, we shared that Cynthia Burks has been nominated to stand for election at our next annual meeting. Cynthia most recently served as Senior Vice President and Chief People and Culture Officer at Genentech. Cynthia has extensive knowledge of human capital strategy and a fundamental understanding that culture is a competitive advantage, which makes her a perfect fit for the WD-40 Company where it really is all about the people. Strategic initiative number three is to strive for operational excellence. Our goal under this initiative is to foster a culture of continuous improvement in which operational excellence is the responsibility of every tribe member. Their commitment to operational excellence continues to be an enormous asset for us as we navigate the global economic challenges likely in front of us. Using our 55/30/25 business model as a framework, we measure ourselves against these operational excellence initiatives. Strategic initiative number four is to grow the WD-40 Multi-Use Product. Our goal under this initiative is to make the blue and yellow can with a little red top available in more places to more people who will find more uses more often. We will grow the WD-40 Multi-Use Product line through continued geographic and digital expansion, increased market penetration, educating end-users about new uses, and through the development of new and unique delivery systems that make the product easier to use. Although the WD-40 Multi-Use Product sales were down 11% to $92.3 million this quarter, we have seen strong growth in recent years as we move closer towards our 2025 aspiration. The desired outcome for this strategic initiative is to grow sales of the WD-40 Multi-Use Product to approximately $525 million by 2025. Strategic initiative number five is to grow the WD-40 Specialist product line. Our goal under this initiative is to leverage the WD-40 brand by developing new products and categories, which build and reinforce the core positioning and create growth through continued geographic and digital expansion. In the third quarter, sales of WD-40 Specialist increased 12% globally to $16.7 million. The desired outcome for this strategic initiative is to grow sales of WD-40 Specialist to approximately $125 million by 2025. Strategic initiative number six is to expand and support portfolio opportunities that help us grow. Our goal under this initiative is to expand and support brands that provide us protection and help us grow. Brands under this initiative include 3-IN-ONE and GT85, as well as our homecare and cleaning brands. In the third quarter, sales included under this initiative decreased 16% globally to $14.7 million. The desired outcome for this strategic initiative will be sales in the category of approximately $50 million by 2025. To reach that number, we expect sales growth of brands like 3-IN-ONE, GT85, 1001, and no vac. Many of our other home care and cleaning product brands will most likely decline in sales over time, but they will continue to contribute healthy returns. Supporting our strategic initiatives are our Must-Win Battles. These are focused action plans to support revenue growth. I will now pass the call to our soon-to-be CEO, Steve Brass, who will share an overview of our sales results and an update on our Must-Win Battles.

Steve Brass, President and COO

Thanks, Garry, and good afternoon. As Garry mentioned earlier, net sales were $123.7 million in the third quarter, down 9% or $12.7 million compared to the prior year. There were a couple of significant events that led to these declines, including severe lockdown measures instituted in Shanghai and the military action taken by Russia. In addition, we experienced decreased demand for our products in certain regions in EMEA compared to the record sales we reported in the third quarter of last year. Currency also negatively impacted in the third quarter, particularly in EMEA. On a constant currency basis, net sales would have been $127.9 million in the third quarter, a 6% decline from the prior year. However, year-to-date net sales were up 4% compared to last year. We experienced strong sales in the month of June, which we believe will position us to achieve sales growth for the full fiscal year to between 6% and 9%. Let’s take a closer look at what’s happening in our trade blocks so that we can get a better understanding of these impacts. We will start with the Americas. Sales in the Americas, which includes the United States, Latin America and Canada, were up 2% in the third quarter to $61.5 million compared to last year. Sales of maintenance products increased 3% in the Americas due to increased sales in Canada and Latin America, which were up 23% and 10%, respectively. In Canada, we experienced strong sales of WD-40 Multi-Use Product, which increased 30%, primarily due to increased promotional activities and a higher level of demand for our products in the industrial channel. In Latin America, we also experienced strong sales of WD-40 Multi-Use Product, which increased 16%, primarily due to the positive momentum in Mexico from the shift we made in 2020 from a distributor model to a direct market, as well as the price increases that went into effect earlier this fiscal year. In the United States, sales of maintenance products remain constant, primarily due to increased sales at WD-40 Specialist, which were completely offset by lower sales of WD-40 Multi-Use Product. WD-40 Specialist sales were up 78% in the quarter because of increased production capacity and improved availability as our supply chain continues to strengthen. These sales increases were offset by lower sales of WD-40 Multi-Use Product in the quarter due to the timing of customer orders and shifting promotional programs. In total, our Americas segment made up 50% of our global business in the third quarter. Over the long-term, we anticipate sales in this segment will grow between 5% to 8% annually. Now on to EMEA. Sales in EMEA, which includes Europe, the Middle East, Africa and India, were down 16% in the third quarter to $49.5 million compared to last year. Sales of maintenance products also decreased by 16% in EMEA due to decreased sales in both our EMEA direct and our EMEA distributor markets, which decreased 13% and 21%, respectively. In our EMEA direct markets, we experienced a 13% decrease in sales in the third quarter, however, if we take currency into consideration, sales in direct markets only declined by 5%. This decrease in sales is primarily attributable to reduced demand for maintenance products compared to the prior period. In the third quarter of 2021, we experienced record sales linked to renovation and maintenance trends associated with the pandemic. These trends were particularly strong in certain regions in EMEA in the third quarter of last year. This quarter, sales in our EMEA direct markets accounted for 71% of the region’s sales. In our EMEA distributor markets, we experienced a 21% decrease in sales of maintenance products primarily due to our suspension of sales in Russia, which resulted in decreased sales of $3.6 million compared to last year. In early March, we made the values guided decision to suspend sales of our products through our marketing distributor customers in Russia and Belarus, and this had an unfavorable impact on our sales in this region this quarter. In the third quarter, sales in our EMEA distributor markets accounted for 29% of the region’s sales. In total, our EMEA segment made up 40% of our global business in the third quarter. As a long-term, we anticipate sales within this segment will grow between 8% to 11% annually. Now on to Asia-Pacific. Sales in Asia-Pacific, which includes Australia, China and other countries in the Asia region, were down 28% in the third quarter to $12.8 million. In our Asia-Pacific distributor markets, sales were $3.2 million in the third quarter, down 56% compared to last year. These sales declines were due to disruptions caused by the pandemic. The product we sell in our Asia-Pacific distributor markets is sourced from a third-party manufacturer in Shanghai. Sell-through to our end-user customers in the Asia-Pacific distributor markets remained strong throughout the third quarter. However, we were unable to replenish inventories due to the severe lockdown measures instituted in Shanghai, which significantly impacted our ability to ship products to our marketing distributors. The severe lockdown measures also impacted China, where sales were $3.3 million in the third quarter, down 25% compared to last year. Lockdown measures in Shanghai were lifted on June 1st, subsequent to that date, we resumed shipping product to our customers in Asia or in China. Barring any further supply chain disruptions, we expect we will ship most of what we were unable to ship in the third quarter in the fourth quarter. In Australia, sales were $6.2 million in the third quarter, up 4% compared to last year, due primarily to the ongoing growth of our base business, increased promotional activities and price increases that went into effect in February. We continue to see strong sales of WD-40 Specialist in Australia. In the third quarter, sales of WD-40 Specialist increased by 39%. In total, our Asia-Pacific segment made up 10% of our global business in the third quarter. Over the long-term, we anticipate sales within this segment will grow between 10% to 13% annually. Now a brief update on our Must-Win Battles. Our Must-Win Battles are the primary areas of action that will enable us to deliver against our revenue growth aspirations to drive sales to between $650 million and $700 million by the end of fiscal year 2025. These hyper-focused actions are the key drivers of revenue growth. Our largest growth opportunity in our first Must-Win Battle is geographic expansion of the WD-40 Multi-Use Product. We continue to experience growth of our flagship brand with global sales of WD-40 Multi-Use Product up 6% year-to-date. We estimate the global market growth opportunity for WD-40 Multi-Use Product to be approximately $1 billion. We have identified a list of priority markets, which show the highest potential for growth and we are focusing our time, talent, and resources on these high potential geographies. Even in the volatile environment we are operating in, we have experienced year-to-date growth in priority markets like China, Mexico and India, where sales increased by 26%, 29% and 16%, respectively. We will continue to invest in building our flagship brand with end-users and these other key markets around the world. Our second Must-Win Battle is the premiumization of WD-40 Multi-Use Product. Year-to-date sales of WD-40 Smart Straw and EZ-REACH when combined, represented 47% of global sales of WD-40 Multi-Use Product. Our objective for this Must-Win Battle is to grow sales of premiumized products to greater than 60% by 2025. For a long time, we have assumed that due to price point concerns, emerging markets couldn’t be easily premiumized. We recently conducted extensive market research with fantastic results and learned that we have huge opportunities in emerging markets around premiumization. We believe that there is a significant opportunity to drive sales of premiumized products in both developed and emerging markets. Our third Must-Win Battle is to grow the WD-40 Specialist. Year-to-date sales of WD-40 Specialist were up 15% compared to last year. We saw solid sales growth of WD-40 Specialist across all of our segments, particularly in the Americas. Though we have turned the corner on the capacity constraints we have been experiencing in the U.S. supply chain. In addition, we have recently conducted research and now have evidence to support what we already knew. The new packaging and brand architecture improve the sell-through of our WD-40 Specialist brand products. Our final Must-Win Battle is digital commerce. Our vision for digital commerce is to engage with end-users at scale, making it easy to access, learn about, and purchase our brands. In the first nine months of fiscal year 2022, global e-commerce sales were down 13%. For us, digital isn’t just about how many units we sell in pure play digital channels, it’s about embracing digital transformation at the organizational level. There is a significant opportunity ahead of us in the digital space that means a complex market share that is there for the taking. For the full year, we expect sales in the e-commerce channel will remain relatively constant compared to the prior fiscal year. More importantly, we will continue to leverage this critical channel as an integral part of our growth story going forward. In closing, I want to share a few thoughts with you about the remainder of the fiscal year. In the third quarter, we were up against very strong sales comparisons, and we are managing through several global disruptions that have negatively impacted our topline results. Despite these disruptions, market conditions suggest that for the full fiscal year, net sales are likely to be in a range between $519 million to $532 million, which reflects year-over-year growth of between 6% and 9%. Now I will turn the call over to Jay, who will provide you with a financial update on the business.

Jay Rembolt, CFO

Thank you, Steve. To begin with, I would also like to welcome Sara to the call. Many of you may recall that in late 2020 I announced my intention to retire. Since that time, we interviewed dozens of internal and external candidates to find the right person for the job. It gives me great pleasure to let you know that Sara is that right person. I have known Sara for six years and I am thrilled to be handing the reins to such a capable leader. I believe you will enjoy and appreciate working with Sara as much as I have. Well, now onto the results. In the third quarter, the challenging inflationary environment and geopolitical uncertainty continue to impact our reported results. Unfortunately, we don’t see any near-term relief in sight and expect the operating environment to continue to remain challenging. However, we remain committed to our 55/30/25 business model and are focused on managing our business so that we can restore gross margin to our target of 55%. With that said, we are not sticking our heads in the sand and ignoring the macroeconomic, geopolitical, supply chain, and inflation concerns that exist in the market today; we continue to actively manage our supply chain as we implement various initiatives to increase the capacity and flexibility of our supply chain for the long term. In tandem with these efforts, we have been implementing strategic price increases across all segments in response to the increased costs we continue to experience. In times like these, I am glad that our stakeholders can see the forest through the trees. What I mean by that is, even though we are underwhelmed by our third quarter results, I am as confident as I have ever been about the long-term opportunities for our company. As Garry mentioned earlier, we continue to be a business with a very strong moat, diversified across 62 trade channels and 176 countries around the world. We have a strong balance sheet, generate steady cash flows, and continue to return capital to our investors with a long track record of both topline and bottomline growth, and a high degree of confidence in the future growth as evidenced by our 2025 revenue target. Most importantly, our business and brand have very strong end-user affinity, which will enable us to continue taking pricing actions as needed to offset inflation. Now let’s discuss the third quarter results relating to our 55/30/25 business model, the long-term targets we use to guide our business. As you may recall, the 55 represents gross margin, which we target to be at or above 55% of net sales. The 30 represents our cost of doing business, which is our total operating expenses excluding depreciation and amortization. Our goal is to drive our cost of doing business over time toward 30% of net sales. And finally, the 25 represents our long-term target for EBITDA. Let’s start with the 55 for gross margin. In the third quarter, our gross margin was 47.7%, compared to 53.1% in the same period last year. This represents a decline of 540 basis points due primarily to the challenging inflationary environment we are experiencing. Increased global supply chain challenges, increased cost of raw materials and continued constraints related to the pandemic have resulted in increased inflation globally. In the third quarter, changes in specialty chemical costs and aerosol cans were the primary drivers of our margin decline. When combined, they negatively impacted our gross margin by 620 basis points. Specialty chemical costs negatively impacted our gross margin by 400 basis points, while the remaining 220 basis points came from the higher cost associated with aerosol cans. Higher warehousing, distribution, and freight costs, primarily due to supply chain constraints negatively impacted our gross margin by 150 basis points. The tight freight market, labor shortages, increased demand for distribution services, particularly in the Americas and EMEA, continue to impact our freight and distribution costs. Gross margin was also negatively impacted by 130 basis points from higher filling fees paid to our third-party contract manufacturers, primarily in the Americas. And finally, gross margin was negatively impacted by 90 basis points due to product mix and other higher miscellaneous costs incurred during the quarter. On a positive note, our gross margin restoration plan is beginning to help. These negative factors were partially offset by a benefit of 490 basis points from sales pricing increases that have been implemented this year. To offset impacts of inflation, we have been implementing sales price increases on nearly all of our products worldwide this year. However, keep in mind that we are yet to see the financial impact of the price increases that we have implemented in some of our largest markets. For example, in late Q3 of this year, we implemented a 25% price increase in the United States, but the impact of that price increase will flow into our financials until the fourth quarter. We are also implementing significant price increases in Europe this summer. As a result, we will continue to see the benefits from price increases in future quarters. Our tribe members are doing a great job executing pricing actions that are continuing to offset inflationary impacts. However, we expect the business landscape to remain challenging and volatile over the near-term. Make no mistake, we will continue to take measures and implement price increases to offset rising input costs. As I said earlier, we remain focused and committed to managing our business so that we can restore our gross margin back to and above our target of 55%. Now I will address the 30, our cost of doing business. In the third quarter, our cost of doing business was approximately 31% of net sales, compared to 32% last year. For the third quarter, approximately 71% of our cost of doing business came from three areas: people costs or the investments we make in our tribe, the investments we make in marketing, advertising and promotion as a percent of net sales, our A&P investment was 4.9%, and finally, the freight cost to get our products to our customers. SG&A expense decreased by approximately $4.5 million compared to last year, primarily due to lower incentive compensation accruals as a result of our current estimate which is projecting that we will – there will be a lower level of achievement when compared to the prior year. These lower employee-related costs were partially offset by increases in travel and meeting expenses due to the resumption of travel as the pandemic restrictions have been lifted. Now this brings us to EBITDA, the last of our 55/30/25 measures. EBITDA was 17% of net sales this quarter, which was down from 21% compared to last year. Our cost of business was down. The pressure we are experiencing in gross margin together with the reported sales decline put pressure on EBITDA this quarter. Well, that completes the discussion on our business model. Now let’s discuss some of the items that fall below the EBITDA line. The provision of income taxes was 20.9% this quarter, compared to 21.9% last year and we expect that our effective tax rate will be approximately 20% to 21% for the full fiscal year 2022. Net income for this quarter was $14.5 million, compared to $21 million last year. Diluted earnings per common share for the quarter were $1.07, compared to $1.52 in the same period last year. Now, a word about our balance sheet and capital allocation strategy. The company’s financial condition and liquidity remain strong. Our capital allocation strategy includes a comprehensive approach to balance investing in long-term growth while providing strong returns to our shareholders. We continue to return capital to our shareholders through regular dividends and share repurchases. On June 21st, our Board of Directors approved a quarterly cash dividend payment of $0.78 per share, to be paid on July 29th to shareholders of record at the close of business on July 15th. During the third quarter, we repurchased approximately 23,000 shares of our stock at a total cost of approximately $4.2 million. In fiscal 2022, we continue to expect we will invest approximately $15 million in capital projects, the majority of which will be for the machinery and equipment we are using to manufacture our next-generation Smart Straw delivery systems. One other item of note that I would like to bring to your attention is the recent increases in our inventory levels. As we continue to work to improve the resilience of our supply chain, we have increased the raw materials, components, and finished goods that we have in inventory to ensure supply and improve our ability to meet market demand. Now let’s turn to fiscal 2022 guidance. We have adjusted our guidance slightly to reflect our current view of the business. As Steve mentioned earlier, we expect net sales growth to be between 6% and 9%, with net sales between $519 million and $532 million. Gross margin for the full year is expected to be around 50%. Advertising and promotion investment is projected to be between 5% and 5.5% of net sales. The provision for income tax is expected to be between 20% and 21%, and net income is projected to be between $69 million and $70.1 million. Diluted earnings per common share is expected to be between $5.02 and $5.10 based on an estimated 13.7 million weighted average shares outstanding. Guidance is based on management’s current view of anticipated results and does not include any future acquisitions or divestitures or the impact of fluctuating foreign currency exchange rates. Additional COVID-19 related lockdowns in China and other unforeseen events may further impact the company’s financial results. That completes the financial overview. Now back to Garry.

Garry Ridge, CEO

Thanks, Jay. In summary, what did you hear from us on this call? You heard that Steve is going to be joined by Sara Hyzer who will be the next CFO of WD-40 Company effective November 1, 2022. You heard that despite the fact that the third quarter sales results were down, we continue to believe we are positioned to achieve sales growth for the full fiscal year, which will represent record sales results for our company. You heard that we continue to be a business with a very strong moat, diversified across many trade channels and countries around the world. We have a strong balance sheet, generate steady cash flow, and continue to return capital to our investors through regular dividends. You heard the sales of WD-40 Specialist were up 12% in the third quarter, and we continue to experience strong momentum due to the increased production capacity and improved product availability. You heard that although we have been experiencing pressure on gross margins from the challenging inflationary environment, we have a solid gross margin restoration plan in place. You heard that some of the significant price increases we implemented in the third quarter, particularly in our Americas trading block were implemented at the end of the quarter, and the positive impact has yet to flow through our gross margin. You heard that we have adjusted our guidance for fiscal year 2022 and believe that earnings per share will be between $5.02 and $5.10. In closing today, I’d like to share with you a quote from Vivian Greene: Life isn’t about waiting for the storm to pass. It’s about learning to dance in the rain. Thank you for joining us today. We would be pleased now to take your questions.

Operator, Operator

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

Daniel Rizzo, Analyst

Hello, everyone. Thank you. Thank you for taking my question. You mentioned, I think, a $1 billion market; I think you highlighted for the Multi-Use Product. I was wondering if that market worldwide includes premiumization or is premiumization something that you are holding separate, which is a separate market that could add to that?

Garry Ridge, CEO

Steve, would you like to address that.

Steve Brass, President and COO

Sure. Thanks, Garry, and hey, Daniel. $1 billion would include premiumization in total, and it’s $1 billion worth of growth. It’s not a $1 billion total opportunity; it’s $1 billion close actually based on the top geographies around the world and on our benchmark. So, yeah, it would include premiumization, but it’s actually about $1.2 billion in total in growth opportunity.

Daniel Rizzo, Analyst

And could you just provide more color on the digital platform? I think you said it was flat year-to-date. I was wondering, just I guess a little surprising given it’s still somewhat new platform, and I thought it was going better than that. I am just, I don’t know, maybe I missed something?

Steve Brass, President and COO

Thank you, Daniel. I think I can take that one also, Garry. In terms of digital commerce, we have been catching up and so a lot of it is related to our Americas region and out of stocks, and it’s absolutely roaring back in the last few months. Overall, I believe the digital commerce for the year, so year-to-date we were down 13%, but that is improving with every month now that goes by. For example, quarter three in the Americas, it’s actually up 42% over the prior year. So we are beginning to catch up and a lot of that was linked to pricing, sorry, to out of stocks on the WD-40 Specialist.

Daniel Rizzo, Analyst

Thank you. Lastly, while costs are a concern, I'm curious if they are stabilizing or if they continue to rise indefinitely. I know there's still a lot of ground to make up, but I'm hoping to see any positive signs in the near future.

Jay Rembolt, CFO

Yeah. Daniel, thank you. I will take that. The margin issue is absolutely a timing issue. If you look at this year in total, in Q1 pricing added 120 basis points. In Q2 pricing added 200 basis points. In Q3 pricing added 490 basis points, which was offsetting the increases that were coming through primarily not from necessarily oil, because oil is fluctuating in that range, but from aerosol cans and other components of our cost of goods. So what I think the light at the end of the tunnel is, each quarter the pricing action we are taking is starting to offset the embedded cost of our raw materials. As we mentioned in this call, the price increase that we have just taken in the Americas or in the U.S. of about 25% will not show up until Q4. So, yes, this is totally a timing issue. We are all convinced that we will get back to 55% or greater over time. It just can’t happen all at once.

Daniel Rizzo, Analyst

Thank you very much.

Operator, Operator

Your next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Linda Bolton Weiser, Analyst

Yes. Hi. How are you?

Garry Ridge, CEO

Hi, Linda. I am great.

Linda Bolton Weiser, Analyst

Good. Can I ask what might have caused a change in your understanding of the situation since your last report in early April? I thought we were already aware of the China lockdowns by then, and it seemed like analysts and investors were more focused on when those restrictions might be lifted. What has shifted about the situation that you weren't anticipating back in April? Could you elaborate on that?

Garry Ridge, CEO

Sure. Linda, the lockdown that we are talking about, which started in May, in fact, and it was a complete lockdown of Shanghai, and Shanghai was locked down for I think nearly six weeks. At that time, all of the shipments out of Shanghai were suspended; people couldn’t go to work and you probably observed that in the media or whatever. I don’t know that we understood how long it was going to go on for or the severity of it. But it certainly shut down operations. We ship all of our Asia distributors and all of our China local business out of packages in Shanghai, and we could not ship a case of product during that time. Those restrictions have subsequently been lifted, as Steve said in early June, and we are starting to ship again. So it was absolutely a surprise and something that we couldn’t have anticipated.

Linda Bolton Weiser, Analyst

Okay. So then the trend of business sort of in the May quarter were then much better in March and April, and then really got bad in May, is that kind of how it trended through the quarter?

Garry Ridge, CEO

Steve, I don’t have that in front of me, but I...

Steve Brass, President and COO

I think for the Asia distributor markets, the problem was simply that we weren’t able to ship, right? So our marketing distributors across the Asia region had stock in local markets, and we were able to service their markets. All that happened was inventory got a little lower; we weren’t really out of stock in those markets. So we fully believe that the shipments that didn’t ship in April and May will fully shift to the fourth quarter. So we won't have lost any revenues in those markets or very little. It will just move from Q3 sales into Q4 sales, and you heard us talk about a very strong June that was partially reflected by those significantly increased shipments to our Asian distributor markets. Now some of the lockdown in China that will have deferred business. That would have been because of the lack of economic activity, factory closures, and complete lockdowns in some cities; there will be some loss of Chinese business from that period.

Garry Ridge, CEO

And another just to add to that, Linda, half the City of Shanghai closed down kind of late March, the government at that time said they thought it would last a week. On around about the 8th or 9th of April, the full lockdown happened in Shanghai and that continued until May 16th when a return to normal was announced by the officials.

Linda Bolton Weiser, Analyst

Thank you. I wanted to ask about the commodity and specialty chemical side. I believe you mentioned that your guidance for the fiscal year was based on an assumption of oil prices between $100 and $120 per barrel. Since your last update, oil peaked around $120 but is now closer to $100. It appears that the situation hasn't worsened significantly, and we've noticed that tin plate and plastic resin prices have actually decreased along with spot prices in the market. I'm curious why the gross margin guidance is being revised downward when commodity prices seem to be within the range of your initial expectations.

Garry Ridge, CEO

So number one, we have seen no decrease in the price of our aerosol cans. We had a 60% increase, which we shared in aerosol cans that’s been embedded and flowing through our cost at different times. So even though spot rates are moving, it has no impact whatsoever on the price of aerosol cans. And the real issue here is, as I have – as we have shared, is the timing of the flow-through of the cost of goods and the offset of price increases. Yes, oil has been fluctuating between $100 and $120. As you know well, it takes a lot of time, 90 to 120 days for any impacts of oil to flow into our system. So just because it’s moved in the last couple of weeks, it has no impact. In fact, yes, it went to 95 last week and it’s back over 105 today. So, in this scenario, oil is not the thing that’s had the biggest impact in the short-term over the last few months. It’s the impact of the cost of aerosol cans, the cost of plastics, the cost of filling fees, all of which have been flowing into our supply chain at varying times and varying places from varying impacts around the world. This is purely a timing issue.

Linda Bolton Weiser, Analyst

Okay. Thanks for that. And then, I mean, I haven’t really run my numbers through the model yet, but I think your gross margin guidance for the year implies the gross margin would be up sequentially in the fiscal fourth quarter, am I thinking of that kind of correctly?

Garry Ridge, CEO

It has to.

Linda Bolton Weiser, Analyst

Yeah. Okay. Okay. Just wanted to make sure about that.

Garry Ridge, CEO

Yeah.

Linda Bolton Weiser, Analyst

Okay. And then, I guess you had mentioned on the call last time that there was a new product that you were planning on launching, it sounded kind of interesting, maybe with some kind of clean or green product. I can’t quite remember, is that something that is still on track, and is that something that could be something that’s important?

Garry Ridge, CEO

Yes. That product is in the final stages of stability and quality testing, and once it’s through that, we would be expecting to announce full details of it in the upcoming quarters, but it’s still on track and we are excited about it. It is a product that will be very, I think, seen as being ESG friendly, and yeah, it’s on track and it will be coming.

Linda Bolton Weiser, Analyst

Okay. And then, finally, we have heard from various retailers about wanting to work down inventory, and if you supply a bunch of different channels, but even among like say industrial distributors and things like that. Are you seeing any kind of work down in inventory that they are trying to do because of any kind of slowdown in demand?

Garry Ridge, CEO

Steve, do you want to cover off on that?

Steve Brass, President and COO

We haven't observed any significant inventory management efforts yet. Some trade channels are still experiencing strong growth, and our industrial sales from last quarter were robust globally, with a 25% increase in the industrial market. While our e-commerce performance is expected to remain flat this year, we still benefit from the pandemic-driven demand in e-commerce and DIY sectors. However, that growth has leveled off, reflecting the sales trends in those channels. We continue to see solid growth worldwide in automotive, hardware, and industry.

Linda Bolton Weiser, Analyst

Okay. I will leave it there then. Thank you very much.

Garry Ridge, CEO

Thank you, Linda.

Operator, Operator

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