Wd-40 Co Status update

Hi. Welcome, everyone. I'm Linda Bolton-Weiser, Senior Analyst at Water Tower Research, and I'm pleased to be hosting today the management team of WD-40 Company, ticker symbol WDFC. Today we have for our Fireside chat, we have CEO Steve Brass and CFO Sara Hyzer. Before we get started, I would like to point out that the company's safe harbor statements can be found at www.wd40company.com. Also, this Fireside chat may not be reproduced or a written transcript distributed without the express written consent of Water Tower Research. Now let's get started. We'll start out with their long-term growth algorithm that the company. That long-term growth algorithm has a few key elements, including targeting maintenance product sales growth in the mid to high single digits, gross margin above 55%, and EBITDA to grow faster than sales.

To achieve these objectives, Steve and Sara and your team, your strategy has four must-win battles, and you've been very consistent with this strategy and what these are. Today, I thought we could frame our conversation around those four must-win battles to start out and how they support your growth algorithm. Why don't we start with must-win battle number one, which is to grow WD-40 Multi-Use Product through geographic expansion. Maybe you can tell us about your approach to global expansion and give us a little overview of some of your highest growth markets.

Sure. Thank you, Linda, and hello to everyone. Great to be with you all today. Yeah, I think it starts with a really strong position. We have a fortress position in our U.S. market. Our U.S. market is about 35% of our global sales, and so that provides us a stable platform from which to expand internationally. If you look at our U.S. market over the past five years, it's had a compound annual growth rate on maintenance products of in the order of 6% or 7%. The U.S. continues to grow. We still have growth opportunities in the U.S. Actually, in dollar terms, the U.S. has still been the fastest-growing market, growing about $55 million over the past five years, heading into this fiscal year. Outside of the U.S., about 65% of our business is already international. We are truly a global business.

Our WD-40 brand is available to buy in 176 countries and territories across the world, and so we're laser-focused on our top 20 growth opportunities around the world. Outside of the U.S., we have growth opportunities just about everywhere you can look. So, a very strong track record already in Latin America, and we've pretty well tripled our business in Latin America over the past five or six years, but still strong growth in Latin America. In Europe and Asia, we pretty well have growth everywhere we look. Yeah, the European direct markets, which I used to manage back in the days, are about a further 30% of our business, and so the U.K.'s, the France, the Germany's, the Spain's, etc., the Italy's.

Those businesses are growing at very solid, predictable, single to high digits, sometimes into the double-digit growth rates, that complements the U.S. market. Looking further afield, at a lot of the emerging markets, we're consistently growing in places like China, which is our single largest growth opportunity, well into double digits. We have a great team. We have a direct business in China of about 60 people. It's now our third largest market globally after the U.S. and France, and delivering very strong growth. Our second largest opportunity being India, where we actually partner with a local company in India, a business called Pidilite, who are a fantastic strategic partner for us, and we've been achieving super strong rates of growth in India as well, over 20%.

India's already our second largest market in unit terms, growing very, very quickly and a market one day that could rival the U.S. in terms of scale. You then overlay that with very strong growth opportunities in a lot of emerging markets, places like Indonesia and Turkey, which are growing in very high double-digit growths. Overall, a mid to high single digit growth target, but with very fast growth available in a lot of these emerging markets.

Great. Thank you, Steve. In terms of your must-win battle number 2, this has to do with growing your sales and gross margin through the premiumization of WD-40 Multi-Use Product. Can you talk about what that is, what that entails, and the economics of that premiumization, and how much opportunity do you still have here?

I'll go ahead and take that one, Linda. For us, premiumization is really about improving that end-user experience, and it also has the benefit of strengthening the economics of the business. These products, and of course I brought products to show. The two products that we talk about when we talk about premiumization is the Smart Straw. The biggest end-user complaint that we get is losing the straw on the classic can. The Smart Straw solves that issue. Smart Straw is one, and then the other one is the EZ-REACH, the one with the flexible straw.

Both of these products solve real user and user pain points and make the product, in this particular case, easier to get to a particular point, and can save end users, particularly professionals, time and ultimately money. This allows us to offer these higher value formats and stronger gross margins, and also deepens our brand loyalty. So year to date, these two formats' sales combined were up 19% over the prior year and represents about 50% of our WD-40 Multi-Use Product sales. So really seeing good traction in those formats. In unit sales, though, our premium formats make up 40% of our MUP sales globally, and so we have a meaningful runway ahead of us for growth there. For context, in a developed market like the U.S., we see about 80% of our sales in those premium formats.

Conversely, on the other side, in our emerging markets, the number can be in the low single digits. We are close to unlocking manufacturing capacity in China, and so really that gives us the opportunity to bring the Smart Straw can into both China and our Asia marketing distributors, really in a region that has our lowest penetration of those formats. From a gross margin standpoint, from a revenue standpoint, this sells at a 30% uplift to the classic can, and the EZ-REACH sells at a 45% uplift. It doesn't cost us either 30% or 45% more to make, so both of these are great margin enhancers for us.

We continue to target our annual growth rate for these formats at 10%, supported by expanding distribution, and so this opportunity is not just to trade customers up, but it's really to make the brand more relevant and really to bring a more useful can to our end users.

Great. Thank you, Sara. That's a really powerful part of your strategy. So in terms of your must-win battle number three, this has to do with your WD-40 Specialist product line. Can you tell us all what those products are and what the growth opportunity is that you see with Specialist?

Sure. The WD-40 Specialist line was conceived about, what, 12, 13 years ago. It was really leveraging the core brand equity that we've built now many places around the world. Whereas the WD-40 core product, the Multi-Use Product that most folk will be familiar with, which is really the kind of Swiss Army knife, if you like, of general purpose maintenance products. Specialist products are designed for professionals who seek a high degree of performance from specialist products. Things like high performance penetrants or high temperature lubricants, silicone sprays, cleaning and degreaser products, which a specialist or a professional would turn to solve more complex kind of maintenance problems. The Specialist range is currently our fastest growing range. As a sub-brand, it's been growing at a compound annual growth rate of about 14%, but we're only just really getting going.

We have an identified opportunity of around $600 million of growth on the Specialist range, and we're only selling about 90% of our sales are to 10 countries. We really have the opportunity to take the Specialist range around the world to many of the countries where we've already introduced and have built the WD-40 core brand successfully. That is a very, very fast driver of growth. It also performs extremely well online, and so, it's really fueling strong e-commerce growth for us as well. Overall, between the two, between the core product and the WD-40 Specialist range, it gives us an opportunity to take a category approach with our retail partners.