Quick Recap on $WDFC Q4: GMs +400bps sequentially. Europe main disappointment. No change to thesis.

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Quick update of WDFC, doubt I do this often, but they reported so soon after I wrote on it I thought I’d give some thoughts. We’re seeing the green shoots of recovery on margins, but EMEA was weak, much more than expected. All in all, nothing changed in my thesis, but I’ll expand.

Maintenance sales (their core product) declined about 30% in EMEA. That’s stark for a business that was resilient in 2008. It would have been just 15% FX-neutral and they did exit some Russian and Belarus business, but still. It was only down 1% in the Q ended Aug. They sell through distributors in the EU, so no surprise in the face of uncertainty, distributors are destocking.

As such, EBITDA missed my estimate by about $5MM ($23MM vs. $28MM) solely due to this. GMs even beat my estimate by about 50bps. And mgmt basically said they have no change to their expectations, which is a second-half story. Normally I take the under on any second-half story, but this one makes complete sense.

I reviewed the “cost of a can” to see what is really driving the margin erosion. Basically 65% of a WD-40 can is either related to oil or tin. While packaging doubled in $s, the real needle movers are the chemical inputs, can, and manufacturing fees. These manufacturing fees are essentially warehousing and freight costs.

I think all of these will be tailwinds in second half.


Plus, China sales grew 22% on the maintenance side and 32.5% in APAC-ex China. So that is a good sign and probably more room to run as China re-opens.

Outside of that, last thing I’ll highlight is they have way too much inventory. They should destock themselves. But anyway, I expect that’ll be a 2H cash source. Could be up to $85MM, honestly. That may seem small, but it ain’t nothing for a company I expect to recover to $120MM+ EBITDA plus have a cash release like that.

 

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