WD 40 CO(WDFC)Q3 2026 法說會逐字稿

Good day. Welcome to WD-40 Company's third quarter fiscal year 2026 earnings conference call. Today's call is being recorded. All participants are currently in listen-only mode. Following the prepared remarks, we will open the call for questions. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now turn the call over to Wendy D. Kelley, Vice President, Stakeholder and Investor Engagement. Please go ahead.

Thank you, and good afternoon. Thank you for joining us today. On our call today are WD-40 Company's President and Chief Executive Officer, Steven A. Brass, and Vice President and Chief Financial Officer, Sara Hyzer. In addition to today's discussion, we encourage investors to review our earnings presentation, press release, and Form 10-Q for the period ending May 31, 2026, available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's call will also be posted shortly. We will discuss certain non-GAAP measures today. Reconciliations to GAAP results are available in our SEC filings and earnings material. Today's call also includes forward-looking statements. Actual results may differ materially. Please refer to the risk factors in our SEC filings for more information. Finally, please note that all information presented is current as of July 9, 2026. We undertake no obligation to update forward-looking statements. With that, I will turn the call over to Steven.

Thanks, Wendy, and thanks to everyone for joining us today. I will begin with an overview of our third quarter performance and progress against select areas of our 4-by-4 Strategic Framework. Sara will then review our financial results and outlook, and we will conclude with your questions. Third quarter consolidated net sales increased 24% year over year to $195 million. Maintenance products, which represented 97% of total net sales, increased 26% to $190 million and were up 22% on a constant currency basis, exceeding our long-term growth expectations and setting a new record for the company. Sales of maintenance products in our direct markets increased 28% year over year while sales through our marketing distributor markets increased 18%. We will discuss the drivers of this performance in a moment. Gross margin increased 40 basis points year over year to 56.6%. We are encouraged by this momentum and remain focused on the levers within our control. Although we expect gross margin to experience some temporary pressure from external cost factors in the coming months, we are confident that the actions we have taken position us well for recovery thereafter. We will vigorously defend our gross margins and may need to take further action in FY 2027 as required. Sara will provide additional perspective on our outlook in a moment. Now let's review third quarter sales results by trade block. Unless otherwise noted, I will discuss net sales on a reported basis compared to the third quarter of last fiscal year. Sales in The Americas increased 29% year over year to $101 million driven by a 31% increase in maintenance product to $98.3 million. This growth was driven primarily by increased sales of WD-40 Multi-Use Product in the U.S. and Latin America, where sales increased $17.2 million and $2.6 million, respectively. Strong performance of WD-40 Multi-Use Product in the U.S. was driven by several factors, including expanded distribution, robust ecommerce sales, and strong promotional activity, including a high-impact promotional campaign featuring a limited-edition can collaboration with Disney Entertainment and The Home Depot. In Latin America, sales increased across Brazil and Mexico, supported by higher sales volume in Brazil and a combination of sales growth and favorable foreign currency translation in Mexico. WD-40 Specialist sales increased by 22% driven by higher U.S. volumes, reflecting new distribution gains, strong placement with large retailers, and growth in online sales. Home care and cleaning product sales declined 9% reflecting our strategic focus on higher margin maintenance products. Sara will give an update on our U.S. home care and cleaning business later in the call. Looking ahead, we expect low double-digit growth in maintenance products in The Americas for fiscal year 2026. Turning to EMEA, third quarter sales were $66.6 million, up 17% year over year, reflecting higher sales volume in both direct and distributor markets, as well as favorable foreign currency exchange rates. On a constant currency basis, sales were up 10%. In our EMEA direct market, sales increased by $6.6 million driven by double-digit growth in maintenance products across key markets, including Iberia and DACH, where sales of maintenance products rose by $2.2 million and $1.5 million, respectively, supported by strong commercial execution, promotional activity, and merchandising. In our distributor market, sales increased by $4.4 million reflecting a strong rebound after several softer quarters and the positive impact of completed strategic distribution changes. Growth was driven by higher sales volumes across key markets, including Saudi Arabia and the United Arab Emirates, supported by the timing of customer orders and increased inventory build within the region. In India, sales increased $1.6 million primarily due to favorable order timing and foreign currency impacts. Sales in the EMEA region also benefited from some advanced buying as customers proactively managed inventory levels amid uncertainty around product availability following geopolitical developments in the Middle East. We also experienced some advanced buying ahead of price increases, which became effective in early Q4. As a result of both of these factors, a portion of fourth quarter demand shifted into the third quarter. WD-40 Specialist sales increased 31%, driven by growth across most of our direct and distributor markets. Growth was led by France and Iberia, supported by strong marketing programs and new product introductions. A reminder: the divestiture of the U.K. home care and cleaning portfolio in fiscal 2025 reduced third quarter sales by $1.1 million. Despite ongoing uncertainty in the Middle East, we expect maintenance product sales in EMEA to increase by low to mid-single digits in constant currency and high single digits in reported currency in fiscal year 2026. In Asia Pacific, sales increased 24% year over year to $27.3 million and were up 18% on a constant currency basis. Growth was broad-based across the region, driven primarily by China and Asia distributor markets, which increased $3 million and $1.4 million, respectively. In China, growth is driven by higher sales volume supported by promotional programs, including online influencers, and expanding distribution across online retail and industrial channels. Sales also benefited from advanced buying ahead of planned price increases later in the year which shifted a portion of expected fourth quarter demand into the third quarter. In our Asia distributor market, sales increased driven by promotional programs, particularly in the Philippines, Indonesia, and Malaysia. WD-40 Specialist sales increased $1 million or 32% driven by growth across the region, with the strongest gains in China where higher volumes were supported by promotional and marketing programs and expanded distribution. We remain encouraged by regional momentum and expect high single-digit to double-digit growth in maintenance products in Asia Pacific for fiscal year 2026. Let's talk about our Must-Win Battles, a core element of our strategy to accelerate revenue growth in maintenance products. Starting with Must-Win Battle number one: lead geographic expansion. Year-to-date sales of the WD-40 Multi-Use Product increased 13% to $398 million driven by solid performance across all three trade blocks. We are seeing strong progress across key markets, with year-to-date growth of 20% in the U.S., 21% in China, and 27% in Iberia. We continue to execute from a proven playbook, expanding distribution and sampling programs to build awareness with end users across 176 countries and territories and 62 trade channels. We estimate the attainable market for WD-40 Multi-Use Product to be approximately $1.9 billion. With fiscal year 2025 sales of $478 million, we believe there remains a significant long-term growth opportunity. Next is Must-Win Battle number two: accelerating premiumization. Year-to-date sales of WD-40 Smart Straw and EZ-REACH, when combined, increased 19% and now represent approximately 50% of WD-40 Multi-Use Product sales. These premium formats strengthen brand loyalty, support gross margin expansion, and provide meaningful runway for continued growth. We continue to target annual growth of more than 10% in premiumized products. Our third Must-Win Battle is driving WD-40 Specialist growth. Year-to-date sales increased 22% to $72.9 million. We estimate the attainable market for WD-40 Specialist at approximately $665 million. With fiscal year 2025 sales of $82 million, we are still in the very early stages of capturing this significant growth opportunity. Today, 90% of our WD-40 Specialist sales come from just 10 markets, highlighting a significant opportunity to expand through geographic growth and product innovation. In the third quarter, we launched our first bio-based lubricant across several European markets. While it is still early, we are very encouraged by the initial results and look forward to rolling out the product across additional markets in the coming quarters. We continue to target annual growth of more than 10% for WD-40 Specialist as we expand our portfolio of purpose-built maintenance solutions. Our fourth Must-Win Battle is turbocharged digital commerce. Year-to-date, ecommerce sales increased 22% led by the United States and China. Ecommerce pure play remains one of our fastest-growing channels. Across digital, we are strengthening execution on key platforms; our social media and video channels are driving much of our digital reach, helping us connect with both new and existing end users in more engaging ways. As a result, we are reaching and engaging more end users than ever before. Digital commerce continues to support each of our Must-Win Battles by improving access to our products and increasing brand visibility and relevance. We will now move to our strategic enablers, which support operational excellence across the business. Zig Ziglar once said, 'You do not build a business. You build people. And then the people build the business.' That philosophy is core to WD-40 Company and is the foundation of our people-first mindset. Our people are remarkably resilient, agile, and innovative. Over the past five years, they have navigated a series of external challenges from the global pandemic to geopolitical uncertainty while strengthening cost discipline, implementing new systems, enhancing how we serve customers, and leveraging our globally decentralized supply chain network, all in the face of significant uncertainty. Last month, we announced a planned leadership transition to build on the strong foundation we have in place. As part of this transition, we introduced new roles to strengthen alignment and accelerate strategy execution, ensuring we have the right structure and leadership in place to support continued growth. These new roles include Chief Strategy and Innovation Officer and Chief Brand and Marketing Officer, and will be filled by experienced WD-40 Company leaders transitioning from within the company. The newly created roles are designed to enhance collaboration, accelerate innovation, and proactively harness AI and digital technologies to drive growth and advance the company's long-term strategy. We also announced that Sara Hyzer will transition to President of our Americas division, reflecting our commitment to developing leaders from within. Sara will continue to serve in her current role during the transition until a successor is named. These changes are designed to support continued growth and position the business for long-term success. With that, I will now turn the call over to Sara.

Thanks, Steven. I appreciate the opportunity to take on my new role, and I am excited about what lies ahead for our Americas business. In the meantime, I remain fully focused on my current responsibilities and on delivering value for our stakeholders. Today, I will review our third quarter performance against our business model, introduce enhancements we are making to further strengthen it, provide an update on the divestiture of our Americas home care and cleaning business, and discuss our fiscal year 2026 guidance and key assumptions. We were encouraged by our third quarter performance with net sales up 24% and operating income growing 47%, reflecting the benefits of scale in our business. The difference between those growth rates highlights the leverage in our business model, as higher revenue flowed through to profitability. As expected, results strengthened as the year progressed, with improvement across both the top and bottom line. Turning to our business model, which expresses gross margin, cost of doing business, and adjusted EBITDA as a percentage of revenue. This quarter, we are seeing the benefits of higher revenue and scale reflected across the model. Starting with gross margin, performance remains strong. Third quarter gross margin was 56.6%, up 40 basis points year over year. This increase was driven by 80 basis points from lower aerosol cans and fill fees, as well as 60 basis points from favorable sales mix and other miscellaneous mix, partially offset by 60 basis points of increases in other input costs. Third quarter gross margin performed as expected despite external cost pressures driven by recent geopolitical developments. This reflected the benefit of higher inventory levels entering the quarter. We expect those costs to move through our production and inventory cycles over the next several months. In response, we have already implemented pricing and cost-saving initiatives across many regions, positioning the business to realize the benefits of these actions, with most of the impact expected in fiscal year 2027. As these actions take hold and the external environment stabilizes, we anticipate gross margin improvement over the course of fiscal year 2027. While the exact timing and pace of that recovery are difficult to forecast, we believe we are well positioned to navigate the environment, strengthen profitability, and drive continued progress. Turning to cost of doing business, which represents operating expenses adjusted for certain noncash items, it decreased to 34% of net sales from 38% last year, reflecting operating leverage from higher revenue and scale. Advertising and promotional investment increased to 6.1% of net sales from 5.8% last year, driven primarily by higher promotional activity in the U.S. We still anticipate being around 6% of net sales for the full year, which is in line with our guidance. Finally, adjusted EBITDA margin increased to 23% from 20% last year, reflecting operating leverage from higher revenue and scale. Now I would like to provide an update on the home care and cleaning divestiture. Last fiscal year, we announced our intent to sell these brands in The Americas and the U.K. We successfully completed the divestiture of the U.K. home care and cleaning brands in August of 2025. After extensive engagement with potential buyers, it became clear that the current macro environment was not conducive to a divestiture of these brands as a bundle. As a result, we are no longer actively marketing these brands for the foreseeable future and have reclassified these assets as held for use. We continue to view these home care and cleaning brands as noncore. We will remain open and opportunistic and are evaluating each brand individually should the right opportunity present itself. For the time being, we will manage these as harvest brands, expecting gradual top-line decline while continuing to generate attractive returns. As a reminder, the Americas household brands combined represent $12 million in annual sales, less than 2% of our global revenue. Consistent with accounting guidance, we resumed amortization and recorded a $1.3 million expense during the quarter related to prior periods when these assets were classified as held for sale. Given the one-time nature of this catch-up expense, we are including this as a non-GAAP adjustment to help investors better evaluate the underlying performance of the business. Additionally, this decision will impact our reporting in two other ways. First, we issued fiscal year 2026 guidance on a pro forma basis, excluding the Americas home care and cleaning business, to provide clear visibility into the performance of the core business. With the reclassification to held for use, our fiscal year 2026 guidance now includes associated sales and earnings from these assets, which favorably impacts elements of our outlook. I will discuss in more detail when I walk through our updated guidance for the year. Second, our decision to retain the home care and cleaning business prompted us to reassess and sunset our long-standing '25 business model. As part of this reassessment, we developed our new enduring business model, which provides a disciplined framework for how we manage the business and create long-term value. It is anchored in four key drivers: maintenance product sales growth targeted at mid to high single digits; gross margin targeted above 55%; adjusted EBITDA growing faster than net sales; and an asset-light model that requires minimal capital investment. Together, these drivers support strong outcomes, including returns on invested capital above 25%, strong free cash flow conversion, and a balanced capital allocation approach that prioritizes organic growth, dividends, and share repurchases. The enduring business model was designed to drive leverage and long-term returns for stockholders, better reflecting our strength as a perpetual compounder. We will continue to report under the '25 model through fiscal year 2026 and transition to the enduring business model in fiscal year 2027 to better align our metrics with our long-term strategy. Turning now to other key measures of financial performance, let's review operating income, net income, and earnings per share for the third quarter. Operating income increased 47% to $40.3 million with foreign currency being a tailwind for us. On a constant currency basis, operating income increased by 42%, primarily driven by higher sales and improved gross margin, partially offset by increased operating expenses. Excluding amortization expense related to the reclassification of our home care and cleaning brands, non-GAAP net income was $31.5 million, up 50% from the prior year. On a non-GAAP basis, diluted earnings per common share were $2.33, up from $1.54 in the prior year quarter. Turning from how we measure performance to how we deploy capital, our balance sheet remains strong and supports a disciplined approach to investing in organic growth and returning value to stockholders. Our capital allocation strategy remains a consistent foundation. On June 15, 2026, our Board of Directors authorized a new share repurchase program of up to $100 million. The program has no expiration date, and the timing and amount of repurchases will be determined based on market conditions and other factors. So let's turn to fiscal year 2026 guidance. As a reminder, our fiscal year 2026 guidance was originally provided on a pro forma basis, excluding the Americas home care and cleaning business that was classified as assets held for sale. Following the reclassification of these assets to held for use, the business has been incorporated back into our guidance, and I will walk through the specific impact to our guidance to help bridge those changes. We have also narrowed our guidance ranges based on our year-to-date performance and outlook. In addition, our guidance is provided on a non-GAAP basis and excludes the one-time amortization catch-up expense of $1.3 million recorded in the third quarter. For fiscal year 2026, we now expect net sales in constant currency to be between $652 million and $667 million, representing growth of 6% to 9% compared to pro forma fiscal year 2025 net sales of $614 million. This outlook includes approximately $12 million in net sales from assets recently reclassified as held for use. It also reflects a narrower guidance range, providing a more refined view of our expected performance for the remaining part of the fiscal year. Based on current exchange rates, we expect reported net sales to be between $675 million and $690 million, representing growth of 10% to 12% compared to pro forma fiscal 2025 net sales. Gross margin is now expected to be between 54% and 55.5%. This revised outlook incorporates a 40 basis point adjustment due to the reclassification of home care and cleaning brands along with an additional 60 basis points from higher-than-expected cost increases. The company has implemented pricing actions and cost-saving initiatives, with the majority of the expected benefit anticipated in fiscal year 2027. Advertising and promotion investment remains projected to be approximately 6% of net sales. We now expect non-GAAP operating income to be between $107 million and $113 million, representing growth of 5% to 11% compared to pro forma fiscal 2025 results. This outlook includes approximately $2.9 million in operating income related to those assets recently reclassified as held for use. Our provision for income tax is now expected to be around 22.5%. Finally, we expect non-GAAP diluted earnings per share to be between $6.05 and $6.35 based on an estimated 13.5 million weighted average shares outstanding. This outlook includes approximately $0.17 per share related to the assets recently reclassified as held for use and represents growth of 6% to 11% compared to pro forma fiscal 2025 results. Our guidance reflects a euro to U.S. dollar exchange rate assumption of approximately $1.17 in the fourth quarter. Actual results may vary as conditions evolve. That completes the financial overview. Now I would like to turn the call back to Steven.

Thank you, Sara. In summary, what did you hear from us today? You heard that we delivered 24% net sales growth and 47% operating income growth, demonstrating the operating leverage inherent in our business model. You heard that third quarter sales benefited from advanced buying due to market uncertainty as well as planned price increases later in the year, which shifted a portion of expected fourth quarter demand into the third quarter. You heard that our Must-Win Battles continue to perform well, with solid double-digit year-to-date growth in geographic expansion, WD-40 Specialist, premiumized products, and ecommerce. You heard that our people-first mindset remains central to how we operate, supported by leadership changes that strengthen alignment and support long-term growth. You heard gross margin was strong at 56.6%, up 40 basis points from last year. While higher input costs are expected to pressure margins in the near term, pricing and cost optimization actions are underway and we expect margin recovery as those benefits are realized. We will vigorously defend our gross margins and may need to take further action in FY 2027 as required. You heard that we decided to no longer actively market our home care and cleaning brands and have reclassified these assets as held for use. You heard that we are introducing our enduring business model framework designed to drive leverage and long-term returns to stockholders by better reflecting our strength as a perpetual compounder. And you heard that we are updating our guidance to incorporate the home care and cleaning business into our outlook and to narrow our guidance ranges based on our year-to-date performance and outlook. Thank you for joining our call today. We would now be pleased to answer your questions.

We will now open the call for questions. If you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, press star one again. Please ensure your mute function is turned off. One moment, please, for the first question. Your first question comes from the line of Aaron Reed from Northcoast Research. One moment. Your line is open. Please go ahead.

Congratulations on that front. I guess my first question really is: how sustainable do you think margins being above 55% are? It seems like something that you are aiming for, but I'd like your perspective on sustainability and how you would speak to that.

Hi, Aaron. Thanks for that question. We had indicated at the end of Q2 that we believed our margins were going to hold in the third quarter, and they did. We did anticipate some cost increases as a result of the disruption in the Middle East, and those cost increases occurred in the month subsequent to Q2. We had enough inventory on the balance sheet to sustain our margin in the third quarter, but we do anticipate those cost increases to begin to flow through in the fourth quarter. That said, we have implemented price increases that will begin to take effect starting in fiscal year 2027, which will help mitigate some of those cost increases impacting our P&L that we anticipate in the fourth quarter. We have also taken cost-reduction actions to help mitigate exposure in the fourth quarter. We are pleased with where the full year is going to land—between 54% and 55.5%—and, considering the global environment, we feel really good about where the year is landing.

Okay. Great. And one other question: when you rolled out the price increases, was oil a component of that? Did oil return to $70 faster than you anticipated? When modeling input cost normalization, what did you expect in terms of timing?

When we looked at the rate of cost increases, the range indicated about a 40% increase in some inputs. In reality, we saw decoupling: the input cost of specialty chemicals and base oils did increase in excess of that 40% in some cases—50% or even higher. We saw significant price increases over that three-month period. The good news is that in June we started to see some pullback. While spot commodity pricing came back down into a lower range, the pace of cost decreases on the input side has been slower. We saw pullbacks of about 20% to 25% in June and anticipate a slower step-down overall. Costs tend to go up quickly and come down more slowly. Assuming things do not escalate further in the Middle East, we expect costs to pace back down toward pre-war levels over time.

Okay. Great. Thank you very much. I will turn it back over.

Thanks, Aaron.

Your next question comes from the line of Michael Baker from D.A. Davidson. Your line is open. Please go ahead.

Thanks. Just to follow up: can you talk about the fourth quarter outlook, the implied guidance? If you do the math from the full year guidance plus what you've earned year to date, sales seem in line with consensus while earnings look a little lower. Is your fourth quarter outlook better, worse, or the same as it was three months ago? My assumption is the top line is similar, and margins may be a bit worse because of how oil is playing out.

Hi, Mike. The fourth quarter outlook changed a bit due to phasing: we saw some demand pull into Q3 that might otherwise have been in Q4. When you look at Q3 and Q4 together, we are landing in the mid to higher end of our guidance range. So it was more timing that impacted the fourth quarter specifically. We feel good about Q4; it will actually be the second-strongest quarter of the year. The majority of our growth has been in the back half of the year and the phasing landed more in Q3 than Q4. On gross margin, there is a bit more of a pullback than we anticipated coming out of Q2, which was hard to forecast, but holding guidance within 50 to 60 basis points given the environment is a positive outcome. Also, we have offset some pressure by reducing discretionary spending in Q4 to help protect the bottom line, which contributes to the stronger bottom-end guidance.

Okay. So to follow up: you are increasing the bottom end of guidance on top line and operating income, and some internal cost savings are helping. Is that correct?

Yes. To give an example: if you add the $2.9 million from the held-for-use assets back into our prior guidance range, that would have put us at $105.9 million to $112.9 million for operating income. We are now guiding to $107 million to $113 million, so we are raising the bottom end by about $1.1 million and tightening the top end. The narrowing we mentioned raises the bottom end of both our revenue and operating income and EPS ranges.

Understood. Thanks. Appreciate the color.

Okay. Thank you.

Your next question comes from the line of David Shachno from William Blair and Company. Please go ahead.

Hi. This is David Shakno on for John Anderson. Two quick questions. First, you announced about a month ago a 'king of the hill' promotion at a large retailer. Any early reads on performance there?

Sure. The promotion in partnership with Disney and The Home Depot is one of the largest promotions we have ever run. If you walk into a Home Depot store, you'll see prominent WD-40 displays. It's been in market about a month and runs for a few months more. We are in the process of ramping up our marketing and expect to reach roughly 80 million consumers across the U.S. in terms of targeting in July. It's driving very strong incremental sales and, after one month, has shown about 75% incremental volume with very little cannibalization. We are very pleased. It's a major promotion for us and one of many activities in the U.S. Combined with strong distribution gains, WD-40 Specialist growth, and ecommerce growth, this promotion and a few others are helping drive our results in the U.S.

Got it. Thanks. A follow-up: on pricing, can you help with the magnitude of pricing? I realize the full impact may come in fiscal 2027, but has there been any retailer pushback so far?

The price increases we've executed are primarily in Asia Pacific and Europe. We conducted price increases in the U.S. earlier in the fiscal year and will review the U.S. situation next year. The increases implemented between June and July were mid- to high-single digits in scale, with a little more impact on our bulk products. The main benefit will show in the back half of Q4 and into Q1 as the pricing cycles complete. We did see a small amount of pull-forward—about $3 million globally—driven by customers concerned about security of supply in places like India and some advance buys in China and Europe. Overall, the price increases have been implemented broadly with limited pushback to date.

Great. Thanks. I'll pass it on.

Thank you.

Your next question comes from the line of Daniel Rizzo from Jefferies. Please go ahead.

Hi, everyone. Thanks for taking my questions. First, did you say that U.S. home care is roughly $12 million in annual sales and about $3 million in operating income? Is that how we should think about it going forward?

Yes, that's correct. The $12 million is on the top line and operating income is just shy of $3 million for those Americas household brands.

You're changing the way you present things and moving to the enduring business model. Are the regional sales goals for The Americas that you discussed in the past still in place, or is it more holistic now?

The regional goals remain in place. The key change with the enduring business model is the commitment to drive adjusted EBITDA growth faster than revenue growth. That's an important commitment from leadership. Over the past few years, we've made significant investments in IT, sustainability, and innovation; many of those big investments are now behind us. We are in a position to prioritize driving the bottom line faster than the top line while still investing in growth.

Understood. With the recent price increases and cost actions, assuming no escalation in the external environment, will those steps largely offset the higher input costs so that by the end of next year you'd be back toward pre-crisis margin levels?

We guided to a midpoint of 55% gross margin for this fiscal year, including the household brands, which bring down margin by about 40 basis points globally. Given the current volatility, it would be unwise to provide a firm margin forecast for next fiscal year right now. Our stated goal is to vigorously defend our gross margins. You may see a couple of quarters where margins reestablish, but the aim is to restore and defend our gross margins subject to what is possible in the external environment.

One last question on inventory: given the current volatility, are you planning to keep inventory a bit elevated to ensure you can meet demand, similar to the post-COVID logistics approach?

We carried higher inventory levels in Q2, and much of that inventory shipped during Q3. We're now closer to our target days of inventory—closer to 90 days—and still believe getting back to a 90-day target is a good goal even in the current environment. We believe we can meet demand at that level.

Alright. Thank you very much.

Thank you.

Thanks, Daniel.

Your next question comes from the line of Linda Bolton Weiser from Water Tower. Please go ahead.

Hi. I wanted to ask about the pricing action. In the previous cycle a few years ago when costs spiked, the price increases were larger and you did lose some customers, primarily in Europe. Do you see things transpiring differently this time around in terms of your ability to keep customers versus lose them? Is anything different this time?

Hi, Linda. This is a very different set of circumstances. The price increases we are putting through now are not on the same scale as those prior increases. That can change depending on how costs evolve, but the current increases have been significantly smaller and have been adopted across the world with much less pushback from partners. We implemented initial moves and will reassess in early FY 2027 if further action is needed.

Is there any conversation with customers around the fact that these spikes or volatility in oil are event-driven, and that makes it harder to put price increases through because they could argue the changes are temporary?

We try not to rush decisions and take a view on likely developments over the next 12 to 18 months. The price increases we put through now do not fully represent the scale of cost increases we've seen; we have assumed some reduction in costs month by month as Sara highlighted. We will take another look in early FY 2027 to determine whether further action is required.

Sara, you mentioned we should expect progressive improvement in FY 2027. Should we interpret that as gross margin down year over year at the start of FY 2027 but improving as the year progresses?

Given the environment, it's difficult to comment far into next fiscal year. Based on current inventory and cost movements, we expect some margin impact in Q4 and into early next fiscal year. The pacing and length of any recovery depend on how input costs trend in the coming months; those dynamics can change daily given geopolitical developments. So while we expect progressive improvement, the exact timing and pace remain uncertain.

On the revenue line: earlier you mentioned new distribution in the U.S., including a large new customer with thousands of outlets. Combined with the successful promotions this year, does that create difficult comparisons for next year? Any channel fill related to the new customer or other channel dynamics we should be aware of?

The new distribution you referenced was a single major customer adding roughly 7,000 new outlets for our 2.75-ounce product. That's a major new customer for us and will ramp over a two-year period as distribution expands into those stores, contributing incremental sales next year. Regarding promotion, this has been a strong year in the U.S. with promotions across multiple channels. The 'king of the hill' promotion is particularly significant given our brand's iconic nature and the power of co-branding with partners like Disney and The Home Depot. That is a repeatable, powerful formula that will help drive future growth whether it's one large activation or multiple smaller activations across channels.

Okay. Thank you so much, and congratulations, Sara, on your new appointment.

Oh, thank you, Linda.

Your next question comes from the line of Aaron Reed from Northcoast Research. Please go ahead.

I'm back. One last question: can you tell us more about where you are finding success with WD-40 Specialist? Adoption seems to be faster than expected. Which segments and channels are driving that, and can you expand on that a bit more?

Absolutely. WD-40 Specialist is growing strongly double digits across the world. We've leveraged a 'learn faster to grow faster' approach by having global teams exchange best practices and focusing on the best-selling items within the Specialist range. Six products account for about 80% of Specialist sales, and disciplined execution to get those into distribution consistently has helped. China and the U.S. have shown very strong Specialist growth—U.S. is in high single digits year-to-date—and Europe continues to grow well. New product innovation has also helped; for example, the bio-based lubricant (BIOLUBE) launched in France has performed very well and will be rolled out globally over 18 months. The Specialist range complements the core WD-40 Multi-Use Product and helps protect and expand shelf space for the overall brand. Today, 90% of Specialist sales come from 10 countries, so we have significant runway to expand geographically and capture more of the accessible market.

Thanks. One follow-up: are distributors receptive to Specialist products, or are they more focused on the multi-use product?

You have to look at Specialist and Multi-Use Product together. The Specialist range supports a category approach and helps retailers manage the category. Specialist helps protect and gain shelf space for the overall brand, creating a virtuous circle that protects the core product while enabling growth for newer items.

Great. That makes sense. Thank you very much.

Thank you.

At this time, there are no further questions. This concludes today's call. Thank you all for attending. You may now disconnect.