cfa institute research report ~~

CFA Institute Research Challenge Hosted By

Local Challenge CFA Society of San Diego California State University - San Marcos

California State University - San Marcos - Student Research [Process Industry, Industrial Specialties Sector]

Nasdaq

Highlights We will initiate our coverage of WD-40 (WDFC) with a Sell recommendation, based on a twelve-month target price of $74.94, offering 27.72% downside from its closing price of $103.68 on February 10, 2016. Our recommendation is primarily driven by: • Macroeconomic Conditions – The global economic slowdown

hinders growth in saturated markets and reduces expectations for penetration into new territory.

• Valuation – Valuation methods indicate an intrinsic value of $74.94 based on DCF Analysis and Relative Multiples Valuation

• Main Risks to WD-40 Include – Adverse changes in economic conditions that drive the specialty chemicals industry, an increase in major input costs, and the possible flood of generic brands into the marketplace.

Recent News

• Jay Rembolt files (144) Filing by insiders prior to sale of restricted securities – 2/12/2016: CFO, Treasurer and VP of Finance, Jay Rembolt, has filed (144), stating his intent to sell 1,000 shares at $103.07 per share, by way of exercise of stock options. This sell off will account for his third within the past three months, totaling $292,992.74 in gross proceeds.

• WD-40 Company announces increase in quarterly dividend – 12/8/2015: Today, WD-40 announced that the company’s board of directors has declared a quarterly dividend of $0.42 per share, marking an 11% increase over the previous quarter’s dividend.

• WD-40 Company files (10-Q) basic quarterly filing for the period ending Nov. 30, 2015 – 1/7/2016: Total revenues for Q1 2016 decreased by 3.98% YoY from $96.353M in Q1 2015 to $92.522M. Results were reportedly hindered by foreign exchange exposure in the Americas, the EMEA and Asia-Pacific segments.

WD-40 Date: 2/10/2016 Ticker – Nasdaq: WDFC

Current Price: 103.68 Headquarters: San Diego, CA

Recommendation: Sell Target Price: 74.94

This report is published for educational purposes only by students competing in the CFA Institute Research Challenge.

Market Profile Closing Price $103.68 52 - Week Range $80.15 - $105.87 Average Volume 3Mo 70,245 Float 96.9% Market Cap. (M) 1,461 Dividend Yield 1.7% Beta 0.88 EV / Revenue 3.97 EV / EBITDA 20.25 Institutional Holdings 74.5% Insider Holdings 3.1 Valuation DCF Multiples Estimated Price 68.12 81.75 Weights 50% 50% Target Price 74.94

Figure 1:

Source: Factset

Figure 2:

Source: Factset Figure 3: MUP Composition

Source: WD-40 Annual Report 2015

Business Description WD-40 Company was originally founded by Sam Crivello and Norm Larsen as Rocket Chemical Company in 1953 and is headquartered in San Diego, California. The company changed their name to WD-40 in 1970, when they produced their first successful water displacement product (flagship) on the 40th attempt. WD-40 divides their products into two main categories, maintenance and household cleaning products. The iconic blue, yellow and red label emotes fond memories of their flagship, multi-purpose maintenance product, which currently sits in 4 out of 5 households in the US. WD-40 uses this product to penetrate markets in the Americas, the EMEA and the Asia-Pacific geographic segments. The company primarily offers its products through mass retail, warehouse club stores, grocery stores, hardware stores automotive parts outlets, sport retailers, independent bike dealers, and industrial distributors and suppliers in 176 different countries and territories worldwide.

Source: WD-40 Annual Report 2015 WD-40 has subsidiaries in the United States, Australia, the United Kingdom and Canada. WD-40 mixes their famous concentrate in four different locations: San Diego, Louisiana, United Kingdom and Australia. The Concentrated formula is mixed with additional ingredients on site as the final product. Products Maintenance products The company’s signature brand, WD-40, is included in the maintenance product category and accounts for a significant portion of annual revenue, roughly 88%. The following products currently sell under the WD-40 brand: WD-40 Multi-Use Product – The company’s flagship product is market leader among multipurpose lubricants, with over 2,000 suggested uses in households, construction, automotive, repair, marine, and industrial industries. In response to customer demand, the company’s latest innovation, WD-40 EZ REACH, unveils a new delivery system that uses a flexible straw, which can bend and maneuver to access hard to reach places. The EZ REACH is designed for automotive professionals and enthusiasts and is currently selling in the U.S. at retailers including Home Depot, Lowes, and AutoZone. The Company is planning to release the EZ REACH to all U.S. customers by the end of the second quarter of fiscal year 2016 and expand to a global scale by 2017. WD-40 Specialist product line – The Specialist line consists of high quality products including penetrants, degreasers, corrosion inhibitors, and lubricants that are marketed towards a more specialized audience. The growth of the Specialist product line has been one of the company’s strategic initiatives for the past two years. The Specialist line was launched in early fiscal 2012 and sells in 60 different countries. In 2015,the Specialist line achieved 24% global

Figure 4:

Source: WD-40 Annual Report 2015 Figure 5: Specialist Product 10-Yr Goal

Source: WD-40 Annual Report 2015 Figure 6:

Source: Factset, Team Estimates

growth, down from 34% inn 2014 (figure 4). Specialist also accounted for 6% of MUP sales; a number WD-40 hopes to get to 25% within 10 years. Recent growth is largely due to increased spending on product promotion and distribution. WD-40 BIKE – Range of products designed specifically for bike enthusiasts and mechanics. The product was launched in fiscal year 2012 and initially focused their sales in smaller independent bike dealers, however the company started distributing the product through the same multi- channel network as the other maintenance products during the first quarter of FY 2016. 3-IN-ONE – This brand consists of drip oil and lubricants for precise applications to small assemblies and mechanisms. This product is the market share leader of drip oils among household consumers and has industrial uses such as locksmithing, jewelry, HVAC, and construction. 3-IN-ONE has gained international acceptance through distribution networks in Europe, Canada, Latin America, Australia, and Asia. GT-85 – This bike maintenance product was acquired by the Company’s U.K. subsidiary in 2014 and is mainly sold through networks in the U.K. and European companies. The acquisition of GT-85 was implemented in order to strengthen the distribution of WD-40 BIKE in the U.K. Homecare Cleaning Products WD-40’s Homecare and Cleaning products sell in the U.S., U.K. and Australia. Due to increasing competition for shelf space in the homecare industry, WD-40 has defined their priority as their Maintenance line while reducing investments in Homecare products. The Homecare business continues to generate positive cash flow to the company but has gradually become a smaller part of overall sales, down to 11.9% in 2015. In the meantime, the revenue it produces helps to cover R&D costs and requires only two employees. Strategy The Company’s current 5-Point Strategic Initiatives are as follows:

• Grow WD-40 Multi-Use Product: Maximize the WD-40 product line by seeking out and penetrating new markets. Use the tried and true to demonstrate quality.Target: Double WD-40 Multi-Use Product net sales over the next 10 years.

• Grow the WD-40 Specialist Product: Leverage the WD-40 brand recognition and quality to introduce specialist into new geographic platforms. Target: Grow WD-40 Specialist to $125 million in net sales by FY 2025.

• Broaden Product and Revenue Base: Leverage the recognized strengths of WD-40 Company and diversify revenue streams. Target: Continue to develop or acquire maintenance products that fit seamlessly with the infrastructure currently in place.

• Attract, Develop and Retain Outstanding Tribe Members: Succeed as a tribe while excelling as individuals. Target: Continue to cultivate a productive and enjoyable work environment.

• Operational Excellence: Continuous Improvement by optimizing resources, systems and processes.

• Target: Execute the 55/30/25 business model while safeguarding the “Power of the Shield.”

Figure 7: Total Executive Compensation

Source: Morningstar

Figure 8: Revenue by Country (2015)

Source: Factset

Figure 9: Porter’s 5 Forces

Source: Team Estimates

Management and Governance WD-40’s management team is lead by CEO, Garry O. Ridge, who joined the company in 1987 and became President and CEO in 1997. Ridge has played a large role in WD-40’s success throughout his tenure, during which share price has increased by 102.3%. Alongside Ridge are several accomplished executives averaging nearly 20 years of experience directly within WD-40. Most of the management team has been in their current positions for over a decade, overseeing steady growth and successfully navigating WD-40 through the 2008 financial crisis. Executive compensation consists of a base salary (~40%), restricted stock awards (~35%), non-equity incentives (~15%), and other compensation (see appendix A) WD-40’s Board of Directors is primarily composed of independent directors and is overseen by Neal E. Schmale, the current Chairman of the Board. Committees overseeing the company’s operations include an Audit Committee, Compensation Committee, Finance Committee, and Governance Committee, each chaired by different board members. Although WD-40’s committee composition and code of conduct policy reflect strong corporate governance, there is some area of concern surrounding board tenure. Despite the board being primarily composed of independent directors, 78% of board members served between 11 and 22 years, providing some concerns involving a director’s ability to stay independent after prolonged service.

Industry Overview / Competitive Positioning Demand Drivers The demand for WD-40 products primarily comes from two different customers: Maintenance repair, construction, and other skilled trade businesses, as well as the “Do it Yourselves”(DIY) household consumers. Skilled trade businesses consume $40-$70 of WD-40 on average, per capita, while the DIY consumers spend $0.40-$0.70 a year. Still, the sheer size of the DIY base results in this category generating the highest aggregate revenue. The following macroeconomic factors were observed in order to gain a better perspective on WD-40’s consumer demand:

- Concerns - Disappointing Outlook for U.S. Economic Growth Since the recovery of the market correction in 2008, the U.S. has seen an increase in consumer spending and a reduction in the unemployment rate to 5%, as of December 2015 due to easy money policies. Although the U.S. economy made a comeback, recent data shows GDP trending downwards in the next couple of years due to slowing markets abroad and negative exports from a stronger dollar. The recent slowdown in consumer spending coupled with shrinking growth estimates for U.S. GDP have negative implications for WDFC. Discouraging Retail Sales In December, U.S. retail sales fell 0.1% and were up 2.1% for 2015, compared to a 3.9% gain in 2014, which was the weakest year for sales growth since 2009. Retailers also restocked their shelves at a slower pace in December, which is a negative factor for WD-40 because of their reliance on inventory turnover. Recent governmental data shows that inventory-to-sales remain high, thus indicating that the low level of restocking may persist.

Figure 10:

Source: Bureau of Economic Analysis Figure 11: Competitive Historical Prices

Source: Morningstar Figure 12:

Source: Bureau of Economic Analysis, Team Estimates

China’s Significant Slowdown & Impact on Global GrowthDatafromBeijingshowsthatChina’sGDPgrowthin2015was6.9%versus7.3%in2014,andtheslowestrateofgrowthfrom1990.Moreover,theresultwasshyof China’s revised growth rate of 7% (figure 10). Although a slowdown wasinevitable, thewindingdownofChina’s Industrialsectorhasnotbeenoffsetbygrowthanywhereelse.Thedaysofdouble-digitgrowthareoverastheChineseeconomy shifts from relying on exports to relying on domestic consumption.Furthermore,growthnumbersoutofBeijinghavebeenthesubjectofsuspiciondue to the routine of reaching government estimates. Although forecasts arenever completely accurate, the concern is that China has been overestimatinggrowth. The threat of China’s slowdown has lead to the reduction in globaleconomygrowthto3.4%fromanalreadylow3.6%. Specialty Chemicals Industry In 2014, the global Specialty Chemicals Industry was valued at $345 billion and is expected to reach $473 billion in 2020, growing at a 5.4% CAGR for years 2015-2020. The combined growth in North America, Europe, and japan will grow slowly at about 2% due to adverse demographic factors and tighter fiscal policies. However, China will still continue to contribute the most growth at 7% after being downgraded from 8%-9%. Generally emerging markets like China offer more dynamic growth due to rising consumer economies and industrialization. Recent Trends in Specialty Chemicals Industry & Competitive Positioning In recent years, Specialty Chemical companies have invested in differentiated products that produce higher margins, however the growth in emerging markets with access to low-cost capacities are leading towards commoditization. On the supply side, local players are advancing along the learning curve and are already competing heavily with multinationals. On the demand side in emerging markets, growth is shifting from exporting businesses to a domestic focus. Additionally, the demand in emerging markets is shifting towards regions that are harder to access due to lack of development, which gives local firms an advantage. In order to compete with local players in emerging markets, WD-40 has focused developing local sales and market support to ensure product promotion as well as increasing operating efficiency.

Investment Summary We issue a Sell Recommendation on WD-40 (WDFC) with a target price of $74.94, using a Discounted Cash Flow Analysis, and a Relative Multiples Valuation. The following concerns support our valuation: Future Growth Reliant on Emerging Markets WD-40 has fully penetrated the U.S. and Europe with their multipurpose lubricants, which has led to a high level of saturation in these markets. In order to grow at a more appealing rate, the company has looked to Emerging Markets for new opportunities. At the end of FY 2015, Emerging Markets accounted for 21.5% of sales, a 12.4% decrease from FY 2014. The contraction in these markets can be partially accredited to currency headwinds, however, gradual slowdown of the world’s second largest economy, China, has had a crippling effect on other emerging markets. Sales in Asia- Pacific region increased only 1% on a constant currency basis in Q1 FY 2016 over Q1 FY 2015, which raises questions on the company’s ability to penetrate new markets across cultural barriers. WD-40 claims to be “in the business of making memories,” relying heavily on buyer sentiment to

Figure 13: Dividends Paid vs. Yield

Source: Factset Figure 14: Stock Repurchase History

Source: WD-40 Company Website Figure 15:

Source: WTI Futures, Team Estimates

differentiate themselves. This marketing technique may breeze right by the Chinese market and others who simply cannot draw the same connection. Potential for Increase in Industry Supply & Imitation WD-40 encounters competition from similar and alternative products produced by major national and multinational companies, but they also frequently find counterfeit products and other infringing products particularly from China and other emerging markets. While WD-40 remains confident in the superiority in the performance of their product, they refuse to patent the formula on the grounds that doing so would require disclosure of the ingredients in their long-held secret. This, of course, leaves them particularly vulnerable to reverse engineering by generic copycats. We believe the company will ultimately face a similar challenge in China as Monsanto’s Roundup. In 2010, Monsanto Company reported a 34% decrease in earnings from its core product, Roundup, caused by a flood of generic herbicides from China. The company had to reformulate their strategy after losing their ability to price Roundup at a premium, leading to a large contraction in Gross Margin. We believe WD-40 faces considerable risk in the commoditization and imitation of their core product and high likelihood of a fate similar to Monsanto’s (see Appendix B). Fortunate enough for Monsanto, they had enough product breadth to shift gears and reposition themselves. We do not believe that WD-40 has as robust of a product offering and is thus at greater risk. Share Repurchases vs. Reinvestment During the period from March 1, 2015 through November 30, 2015, the Company repurchased 278,334 shares at a total cost of $23.8 million and plan to purchase $30 million a year moving forward using debt from their revolving line of credit with Bank of America (figure 14). The company’s ROIC and WACC are 16.79% and 7.3%, respectively. This desirable 9.49% spread raises questions as to why they are not reinvesting and expanding their business as opposed to buying back shares. We believe the company is repurchasing shares at a premium to boost earnings to distract investors from the lack of opportunities for organic growth. WTI Oil Likely to Make a Comeback Accounting for about 35% of Cost of Goods Sold, petroleum, has dropped significantly since 2014 and has helped the company expand their gross margin, however, analysts have predicted that oil prices will gradually make at least some degree of a comeback over the next several years (figure 15). This appears to indicate the margin expansion that the company has recently experienced may be about to change. We forecast a contraction in gross margin after 2018 as the cost of WTI increases and the three quarter lag in

Figure 16: Insider Stock Sales

Source:Bloomberg

Figure 17: Cost of Goods Sold Projections

Source: Team Estimates Figure 18:

Source: Team Estimates Figure 19: Annual Revenue Projection


which WTI prices will trickle down into WD-40’s COGS. WTI was chosen as the best indicator for the influence of crude oil because its R-Squared indicates that it has a significantly higher correlation with WD-40’s cost of goods sold than Brent Oil. (Appendix C) Share Repurchases vs. Insider Selling While the company has been repurchasing shares at historical highs, insiders have sold 43,006 shares in the open market during the same period. We believe insiders, especially management, selling their positions while repurchasing stock with company funds sends conflicting signals, deteriorates shareholder value, and supports our sell recommendation.

Valuation Valuation Price Target: 74.94 Recommendation: Sell Recommendation: Sell Two Valuation methodologies were utilized in deriving WD-40’s stock price; including Discounted Cash Flow Analysis and Relative Multiples. A Monte Carlo simulation was employed, using the DCF framework, to analyze how different combinations of important input factors affected the intrinsic value of WD-40’s stock price. DCF Model A Discounted Cash Flow Analysis was used to estimate the Intrinsic Value of WD-40’s stock price due to relatively predictable cash flows and the assumption that the company is mature and slow growing. We used a 5-year timeframe for the model based on guidance from historical performance, industry outlook, macroeconomic factors, and revenue growth. Driven by FCF, the DCF model led to an intrinsic value of $68.12; a projected 34.29% downside. The DCF model is most sensitive to the following factors: Figure 20:

Source: Team Estimates Weighted Average Cost of Capital The cost of equity was calculated using the CAPM model. We used a 10- year government bond rate of 2.05%, the adjusted beta 0.88 (WDFC price regressed against the S&P 500), and the sum of market and country risk premium is equal to 6.58% (according to A. Damodaran’s estimation). The after- tax cost of debt was calculated using WD-40’s marginal tax rate, 30%, and the LIBOR + 0.85% cost of debt from their revolving line of credit (Figure 20). Revenue Growth Revenue growth is based primarily on consumer spending forecasts in the U.S and Europe as well as retail and industrial expected growth in China. In recent years, WDFC has displayed weak revenue growth (1.29%, 2-Yr CAGR), which we believe will continue with the slowdown in the global economy. Unfavorable industry supply and demand characteristics coupled with the risk of imitation from low- cost “copy cats” add to the negative outlook outlined by

Figure 21: Multiples Summary

Source: Team Estimates Figure 23: Monte Carlo Statistical Data

Source: Factset Figure 22: EV / EBITDA History

Source: Team Estimates Figure 24:


government data. The combination of growth in consumer spending in the U.S. and Europe as well as expected retail and industrial growth in China resulted in a projected 5-year revenue CAGR of 3.83%. Cost of Inputs The increase in COGS, as a percentage of sales after 2018 is due to the expected increase of WTI Crude in the future (Appendix C). The company has enjoyed very low input costs, which has helped reach 56% Gross Margin as of Q1 2016. However, we expect the price of oil to increase over the next several years leaving the company with a project 53% gross margin. Furthermore, COGS were forecasted using futures of WTI, which we believe to be conservative given the volatility in commodity prices. Terminal Growth As the discouraging industry characteristics continue, WD-40’s growth will slow. This rate will reach a terminal growth rate equal to expected inflation of 2.5% (assumed historical inflation). Relative Valuation The relative valuation focused on several different multiples with the most compact spreads. Each of the four multiples used in our valuation provides insight into how WD-40 is trading in comparison to its peers. By weighting each multiple equally, this leads to an intrinsic value of $81.75, well below the current trading price. Due to the narrow spread among these outputs, we remain confident that this value accurately reflects the true intrinsic value per share and supports our Sell recommendation. (See Appendix H) Monte Carlo Simulation Using the DCF model framework, we employed a Monte Carlo simulation to analyze how varying combinations of input values affected WD-40’s intrinsic value per share. This method allows us to account for uncertainty in several factors contributing to our price target. Input factors include maintenance products growth, household industry growth, cost of goods sold (as a percentage of revenue), WACC, and the assumed long-term growth rate. Each input factor was assigned a unique probability distribution reflecting its range of possible values (see Appendix G). Using Oracle Crystal Ball, 200,000 simulations were run to forecast WD-40’s intrinsic value per share, resulting in an average price of $69.55. Based on the results of the simulation, we can conclude with a 95% confidence level that WD-40 is trading significantly above its fair value, supporting our Sell recommendation. Figure 25: Monte Carlo Analysis


Statistic Values Trials 200,000 Mean $69.55 SD $12.00 Median $68.09 25th percentile $61.09 75th percentile $76.42

Figure 26:

Source: Factset, Team Estimates

Figure 27: ERP by Geographic Segment

Source: Damodaran’s ERP Estimates

Figure 28: Consumer Spending Projections (Americas)


Financial Analysis Overview The financial condition chart above reveals WD-40’s position moving forward (See Appendix D). The future ratios were estimated using vertical analysis of the income statement and balance sheet.

Global Economic Trends Weaken Growth Prospects The slow down in Emerging Markets has sent shockwaves through developed economies, diminishing demand for consumer products. We expect low growth numbers in the U.S. and European markets due to high levels of saturation, however, weaker than anticipated growth numbers out of China is the biggest concern for the company because of their reliance on Emerging Markets for revenue growth. We believe these major economic factors will continue to drag on top line growth for the company. Figure 29:

Source: Team Estimates Expected Increase in Price of Oil Constrains Margins Major decreases in the price of oil have helped the company expand gross margin, operating margin, EBITDA, and net profit margin in 2015. We expect to see a rally in oil over the next several years, which will hamper the company’s ability to remain as profitable as they are today. The three quarter lag of input costs into COGS will begin to materialize after 2018 and will become 53% of revenues by 2021 (Appendix C). Weaker than Expected Growth Leads to Higher Inventory Levels U.S. business inventory levels edged up in 2015, pushing inventory- to- sales numbers to 7-year highs. We believe the soft demand in the retail industry (the largest means of distribution for the company) will ultimately lead to less shelf space for WD-40 and larger inventories. The company will have to react by selling their product at a discount or increase promotional and advertising activities. Pessimistic Outlook for WD-40 The unattractive outlook for economic growth throughout the globe coupled with the possible increase in industry supply will lead to a 5- year CAGR revenue growth rate of 3.83%. On the other hand, the likely increase in the cost of petroleum-based chemicals will lead to a 5- year CAGR rate of 5.47%

Figure 30: Risk Matrix

Source: Team Estimates Figure 31: VOC Regulatory Timeline

Source: California Air-Resources Board (CARB)

in COGS. The cost of inputs increasing faster than revenues dampens Operating Income growth with a relatively flat 5- year CAGR of 0.21%.

Investment Risks Regulatory Risk: VOC Limitation Restriction (RR1) WD-40’s flagship maintenance product accounts for 88.1% of the company’s annuals revenue. This product, along with several others, including BIKE and Specialist product lines, utilize an aerosol can method of application (figure 31). With regulation of VOC level varying from state to state, any increased stringency in regulation could force WD-40 to invest heavily in R&D. Market Risk: Foreign Exchange Risk (MR1) WD-40 transacts in 5 different currencies around the world and does 35% of its sales in currencies other than the US Dollar. In fiscal 2015, the strengthening of the US Dollar diminished consolidated net sales by $16 million and $3.7 in Q1 of 2016, already. Translational exposure impacted results in Canada, Australia, China, and the EMEA. If the momentum of the USD and the strengthening of the GBP to the Euro continues, this exposure will continue to negatively impact WD-40’s overseas activity (Appendix C).

Commodity Risk (MR2) Oil accounts for about 35% of WD-40’s cost of goods sold. In addition, WD-40 does not hedge against fluctuating oil prices, which could be a potentially costly for the company. With oil prices currently at extreme lows, WD-40 faces the risk that the price of oil will rally and bring their cost of goods sold up with it. If this were to occur, it would certainly put a squeeze on gross margins. The company states that in such an event, they will be able to pass these expenses on to the customer, however, with low differentiation and a highly competitive marketplace, this safety barrier may prove to be overconfidence. Operational Risk: Imitation Risk (OR1) As WD-40 expands their global reach into emerging markets such as China, they may encounter an increasing amount of imitations. WD-40 boasts an impressive profit margin that will attract a significant amount of attention from market participants who seek out opportunities to imitate high margin products in order to release a generic version at a lower price. In 2010, Monsanto fell victim to this threat after opening a manufacturing plant in China for one of their largest revenue producers, Roundup. Shortly after opening the plant, generic versions of the product hit the market at far lower prices. The result was disastrous for the product line and forced Monsanto to reposition Roundup within the market at a far discounted price. With 88.1% of WD-40’s revenue in an unpatented, maintenance product line, they have already begun seeing imitations in the marketplace. (Appendix B) Other Risk: Lack of Independence Among Board of Directors (OR2) WDFC meets the SEC’s requirement of independent board members. However, the long tenures of five out of seven independent board members potentially pose a conflict of interest between management and shareholder alignment.

Disclosures:Ownershipandmaterialconflictsofinterest:Theauthor(s),oramemberoftheirhousehold,ofthisreportdoesnotholdafinancialinterestinthesecuritiesofthiscompany.Theauthor(s),oramemberoftheirhousehold,ofthisreportdoesnotknowoftheexistenceofanyconflictsofinterestthatmightbiasthecontentorpublicationofthisreport.Receiptofcompensation:Compensationoftheauthor(s)ofthisreportisnotbasedoninvestmentbankingrevenue.Positionasaofficerordirector:Theauthor(s),oramemberoftheirhousehold,doesnotserveasanofficer,directororadvisoryboardmemberofthesubjectcompany.Marketmaking:Theauthor(s)doesnotactasamarketmakerinthesubjectcompany’ssecurities.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of San Diego, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

Appendix A: Management and Governance

WD-40 Key Executives: Executive Title Tenure with WD-40

Garry O. Ridge, 59

Director, Chief Executive Officer and President

• Managing Director (Australia): 1987-1994

• Director of International Operations: 1995-1996

• Executive Vice President/Chief Operating Officer: 1996-1997

• President and Chief Executive Officer: 1997-Present Total tenure: 29 years

Jay W. Rembolt, 64

Vice President, Finance, Treasurer and Chief Financial Officer

• Manager of Financial Services: 1997-1999

• Controller: 1999-2001

• Vice President, Finance/Controller: 2001-2008 • Vice President, Finance and Chief Financial Officer: 2008-Present Total tenure: 19 years

Michael L. Freeman, 62

Division President, The Americas

• Director of Marketing: 1990-1994

• Director of Operations: 1994-1996 • Vice President, Administration and Chief Information Officer: 1996-2001 • Senior Vice President, Operations: 2001-2002

• Division President, The Americas: 2002-Present Total tenure: 26 years

William B. Noble, 57

Managing Director, EMEA

• International Marketing Manager for the Asia Region (WD-40 Australia): 1994-1996 • Managing Director, EMEA: 1996-Present Total tenure: 22 years

Stanley Sewitch, 62

Vice President, Global Organization Development

• Vice President, Global Organization Development: 2012-Present

Total tenure: 4 years

Richard T. Clampitt

Vice President, General Counsel and Corporate Secretary

• Vice President, General Counsel and Corporate Secretary: 2014-Present

Total tenure: 2 years Geoffrey J. Holdsworth, 53

Managing Director, Asia-Pacific

• General Manager (WD-40 Australia): 1996-1997

• Managing Director, Asia-Pacific: 1997-Present Total tenure: 20 years

WD-40 Key Executive Compensation:

Board Member Position Board Tenure Board Committees Insider Holdings (%)

Neal E. Schmale Chairman of the Board 15 years

• Audit Committee

0.075 • Corporate Governance Committee

• Finance Committee

Garry O. Ridge, 59 Chief Executive Officer and President

19 years • N/A 0.469

Mario L. Crivello, 75 Independent Director 22 years

• Corporate Governance Committee

1.924 • Compensation Committee


Peter D. Bewley, 69 Independent Director 11 years

• Audit Committee


• Compensation Committee


Linda A. Lang, 57 Independent Director 12 years

• Audit Committee

0.025 • Compensation Committee


Giles H. Bateman, 70 Independent Director 13 years

• Audit Committee 0.042


Richard A. Collato, 72 Independent Director 13 years

• Audit Committee

0.028 • Compensation Committee (Chairperson)

Gregory Sandfort, 60 Independent Director 5 years

• Audit Committee



Melissa Claassen, 43 Independent Director < 1 year • Corporate Governance Committee 0

Appendix B: Monsanto

In 2009 and 2010, Monsanto experienced a flood of generic glyphosate herbicides from China, nearly forcing them out of the market that they created with their product, Roundup. As a result, revenues from their Agricultural Productivity line by fell by 42.13% from year-end of 2008 to year-end of 2010. Monsanto’s response to this market upheaval was to reposition their product within the market by implementing a severe pricing cut to compete with generic brands and reduce the number of formulations. Revenues for the product made a revival over the following years; however, Seeds & Genomics has been forced to compensate for the shortfall to continue overall growth.

Appendix C: Crude Oil Determining Three-Quarter-Lag Period

By offsetting the COGS by 3 Quarters into the past, we observe a significantly higher R-Squared. This tells us that there is roughly a three Quarter lag time for the effects within the crude oil pricing to trickle down into the company's COGS. Furthermore, once this lag has been applied, WTI Crude has a much higher R-Squared than Brent Crude. This tells us that the WTI Crude pricing is more highly correlated with historical COGS than Brent Crude. Determining Most Suitable Crude Measure

WTI Forecast

Appendix D: Financials

Appendix E: Porter’s 5 Forces

Threat of New Entrants: High Threat WD-40 faces their biggest threat from new entrants. As they venture further into their targeted emerging markets, boasting their desirable profit margin, they will begin to attract attention from copycats who will seek to make a generic version of their unpatented Multi-Use Product, selling it a far lower price while still enjoying a healthy profit margin. This threat most closely relates to the aforementioned Monsanto scenario and their fatal involvement in the efficient Chinese market. Bargaining Power of Buyers: Moderate Threat WD-40 has an extremely diverse market of buyers, partially due to their multiple product lines, Home Care and Maintenance. WD-40’s largest customer is Wal-Mart, a buyer typically known for their ability to gouge their suppliers by offering highly competitive shelf space. Although Wal-Mart and other similar large chain stores are their largest consumers, even Wal-Mart only accounts of 6% of sales. What this tells us is that although they are exposed to this form of powerful buyer, their exposer is minimal and diversified through broadened product offerings. Threat of Substitute: Insignificant Threat The threat of substitutes is of little concern to WD-40. Spray lubricants are essentially only one step removed from being a commodity, making it exceedingly difficult to substitute. In addition, WD-40’s Multi-Use Product has over 2,000 documented uses, a feat that few other materials are capable of. Competition in the Industry: Moderate Threat WD-40 has no real direct competitors, only companies who manufacture one or two similar products as a part of their broad spectrum of offerings. However, we believe that with the heightened threat level from new entrants may spawn future, more fierce competitors. Bargaining Power of Suppliers: Moderate Threat Suppliers to WD-40 are largely raw materials producers but also include the third party manufacturers whom WD-40 leverages to process the concentrated formula that they produce. This dependence upon the third party manufacturers neutralizes the freedom they have in the raw materials marketplace.

Appendix F: DCF Analysis

The chart above represents growth estimates broken down by region and business segment. We used consumer-spending forecasts in the U.S. to estimate growth in the Company’s MUP product line in the Americas segment. Consumer spending forecasts were also used from the Eurozone to estimate future growth in the EMEA region. We used forecasted industrial and retail governmental data from China to estimate growth in the Asia- Pacific Region. Lastly, to account for possible currency headwinds in 2016 a small reduction in growth was forecasted; we do not expect a large strengthening of the dollar over last year’s gains.

WACC Equity Risk Premium

In calculating the cost of equity, we used an ERP calculator created by A. Damodaran to gain a reasonable estimate of the equity risk premium for the company that includes all operating locations. Weighted by the amount of revenues generated from each region, we calculated an overall Equity Risk Premium of 6.58%

Completed DCF Calculations

Appendix G: Monte Carlo Simulation Parameters Monte Carlo Input Factors: The Monte Carlo simulation took five primary factors into account, resulting in 25 input values with defined probability distributions. See the table below for a detailed explanation of each factor and its parameters.

Factor Factor Effects Parameters Explanation

Total Maintenance

Products Growth

Total Revenue

2016: x=3.43%; s=0.63% 2017: x=3.66%; s=0.71% 2018: x=3.83%; s=0.85% 2019: x=4.05%; s=0.91% 2020: x=4.23%; s=0.97% 2021: x=4.20%; s=1.03%

This allows for sensitivity in several of our revenue forecasting factors including consumer spending, industrial growth, and retail sales growth. Standard deviation increases each year to reflect more uncertainty in long-term estimates than near-term estimates.

Household Industry Growth

Total Revenue

2016: x=1.52%; s=0.42% 2017: x=1.54%; s=0.48% 2018: x=1.48%; s=0.53% 2019: x=1.42%; s=0.60% 2020: x=1.36%; s=0.63% 2021: x=1.30%; s=0.65%

This allows for sensitivity in household products revenue, which is not expected to have a significant effect. Standard deviation increases each year to reflect more uncertainty in long-term estimates than near-term estimates.

COGS (% of Sales) based

on WTI

Cost of Goods Sold

2016: x=43.29%; s=1.50% 2017: x=41.27%; s=1.61% 2018: x=43.91%; s=1.72% 2019: x=45.25%; s=1.97% 2020: x=46.10%; s=2.13% 2021: x=46.82%; s=2.31%

This allows for sensitivity in the effect of oil prices on WD-40’s cost of goods sold. It accounts for the trickle-down period that occurs between price changes and its effect on COGS. Standard deviation increases each year to reflect more uncertainty in long-term estimates than near-term estimates.

WACC Cost of Capital / Discount Factor

x=7.30% s=0.5%

This allows for sensitivity in the discount factor and is based on the firm’s historical WACC spreads.

Long-term Growth Rate Terminal Value x= 2.50%

s= 0.5%

This allows for sensitivity in the firm’s long-term growth rate, which is based on historical inflation.

Appendix H: Relative Valuation

References

Bloomberg financial markets [Computer software]. (n.d.). Retrieved February 15, 2016. Coons, R. (2010). Monsanto lowers forecast, announces roundup price cuts. Chemical Week, 172(13), 8. Retrieved from

http://ezproxy.csusm.edu/login?url=http://search.proquest.com.ezproxy.csusm.edu/docview/506135368?accountid=10363

Damodaran, S. (n.d.). [Damodaran Online]. Unpublished raw data. [Form 8K - 2015]. (2016, January 7). Unpublished raw data. FactSet [Computer software]. (n.d.). Retrieved February 15, 2016.

Moldof, A. (2013). PRO FORMA FINANCIAL STATEMENTS: AN ILLUSTRATIVE EXAMPLE. Construction Accounting &

Taxation, 23(5), 41-47. Retrieved from http://ezproxy.csusm.edu/login?url=http://search.proquest.com.ezproxy.csusm.edu/docview/1468665555?accountid=10363

Silverman, E. (2010). EPA APPROVAL OF CALIFORNIA CONSUMER PRODUCT VOC RULES COULD BE MODEL.

Inside EPA's Clean Air Report, 21(25) Retrieved from http://ezproxy.csusm.edu/login?url=http://search.proquest.com.ezproxy.csusm.edu/docview/1008902102?accountid=10363

WD-40 Company, Investor Relations. (2016, January 7). Q4 2015 Earnings Report [Press release]. Retrieved January 7,

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Transactions, , ES41-ES49,ES410-ES412. Retrieved from http://ezproxy.csusm.edu/login?url=http://search.proquest.com.ezproxy.csusm.edu/docview/208193177?accountid=10363

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