WD-40 Co (WDFC) 2002 Q2 法說會逐字稿

This is Premiere Conferencing. You're on hold for today's WD-40 Company second quarter 2002 earnings conference call.

At this time we are awaiting additional participants and should be underway shortly. We do thank you for your patience, and please continue to hold.

Please stand by. Good day and welcome to the WD-40 Company second quarter 2002 earnings release conference call.

Today's call is being recorded. At this time I would like to turn the call over to the Director of Corporate and Investor Relations for WD-40 Company, Ms.

.

Please go ahead ma'am.

Thank you.

Good afternoon and thank you for joining us for our second quarter 2002 earnings call. Today we are pleased to have the following members of our senior management team on our call.

Garry Ridge, President and CEO; Michael Irwin, Senior Vice President and CFO; Graham Milner, Senior Vice President for the Americas; Bill Noble, Managing Director for Europe; and

Holdsworth, Manager Director for Asia-Pacific.

We would like to remind you that our New York Investor luncheon is scheduled for April 17th at the Intercontinental

Hotel at noon.

If you wish to attend, please RSVP via e-mail to

.

This conference call contains forward-looking statements concerning WD-40 Company's outlook for sales, earnings, dividends, and other financial results. These statements are based on an assessment of a variety of factors, contingencies, and uncertainties considered relevant by WD-40 Company.

Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from forward-looking statements including sales of specific brands; the impact of new packaging and displays; the acquisition of brands; the impact of foreign currency; changing accounting principles; uncertain global economic conditions; competition and the company's outlook for the future year.

The company's expectations beliefs and projections are expressed in good faith and believe by the company to have a reasonable basis.

But there can be no assurance that the company's expectations, beliefs or projections will be achieved or accomplished. The risks and uncertainties are detailed from time to time in reports filed by WD-40 Company with the SEC including Forms 8-K, 10-Q, 10-K, and readers are urged to carefully review these and other documents and research.

At this time I'd like to turn the call over to Garry Ridge for introduction of the call.

Thank you

.

It's great to have a number of our senior management team on the call today. Today we reported net sales for the second quarter ended February 28th of 55.6 million, an increase of 34.6 percent over the same quarter last year.

Sales year-to-date are reported at 109 million, an increase of 54.8 percent over the same period last year.

Second quarter earnings are up 41 cents per share, a 17-percent increase over the same quarter last year and year-to-date earnings are 68 cents per share, an increase of 54 percent over the first six months of last year.

These results are a tribute to the magnificence of our people executing on our strategy of diversification across brands, borders, and trade channels. We are no longer wholly dependent on our fortress brand, WD 40. I'll hand over to

, our CFO, who will discuss the numbers for the quarter and year to date.

Thanks, Gary. We'll begin with a review of sales and then on to the rest of the financials. Starting off with sales, total quarter sales, as Gary mentioned were 55.6 million, up 34 percent over the second quarter last year. Without the household products which were the 2000 Flushes, Carpet Fresh, and X-14 brands, company sales for the quarter were 37.2 million, up 8 percent compared to last year. Sales through 6 months are $109 million, up 54.8 percent over last year. And without household products, our half year sales are 70.9 million, up $450,000 versus last year.

Lubricant sales, which were WD40 and 3&1, were 35.3 million, up 7 percent from last year, which is something we expected due to our decision not to do a WD40 bonus ounce promotion in US. For the past eight years, that promotion has been a significant source of revenue in the US market. The downside is that it put a great deal of free product into the market. 13.7 million free ounces in the last fiscal year, which was equivalent to about $2.6 million in sales revenue. We didn't do that promotion this year as part of our long-term plan to shorten the consumer repurchase cycle of WD40, but we do have a new WD40 brand promotional relationship with NASCAR in the US this year, and we expect full year's sales of the brand in the US will be about where they were last year. Lubricant sales for the first six months were $66.5 million, up one percent.

Hand cleaner sales which represent Lava and Solvo are 1.8 million in the quarter, up $800,000 from a year ago. We've been staging for a promotional effort over the next six months with Lava with TV beginning in April. For the half year hand cleaner sales were 4.3 million, flat versus a year ago.

Household products, again 2000 Flushes, Carpet Fresh and X-14, had another strong quarter with sales of $18.4 million. There is no comparable period last year since the acquisition of those brands closed last May.

America's Q, second quarter sales were $44.3 million, up 55 percent against last year, and without household products, America's sales were off 10 percent at $25 million, a reflection of the WD40 bonus can promotion we previously mentioned and challenges in Latin America, particularly with Argentina. After six months, America's sales were 85.6 million, up 83 percent compared to last year, and without household products, America's half year sales were $47.5 million dollars, up one percent against a year ago. Asia-Pacific Q2 sales were $2.8 million, off by 20 percent.

Through six months Asia-Pacific sales were $5.7 million, down 14 percent. Throughout the year difficulties in Asian economies have offset strong results in Australia.

Europe second quarter sales were $9.4 million, off four percent versus a year ago due to Germany and

Europe sales were $17.7 million, up three percent compared to last year.

Gross profit margins in fourth quarter were,

the quarter were 54 percent versus 55.5 percent a year ago, due largely to mix effects, and for six months gross margin was 54.5 percent.

Sell in general at administrative expense for the quarter was $11.8 million versus $9.1 million in the second quarter last year, an increase of 28.9 percent. As expected, our overheads increased at a slower rate than sales.

This quarter also includes approximately $130,000 related to the consolidation of our

New Jersey office.

For the half year, SG&A expense increased by 31.5 percent to $23.1 million.

Advertising promotion expense of 7.1 million in the second quarter versus 4.8 million a year ago.

The increase is attributable primarily to household product. For the year advertising promotion expense is 16.3 million against $8.6 million a year earlier or an increase of 89 percent.

As we've discussed in earlier calls, the household products and grocery business required different investment levels than the traditional WD-40 business had.

During the quarter advertising promotion expense is 12.9 percent of sales, while year-to-date it sits at 14.9 percent of sales.

We expect that

expenses will run at a rate closer to 17 percent on the year as we had previously told you. Earnings before interest, taxes, depreciation and amortization EBITDA grew by 24 percent in the second quarter to 11.4 million and for six months our EBITDA is 20.6 million, an increase of 47 percent versus a year ago.

Amortization expense was $71,000 on the quarter. As announced in Q1, we adopted Financial Accounting Standard number 142, and so we are no longer amortizing acquisition-related goodwill and intangibles.

As a result of the previous items, operating income for the quarter was $11 million compared to $8.3 million in the second quarter last year, and for the half year operating income is 19.8 million compared to 12.2 million last year.

Net interest expense for the quarter was $1.3 million versus $257,000 in Q2 last year, and for the year net interest expense was 2.6 million versus $526,000 last year.

The higher interest cost reflects funds borrowed for the acquisition of

. Net income for the quarter was 6.5 million compared to 5.4 million in the same quarter last year, and on a diluted per share basis, earnings were 41 cents per share compared to 35 cents per share last year. For the half year, net income after extraordinary items and cumulative effects from an accounting change, was 10.9 million versus 16, 6.8 million last year. This equates to earnings per diluted share of 68 cents after six months compared to 44 cents last year.

You'll also notice that our shares of, weighted average shares outstanding have increased to 15.9 million shares at the end of the second quarter. The increase stems from employee exercises of stock options, as disclosed on SEC form 4. Key members of management have exercised their stock options as well and increased their personal holdings of stock. In my own case, I have more than doubled my ownership of WD40 company shares in the past quarter, while our CEO, Gary

has purchased and additional 6,200 shares.

Regarding the dividend on March 26, the board of directors of the WD40 Company declared a regular quarterly dividend of 20 cents per share, payable on April 30, 2002 to shareholder's of record on April 12, 2002.

A few words about our balance sheet of February 28th, cash and cash equivalents were $7.8 million at the end of the quarter, up from 4.4 million at the beginning of the fiscal year. Our cash position has been strengthened by solid business results, better inventory management, and employee's exercising stock options. The latter is also evident in the change in our paid in capital.

Accounts receivable grew a bit due to the weighting of sales towards the last part of the quarter, and inventories also declined as we have mentioned before as we have noted we better manage our inventory. Once again, inventories remain low relative to a business of this size.

Current portion long-term debt at zero is a reflection of our financial package previously announced, which calls for interest-only payments for three years. As required in our third quarter, we'll be adopting a new accounting rule known as financial accounting standards boards emerging issue task force number 0109, a new rule that essentially shifts marketing investments made with customers from marketing expense on our income statement to a reduction in sales and, while it will have no bottom line impact, it will change the way our income statement will look.

So that's the financial update. Thanks. I'll turn it over to Graham

our Senior Vice-President of America.

Thanks, Mike and good afternoon. In the America's our Q2 results are also a tribute to our strategy of diversification across brands, borders and business trade channels. No longer wholly dependent on our fortress brand, WD40, the region saw modest sales in this brand, more than offset by strong sales of our new brands. In the USA, the strong sales of our 2000 Flushes brand was particularly satisfying in the face of heavy promotional activity by the competition. As a demonstration of our country's diversity. The weakness of Latin America primarily in Argentina and Mexico was offset by a solid performance by our Canadian team.

Their business is solid and secure, and we are delighted to see that the 2000 Flushes brand, which was in significant decline when we acquired it last year, have seen us halt that decline. We expect to see our efforts rewarded with brand growth in the next fiscal year.

Although the Canadian team missed Q2 versus prior year, that was a timing issue and our year-to-date sales are ahead of last year. In the USA, our second quarter performance also shows how channel diversity helps us.

The WD-40 brand, for example, had strong mass merchandise, hardware and club business, which offset weaker gross

. Overall we are very encouraged to report that all six brands despite some unevenness between Q1 and Q2 are ahead of prior year through the first six months.

The integration of our new brands is clearly going well, and we are pleased by the second quarter results and our year-to-date sales. Our outlook for Q3 and the balance of the year is cautiously optimistic.

The solid Canadian business should help offset some of our Latin American weakness. This weakness is most pronounced in Argentina and was about 15 percent of our business in the region coming from this country will not pull in the business during the rest of the year, and we expect Latin America to finish behind prior year.

In the USA, however, our business looks good. The promotional excitement of our WD-40 brand becoming the official, multi-purpose free lubricant of NASCAR is just now taking hold and will help us replace the loss sales from our traditional Q2 and Q3 bonus

promotion, which

addressed in his remarks.

Our mass merchandise business is solid across all brands. Our hardware business holding its own and a promotional plan's in place are realized, of course, never a guarantee.

We expect to meet expectations for the next quarter and the remainder of the year in The Americas region. It's now my pleasure to turn the call over to my colleague, Bill Noble, Managing Director for our European operations - Bill.

Thanks Graham. Good afternoon ladies and gentlemen.

WD-40 Company's Europe's business has grown by three percent over the first six months where the region's economies are still mostly growing. The WD-40 brand has grown by seven percent over the first six months.

3-IN-ONE is flat and Lava sales have fallen against the same previous period, in which we launched Lava.

WD-40 40 brand has experienced particularly strong growth in our direct markets of France, Spain, Portugal, Italy, and Austria. This is contrary to the success

of promotional programs and continued growth and distribution.

We have added 444 new accounts in the last six months. In our distributor market, WD40 brand is growing significantly in Russia, ex-Yugoslavia, parts of Scandinavia, and areas of the Middle East.

WD40 is experiencing

styles in Germany and Poland. These are both key markets for us, but have core trading channels in recession. Since the launch of Lava in the UK, we've been able to gain over 60 percent weighted distribution with our customer base. We have secured listings with the leading groups in hardware, auto, and grocery along with builders' merchants, petrol forecourts, and cash and carry outlets. The

with these accounts has exceeded their expectations, but has not reached our planned level of turn over. We have reset our goals, but continue to add to our distribution and support the brand.

The current and medium term driving force in all the European countries for WD40 is to continue building the fortress. We expect to have a record year of

earnings. I will now pass over to Jeff

, Managing Director, Asia Pacific.

Thanks, Bill. Trading conditions in Asia continue to be difficult in the last six months while Australian and New Zealand markets are showing strong growth through the period.

Sales in the Asia Pacific trading block were down 40 percent for the half year, brought about by a decline in purchase for distribution in the region. The impact of an early Chinese New Year also affected our year on year analysis. Our expectations for the six months were for flat sales, but the continued economic difficulties in the region saw that move down as our distributors became overly conservative in their purchase cycles and ability to sell large quantities in the market.

The economies in Asia continue to be affected by a decline in exports to the US and a decrease in markets such as tourism. Importantly, we continue to invest in the Asian market particularly through sampling and expanding our distribution. China continues to be affected by counterfeiters who've taken market share away from the genuine article, our WD40. The counterfeiters are marketing a product that is incorrectly labeled and with a liquid that is primarily kerosene or white spirits. The product is then distributed by wholesalers who sell the product to retailers across the country from the back of their trucks in various quantities. We have in the last six months conducted numerous retail raids utilizing the Chinese authorities. While the ability to stop counterfeiters completely may be a near impossible task, we're encouraged by China's entry into the WTO and do see the opportunity to reduce the impact to a controllable situation. The key to this reduction is to find the manufacturing plant with filling operations in China, of which we are well underway.

Australia continues to record strong sales growth across the board. WD40 sales have increased by 20 percent year on year, 3 & 1 418 percent on a small base, while

increased 40 percent against last year.

continues to grow in distribution and sales as consumers sample

product and

grows throughout

and media advertising.

was the number one brand in the heavy duty hand-cleaning category in grocery and hardware, and we continue to expand its presence in automotive and industrial markets.

New larger sizes also benefits sales in the heavier usage markets such as workshops and factories through our distribution.

WD-40 remains the number one brand in Asia and

while

is the number one heavy-duty hand cleaner in grocery and hardware in Australia. We're well positioned in all markets when the economy strengthens in the future.

We both in

and Australia a strong staff who believe in our brands and the direction we are taking. As a company we're committed to our strategies and looking forward to a bright future.

I'd like to hand back the call to Garry Ridge.

Thanks

.

I'd like to recap. One of the values of WD-40 Company is a healthy discomfort with the status quo. And with that in mind we are not satisfied with the results we are delivering with the Lava brand.

The brand needs revitalization in the U.S. and the refocus and refocus in the U.K. Our planned TV marketing program advertising which starts in April will address this in the U.S. and as Bill referred, we have rescaled our investment in the - in the U.K. to match our new expectations.

Some other questions you might want to have confirmed. Where are we in the integration of the Global Household Brands acquisition?

Answer, the acquisition is now fully integrated into the WD-40 business model. All major costs associated with the integration have been expensed.

The new business platform is operating efficiently and delivering results. You may ask what's next?

More of the same - build the WD-40 brand, defend and acquire. We will continue to expand distribution across trade channels of all relevant brands in the U.S., Canada, Australia and the United Kingdom.

We will continue to increase the brand equity of our current brands, which includes researching opportunities for brand extensions and continued investment in building consumer demand.

We will continue to build the WD-40 brand in international markets that still have attractive growth prospects.

These include the focus markets of Italy, Spain, France, Germany, Eastern Europe, and Russia, as well as China and Mexico. We will deliver increased earnings through the leverage and diversification of our business across trade channels, brands and borders.

And we continue to look for acquisitions that would deliver increased shareholder value if they were part of the WD40 business model. All in all, pretty exciting times to the magnificent team of people at the WD40 company to have a healthy discomfort with the status quo and a determined goal to deliver faster, more profitable growth over time. We are now a fortress of brands. We would be pleased to answer any questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch tone telephone. We take questions in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star one to ask a question. And we will pause a moment to assemble our roster.

Our first question comes from Larry

of LAR Management.

Hi. Good Afternoon.

Hi Larry.

How you doing?

Magnificent. Thank you.

Good. Two questions. One, on a cash flow basis, assuming, which is a silly assumption but I don't know the magnitudes, assuming a nominal level of acquisitions, how would debt, or how much debt would be paid down each of the next two years? Secondly, you spoke earlier that in the second half promotion and advertising might run 17 percent of revenues, am I correct?

The average for the year will be probably 17 percent.

All right. The average for the year will be 17, it was, what, 14 for the first half?

About.

All right so it'll be significantly higher in the second half.

Yeah, you might hit, you might

Twenty?

You might have heard me say that, you know, we've got TV going on with Lava, et cetera.

Right. So when you come into next year, and you anniversary the big acquisition, what do we look at the promotional spending to be?

About 17 percent of sales on an actual basis.

Same, same.

Yes.

OK. Thanks and keep up the good work.

Yeah, this is Mike Irwin, Larry. You had asked a question about cash flow and what debt would be paid down. At this point, our borrowings really are geared toward a three year period of interest only payments.

Right.

And so at this point we don't have a plan in mind to pay down debt within that three year period.

So the interest factor, or the interest dollars will remain the same or higher, assuming rates are going up?

Well in our case on our loans...

You're locked?

Yeah, we had a fixed rate loan, and so we could see interest cost rise if we were to drive down on our revolving line of credit.

OK.

But at this point, it, you know, it is what it is.

OK.

Thank you.

Moving on to

of J.P. Morgan.

Hi. I'm not sure whether you covered this, and I didn't - and I didn't catch it, but I was just looking for a little more information on how the WD-40 brand did in North America year-over-year in the quarter.

Sure. I talk about, if I talk about in the U.S. probably...

Yeah.

The WD-40 brand in the U.S. was about nine percent down in the quarter. It's four percent over year-on-year.

The reason it was down in the quarter, as

alluded to, is that traditionally over the past six or seven years in this quarter, we've run a major promotion, which was a bonus

.

Right.

That bonus

was by this can and you get 20 percent free.

Right.

Made a decision to discontinue that promotion. The reason, we wanted to take out the free ounces out of the market with an objective of reducing the repurchase cycle.

OK.

So instead of giving them 20 percent more free, we want them to buy another can.

OK.

So I think overall, given that we've done that, to have a four-percent growth over the six-month period is something that we're very satisfied for in a market like the U.S.

OK. Thanks.

Thanks the for clarification. That's it.

Thank you.

Now Jeff Zekauskas with J.P. Morgan has our next question.

Hi. Good afternoon.

Hi Jeff.

A couple of questions.

You know when you look at the comp store sales of Depot and Lowe's, they seem to be picking up a little bit of speed. Is that something you're beginning to feel?

I think we mentioned in the first quarter that we had a very good quarter with those types of accounts. We certainly have solid business - Graham alluded to that.

Graham, how would you feel about those areas?

Hi Jeff.

Hi.

We, as you may recall, we switched our merchandising service in the first quarter and we're now going with the group of - or regional merchandisers and Home Depot and we're starting to see that business really come good.

We had a nice quarter, first six months and the two customers you mentioned and have, I guess, cautiously optimistic expectations for the balance of the year with them based on that. Their new initiatives driven by their new president are causing some at-store challenges, but we feel that with the new services we're meeting them very well.

challenges that you face?

The stated position of Home Depot is to have less on-floor displays in the store, less clutter throughout the business, throughout the store itself. This affects, perhaps, our ability to have displays present there. We have been able to very cleverly circumnavigate that by the strength of our brand, and if you go into, and I invite you all to go into any Home Depot in your neighborhood and look at the impressive array of WD40 throughout the stores as a tribute to the merchandising effort currently in place.

So does that mean your shelf space is larger or smaller or the same in Depot?

I would say that this time versus a year ago, which is a heavy promotional time, we are every bit as magnificent as we were a year ago. It's a thing that we're very proud of.

OK. If, Forgive me, I joined the call a tiny bit late. You know, if you look at your WD40 sales domestically and you kind of break it into the sales to the big box retailers and the sales to everybody else, sort of, what's the, what's the volume pattern in the quarter?

I don't think we got into the detail of volume by major or strategic account. Over all, you know, the, we've said that our top 65 accounts are about what, nine or ten percent of our sales. No, up about 9 or 10 percent. So, if you look at our top 65 accounts which are basically the store that you would refer to as the movers and shakers, our sales are about 9 per cent up in the quarter.

So its, so the weakness is really from the smaller accounts for various reasons.

Jeff Graham here again. Absolutely continuing the trend of the big getting bigger and the small getting smaller. We see continued big store, big chain growth and we are challenged at the regional level. That not withstanding, our regional business is also up about 6 percent year on year for the first six months. So overall, business is pretty good.

OK. What was the benefit from the change in amortization accounting in the quarter?

I'll let Mike answer that.

I'm sorry, could you repeat the question?

What was the earnings per share benefit from the change in the

142?

I think if you look at it on a year to year basis, it's about 2 cents that we took on that would have added to earnings per share last year. So if we are comparing just like to like comparisons, you could add about 2 cents to earnings per share in the same quarter last year.

It's only a 2 cent benefit? I mean, didn't...

In last year quarter, yes...

Oh, I see you made your acquisition later in the year.

Yes.

OK. Thank you very much.

Just a reminder, if you would like to ask a question, please press star, one on your telephone. And gentlemen, it appears there are no further questions.

I'll turn it back over to you for any closing remarks.

OK, thank you very much.

Thanks for joining us on our second quarter, and we'll see you in about three months from now and continue to be magnificent. Good afternoon.

That does conclude today's conference. Thank you for your participation.

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