WD-40 Co (WDFC) 2002 Q3 法說會逐字稿

Good day.

Welcome to the WD-40 Company third 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, Miss Maria Mitchell. Please go ahead ma'am.

Good afternoon.

Thank-you for joining us for our third quarter 2002 earnings call.

Today we are pleased to have Garry Ridge, President and CEO and Michael Irwin, Senior Vice President and CFO.

This conference call contains forward-looking statements, concerning WD-40 Company's 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, impact of acquisitions, 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 believed by the company to have a reasonable basis.

That there can be no assurance that the company expectations or beliefs 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 fairly review these and documents and research.

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

Thank-you, Maria.

Today we reported third quarter net income of $5.2 million or 32 cents per share compared to $3.7 million or 24 cents per share for the -- of a previous year an increase of 33%.

Net income for the 9 months ended May 31st, 2002 was 16.1 million or $1.01 per share compared to 10.5 million or 68 cents per share over the 9 months of last year, a 49 percent increase.

I would like Michael Irwin to take on the call and discuss the numbers and some of the relevant changes in accounting practices in more detail.

Thanks, Garry.

The results we'll report today reflect the adoption of a new application of accounting guidance known as Financial Accounting Standards Board Emerging Issue Task Force number 01-09. It reclassified certain marketing costs from advertising and sales promotion expense to a reduction in sales revenue.

These costs would include things like customer incentives, co-op advertising and coupons.

Though it has no impact on net income, it does change the appearance of the income statement.

As a matter of fact, the effect on sales was a reduction of about 9.5% in the quarter compared to 5.5% in Q3 of last year.

And about 9% through the 9 months of this fiscal year compared to about 4.5% last year.

The amounts that were reclassified are as follows.

In the third quarter of this fiscal year we reclassified about $5.4 million worth of expense compared to about $2.4 million last year.

And May year-to-date, 2002 reclassified about $15 million worth of expense compared to $5.1 million last year.

That leaves us with total quarter sales $51.5 up 28% over the third quarter last year and sales through 9 months are $150.9 million up about 40% over last year.

We'll now review the segment sales results without the application of the new accounting.

Lubricant sales, which includes the WD-40, 3-IN-ONE brands in the third quarter were 34.4 million, slightly ahead of last year.

Lubricant sales for the 9 months were 100.9 million, up about 1 percent.

Hand cleaner sales which include the Lava and Solvol were $4.1 million in the quarter up 61% against a year ago.

We have significantly stepped up our promotional activity to support the Lava brand.

Through 9 months hand cleaner sales were $8.4 million, up 23% against a year ago.

We are in the early days of a renewed emphasis on the Lava brand in the U.S.

It's too early to project results forward.

Household products which includes the 2000 Flushes, Carpet Fresh and X-14 brands had another strong quarter with sales of $18.5 million versus $5.9 million a year ago.

Thing to note in the quarter is last year's number for the third quarter included only one month of the household products business because that acquisition had closed at the end of April.

The newly acquired Spot Shot brand will become part of our household product segment in future periods.

But again, the acquisition of Spot Shot closed on May 31st, so it had no effect on third quarter sales of this fiscal year.

Without household products, Americas sales were up 4% at $25.5 million, a reflection of the WD-40 bonus camp promotion previously mentioned and challenges in Latin America.

After 9 months, America sales were 129.6 million, up 64% against last year, and without the household products, Americas' year-to-date sales were $73 million off one percent against a year ago.

Asia-Pacific 3rd quarter sales were $3.4 million up to 45%.

It was a strong quarter in the Asian market since Asia-Pacific were up 9 million which is up about two percent on the year-to-date.

Europe third quarter sales were $9.5 million up 18% against the third quarter of a year ago.

And through 9 months, Europe sales were 27.2 million, up 8% compared to last year.

We have had good year-to-year results in Spain, Italy, Germany and other markets like Russia, Poland and the Middle East.

And Europe sales did not include household products because those are sold in other parts of the world.

Gross profit margin as reported in the quarter was 48.5% compared to 51.2 in the third quarter last year, while fiscal year-to-date gross margin was 49.5% compared with 53.3% in 2001.

Both of those are due to product mix and the effects of reclassification of marketing costs.

Without the reclassification of marketing costs gross margin in Q3 would have been 53.4 -- 53.4% versus 53.9% in the third quarter last year due to the impact of product mix.

Year-to-date gross margin would have been 54.1% compared to 55.4% a year ago, also due to product mix.

The effect of the reclassification on margin was greater in the current quarter, end of fiscal year-to-date, primarily due to the marketing associated with household products and grocery.

Larger portion of the marketing tactics to support that business require reclassification.

In addition, last year's third quarter, again included only one month of household product sales, thus the impact of the reclassification is greater in the current year than it was last year.

Selling general administrative expense for the quarter was 11.7 million versus $8.3 million in the third quarter last year.

Through 9 months, SG&A expense was 34.9 million compared to 25.9 million last year.

Advertising and sales promotion expense was 4.2 million in the third quarter versus 4.6 million a year ago.

And year-to-date advertising and sales promotion costs were $10.9 million compared to $10.4 million last year.

The results was largely impacted by the application of the new accounting guidance that we have already mentioned.

Without the reclassification, advertising and promotion expense for the quarter would have been 9.6 million and $25.9 million on a year-to-date basis.

The significant increase over last year as a result of a full period of household products marketing.

Earnings before interest taxes, depreciation and amortization, EBITDA grew by 16% in the third quarter to 9.3 million and through 9 months our EBITDA is $29.9 million, an increase of nearly 36% against a year ago.

Amortization expense $71,000 on the quarter and as announced in the first quarter we adopted FASB 142 so we are no longer amortizing acquisition related goodwill and intangibles.

As a result of the previous items operating income for the quarter was $9 million compared to $6.7 million in the same quarter last year.

And for 9 months, operating income was $28.8 million compared to $18.8 million last year.

Net interest expense for the quarter was $1.4 million, against $671 thousand in the third quarter last year.

And through 9 months, net interest expense was $4 million versus $1.2 million last year.

The higher interest costs reflect funds borrowed for the acquisition of Global household brands.

Looking ahead our interest costs will rise due to the $27 million borrowed for the Heartland acquisition for Spot Shot which closed on May 31st.

Net income in the quarter was 5.2 million compared to $3.7 million in the same quarter last year.

On a diluted per share basis earnings were 32 cents per share compared to 24 cents last year.

For 9 months, net income after extraordinary items from accumulative affects from an accounting change was $16.1 million versus $10.5 million last year.

And that equates to earnings per diluted share of $1.01 in the nine months, compared to 68 cents last year.

You will also notice that our weighted shares outstanding, including dilution, have increased to 16.2 million shares at the end of the third quarter.

Increase stems from the employee exercises of stock options and the shares that were issued to finance the Heartland acquisition.

We issued 434,000 shares on May 31st, as partial payment for that acquisition.

Regarding dividend, on June 25th,

the Board of Directors of WD-40 Company declared a regular quarterly different vent of 20 cents per share payable on July 31st, 2002 to share holders of record on July 12th, 2002.

A few words about our balance sheet at May 31st, 2002, cash and cash equivalents were $8.2 million up from $4.4 million at the beginning of the fiscal year.

Cash position has been strengthened by solid business results, better inventory management, employee exercises of stock options and diligent follow-up on collections.

Accounts receivable declined due to the collections follow-up and the timing of sales in the quarter.

Inventories also declined as we have managed them better.

Inventories remain low relative to a business of this size.

You also note there's an unallocated purchase price on the balance sheet.

That relates to the acquisition of Heartland.

This will be allocated to other categories in the future upon the final purchase price allocation.

We also borrowed $7 million from our revolving line of credit and $20 million of long-term debt to help finance Heartland.

Paid in capital due to the employee exercise of stock options and the issuance of approximately $12 million in stock for Heartland.

That's the financial update.

Thanks and

I'll turn it over to Garry Ridge.

Thanks, Mike.

We are proud of the efforts our people have made to execute our long-term plan of diversification across brands, borders and business channels.

Because of those efforts, it's more than likely we will deliver the most profitable year in WD-40 Company's history.

We are also pleased that our year-to-year earnings before interest, tax and depreciation and amortization, EBITDA, is nearly 36% over last year.

We are really pleased with the success we have had with the household products line since we acquired it last year.

Without any new product introductions on a year-over-year basis comparison, we have grown the household product sales by more than 15% in the 9 months of this year compared to the same period last year if we had owned the brands for that entire period.

We are equally pleased to see that our core brand, WD-40 is stable, even with the elimination of the bonus sales program within the U.S. and in other locations.

Spot Shot joined our fortress of brands last month, and we are right on track at the beginning of this mont, actually, and we are right on track to have the key elements of integration in place by July 1.

We are confident Spot Shot will add value to our fortress of brands and we are excited about the potential we see to grow the brand in the U.S. and other countries around the world.

The results we have delivered in the third quarter are consistent with the growth we have shown in the past in the prior two quarters.

I believe we are demonstrating we have the competency to not only have a clear significance, but also execute on that vision, the results being, we are growing the company by acquisition and by the growth of those acquisitions.

We continue to explore and research new line extension opportunities for all our brands, and some of these will soon appear on the shelves of stores in the U.S. and the U.K.

We are tracking on course to grow sales and profits.

We would be very happy to take any questions.

Thank-you.

And today's Q&A session will be handled electronically.

If you would like to ask a question, we would ask you please press the star key followed by the digit one on your touch tone phone.

Once again, that's star one on your touch tone phone to ask a question.

We'll pause for just a few moments to assemble our roster.

First question comes from Patrick Winton with the Sizer Company.

Hi, guys.

Congratulations.

Good quarter.

Thank you.

Can you talk a little bit more about how the Heartland integration is coming along?

I know you said you are on track for the July 1, goals.

Can you give us more information on that?

Yeah.

We think, in our press release we announced it was our goal to integrate the Heartland operation into the WD-40 system.

We will be invoicing Heartland or the Spot Shot products through the WD-40 system come the first of July.

We have been running the two businesses parallel for the first month, and we will be totally integrated, probably somewhere around September time as we previously discussed.

So it's come along very well, and we are pleased we are able to bring it in and do it in a relatively quick time.

Okay.

Great.

On the gross margins for this quarter, should we be thinking about gross margins in this area, kind of a sub-50% going forward?

Mike?

Patrick, that's a good question.

The gross margins that we now report are affected, of course, by the reclassification of marketing costs.

Sure.

Marketing to sales.

That, it's difficult at this stage, to say if this quarter is a representative sample.

The reason for that is, because certain marketing costs are subject to the reclassification and some aren't.

And that will vary based on the tactics we might employ in the future as to the impact on gross margin.

So it's hard to say what those are.

And I guess what we have done here is, we have given you the amounts that were reclassified as a means by which you can get some insight into our business relative to the way it had been before.

Sure.

Okay.

Great.

Also wanted to ask about Lava.

You said you weren't completely satisfied with the Lava performance.

What are we going to do there?

And what are some of the opportunities for Lava going forward?

As we announced earlier, we have just commenced our T.V. program with Lava.

That started to kick in in this quarter.

Our distribution build is continuing.

But we really need to, as we said, turn up the volume on some of the things that we are doing with Lava, and it's under our microscope.

We know we can do better than we are doing with it, and really our focus is in doing that.

And it means investment, it means increased distribution, it means really leveraging the strength of the organization behind it.

Now that we have the Global household brands acquisition settled in and Spot Shot's come in, it's strengthened our leverage a little more.

So it's really a job of marketing.

And we are working hard on that.

Great.

Well, congratulations again on the year-over-year trends.

And look forward to it.

Thank you.

Thank you.

Our next question comes from Jeff Zekauskas with J.P. Morgan.

Hi, Jeff.

Hi, Jeff.

Good afternoon.

A couple of things.

First a question of clarification, if you wouldn't mind.

The year-over-year change from the acquisition was a benefit of 12.6 million, so the underlying business was 38.9 million for the quarter, I guess, versus 40.3 in the year ago?

So it was like down, I don't know, 3%, something like that.

How does that reconcile with lubricants being flat for the quarter and Lava up?

Jeff, probably -- I didn't quite follow your numbers.

It's probably the reclassification of the marketing expense that may speak to the gap that you are referring to.

When we were talking just now about sales by segment, we talked about the sales by segment without regard to the application of the reclassification.

Okay.

Because the numbers I gave were on a reclassified basis.

Well, we -- I don't think that we have given the numbers by segment on a reclassified basis.

Okay.

Well, can you talk about the volume numbers on a reclassified basis?

No, not at this point.

Okay.

Um -- the -- you know the nice earnings growth that you had during the quarter, I take it that it was earnings accretion from the acquisition you made, primarily, is that correct?

From Global household brands?

Mmmm-hmmm.

I guess Global household brands, year-to-date are growing at about 16% in sales.

If we -- year-over-year, if we had owned them.

Mmmm-hmmm.

We had, in raw form, we only had one month of their sales in this quarter of last year.

But, if you want the summary, the one-line summary of the business, lubricants -- a lubricant group is flat,

the household products area is growing,

hand cleaners is growing and Spot Shot is coming.

So, I guess just a last question in the lubricants area, can you just talk about pricing and raw material costs?

Whether they are changing?

Whether they are staying the same?

Going up?

Going down?

There's been no material changes at this time.

I think the -- the only thing that we are considering is, you know, we are watching still prices, of course, as some of those affects may effect all can manufacturers in the future periods.

Right.

That there's been no material impact at all.

And pricing?

Um -- our pricing to customers?

Yes.

Um -- there's been no significant or material changes in pricing.

Okay, thank-you very much.

Okay, Jeff, thanks.

Thank-you,

And as a reminder, if you would like to ask a question, please press star one at this time.

There don't appear to be any further questions.

Mr. Ridge, I will turn the call back over to you foreclosing comments.

Thank you.

Good afternoon to those that are listening.

We'll see you at the end of the fiscal year sometime in late September.

Keep spraying and cleaning and washing and using our brands.

Thanks.

Bye.

That does conclude today's conference.

We thank-you for your participation.