WD-40 Co (WDFC) 2002 Q4 法說會逐字稿

Good day and welcome to the WD-40 fourth quarter 2002 earnings release 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.

Good afternoon, and thank you for joining us for our fourth quarter earnings call.

Today, we are pleased to have Garry Ridge, president and CEO, and Michael Irwin, executive vice president and CFO.

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 that may call cause results to differ materially, impact with advertising expenditures, impact of acquisitions, change in accounting principles and certain global economic conditions, compositions 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.

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 8k, 10q and 10k, and readers are urged to carefully read these and other documents and research.

At this time, I would like to turn the call over to Garry Ridge.

Thank you.

It was a record year for sales and earnings for WD-40 Company.

The applause of our magnificent team of people is earning per share of $1.53.

We have a lot to cover in the call today, so let's get right back on to looking at the quarter and the year, and I would like for Mike Irwin to do that.

Thanks Garry.

The results we report today, as with last quarter, reflect the application of the accounting guidance known as EITF 0109 that reclassifies certain marketing costs from advertising and promotion expense to a reduction in sales revenue.

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

Though it has no effect 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 sales of 9.2% in the quarter compared to 9.3% in Q4 last year.

For the year, the effect was a reduction of sales of 9.1% for the year versus 6.2% last year.

So, we will go through the results after the impact of those reclassifications, and starting off with sales.

Total fourth quarter sales were 65.9 million, up 18% over the fourth quarter last year.

Sales for the year were 216.8 million, up 32% over last year.

If we look at our business by product segment, we will start out with lubricant sales, which include WD-40 and three-in-one brand, the sales of lubricants in Q4 were 38.3 million, 4% ahead of last year.

While lubricant sales for the full year were 133.9 million up 1%.

Hand cleaner sales which include Lava and Solvall [phonetic] were 2.4 million in the quarter, down 26% from Q4 last year and through 12 months, hand cleaner sales were $10.1 million, up 4% versus a year ago.

Household products which include 2000 Flushes, carpet fresh, X-14, and Spot Shot has a strong quarter with sales of $25.1 million, versus $16.4 million a year ago.

For the year, household products contributed 72.7 million in sales, an increase of 237%.

Last year's sales included only 4 months of household product sales since the company acquired 2000 Flushes, Carpet Flesh and X-14 in May of 2001.

Spot Shot was acquired in May of 2002.

Within our trading blocks, America's Q4 sales were 49.4 million, up 17% against a year ago, and for the year, sales in the American trading block were 164.9 million, up 42% compared to last year.

Asia Pacific Q4 sales were 3.9 million dollars down 2%, and through 12 months, Asia Pacific sales were $12.8 million, about even with last year.

Europe fourth quarter sales were $12.6 million, up 18% versus a year ago, and for the full year, Europe sales were $39 million, up 12% compared to last year.

We've had good year-to-year results in places like France, Germany, Italy, Spain, and in Russia.

Gross profit margin in the quarter was 51.4% versus 47.9% in Q4 last year, while fiscal year-to-date gross margin was 50.1% compared to 51.4% in 2001 due to the product mix and the effects of the reclassification of marketing costs.

Without the reclassification of marketing costs, gross margin in Q4 would have been 55.9% versus 52.7% in the fourth quarter last year, and that's due to the impact of product mix, and for the year, gross margin without the reclassification would have been 54.7% compared to 54.4% a year ago also due to product mix.

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

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

In addition, last year included only four months of household product sales so the impact of the reclassification is greater in the current year compared to last year.

Moving on down our income statement, selling general administrative expense for the quarter was $15.9 million versus 10.8 million in Q4 last year.

The increase year to year is really attributable to the impact of Spot Shot as well as to incentive costs stemming from strong business results for the current year.

Through 12 months, SG&A expense was $50.7 million, compared to $36.7 million last year.

As the difference is attributable to the full-year impact of the household products acquisitions along with the addition in Q4 of Spot Shot which added to our SG&A costs and the aforementioned incentive costs.

Advertising sales were 4.3 million in the fourth quarter compared to $5 million a year ago.

For the year, A&P costs were $15 million compared to $15.4 million last year.

The result is largely impacted by the application of eitfo and reclassification.

Without the reclassification of marketing costs, a & p expense for the quarter would have been $11 million this year and $10.7 million in Q4 last year.

A & p expense for the full year without reclassification would have been $37 million this year compared to $26.3 million last year.

The significant increase over last year is a result of the full year of household products marketing.

Earnings before interest taxes depreciation and amortization grew by 25% in the fourth quarter to 14 million.

Through 12 months, our EBITDA is 43.9 million, an increase of 32% versus a year ago.

Amortization expense was $72,000 in the quarter and $285,000 for the year.

As we announced in Q1, we adopted financial accounting standard 142 so we are no longer amortizing acquisition related good will and indefinite live intangibles.

As a result of the previous items, operating income for the quarter came in at $13.6 million compared to $9.3 in the same quarter last year.

For the year, operating income was $42.4 million compared to $28.1 million last year.

Net interest expense for the quarter was $1.8 million versus $1.4 million in Q4 last year, and for the year, net interest expense was $5.8 million compared to 2.6 million last year.

The higher interest costs reflects funds borrowed for the two household products acquisition.

Net income in Q4 came in at $8.6 million compared to $5.4 in the same quarter last year, leaving us with earnings per share on a diluted per share basis with 52 cents compared to 34 cents last year.

For the year, net income after extraordinary cumulative effects were $24.7 million compared to 15.9 million last year and that leaves us with earnings per diluted share of $1.53 compared to $1.02 last year.

Net income was favorably affected by a one-time reduction in tax due to the resolution of several tax matters.

The effect reduced our taxes by $500,000 in Q4 thereby raising the net income by the same amount.

That impact added 3 cents to earnings per share.

We expect that next year's tax rate should be consistent with the 32.5% rate we would have achieved without these one-time items.

As expected, Spot Shot was accretive in the quarter and added to earnings per share by approximately 4 cents.

At the end of Q4, our weighted average shares outstanding including delusion was increased to 16.6 million shares compared to 15.8 million from last year.

The increase stems from employee stock options and shares issued to finance the Heartland acquisition.

As you may remember, we had issued $434,000 shares on may 31st as partial payment for that acquisition.

Regarding the dividend on September 24th, the board of directors of WD-40 declared a regular quarterly dividend of 20 cents per share payable on October 31st, 2002, to shareholders of record on October 11th, 2002.

A few words about our balance sheet at the end of August, cash and cash equivalence were $11.1 million at the end, 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, employee exercise of stock options and diligent follow-up on collections.

Accounts receivable increased to $43.8 million due to the timing of sales in the quarter and to the addition of Spot Shot.

Inventories declined as we managed them better and inventories remain low relative to a business of this size.

Good will and other intangibles grew as a result of the Spot Shot acquisition, and long-term debt also increased in the year primarily due to the financing of the Spot Shot.

Paid in capital grew 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 will turn it back over to Garry Ridge.

Thanks, Mike.

Now for something new, now for guidance for 2003.

It has not been our practice in past to give earnings guidance.

We are now going to do that.

However, I want to warn you.

We do not run this business on a quarter-to-quarter basis just to please the market.

The guidance I'm giving is based on our expected full-year results.

I will update the guidance on a quarterly basis during our regular webcast conference calls.

The guidance is based on revenues and reporting using the adopted eitf 0109.

Our target earnings per share for fiscal 2003 is between $1.60 and $1.70 per share.

We expect our global EBITDA for 2003 to be in the 50 to $55 million range.

We expect that our global sales will grow about 15% over 2002.

The Americas should grow by 17%.

Europe should grow by 11%.

And Asia Pacific should grow by 9%.

Timing wise, we expect to see our sales revenues flow 21% in quarter one, 27% in quarter two. 25% in quarter three, and 27% in quarter four.

Looking at us from a product group perspective, globally, we expect our lubricants product group will grow by 4% in 2003.

Our hand cleaners may decline by 9% in 2003, and our household products are expected to grow by 40% in 2003.

Our global marketing investment after the impact of eipfo 109 is expected to be in the order of 9.3% of sales.

By quarter, that investment should flow 26% in the first quarter, 19% in the second quarter, 24% in the third quarter, and 31% in the fourth quarter.

Today, we announced some changes in our leadership team.

These changes will, again, increase our focus on the growth of WD-40 brand outside of the U.S.

Align the America sales, marketing, supply chain and information teams under one leadership.

Provide an accountable, dedicated focus on the development new products in all markets in all trading blocks.

Deploy the competencies and talents of the leadership team in the areas of greatest impact.

Strengthen our first string leadership ranks; and provide a structure that continues to identify and develop leaders throughout the organization.

There is a separate press release that details these changes and I recommend you take a look at it.

Looking at our core business objectives for 2003, we are increasing our focus on the development and growth of the international WD-40 brand markets.

Many still have lots of growth potential.

There are lots of new cans of WD-40 to be sold outside of the U.S., as we've seen and will continue to see in countries like Germany, France, Spain, Italy, Russia, and China.

We see great opportunities to grow Spot Shot.

We are turning up the volume on our consumer activity in the U.S., and that translates into increased marketing investment as I have outlined in our guidance earlier.

We are also moving fast on identifying the low-hanging [inaudible] for Spot Shot internationally, and our newly-formed team tomorrow has that as a priority.

We recently launched the first line extension for Carpet Fresh brand.

It's called Carpet Fresh Auto.

Maybe you have seen it on the TV already or in last Sunday's paper, you got an FSI to get a couple cents off a can.

The line extension points clearly to the strength of our multi-trade channel knowledge and distribution strengths, and allows us to use those to take advantage of market opportunities not easily accessible to other consumer products companies.

We continue to broaden the distribution of X-14 and the 2000 Flushes brand.

I'm extremely pleased that we can grow these brands organically by 10.1% in fiscal year 2001.

A good start with more to come.

By now, you'll see it's obvious we're turning up the volume on product and brand development.

We've put one of our best men on it.

Every day, he wakes up and he concentrates on the important area of growth instead of the urgent business of today.

You will see some new products under our current brands appear during 2003.

We're excited about these opportunities.

On the question of new acquisitions, we've made a number of successful acquisitions over the past three years.

Our prime goal in 2003 is to extract the extra values those brands now have under our care.

We will, however, not close our eyes as we walk around looking for acquisition opportunities.

You've all heard a lot and on the new Sarbanes oxly Act, Mike and I will be certifying the fiscal 2000 results when we file our 10-k which is due in November.

We celebrate the finish of this year and quickly get on with the business at hand.

At 2002 results, while impressive, are important, but simply another step in our journey.

We'd be happy 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 followed by the 1 key on your telephone.

We'll proceed in the order that you signal us.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment, and we will pause for a moment.

Our first question comes from Joseph Sekaucus with J.P. Morgan.

Jeff Sekaucus [phonetic].

Good afternoon.

Congratulations on a nice quarter.

Thank you Jeff.

Your forecasts are extraordinarily detailed for next year so I'm just going to scratch the surface.

As part of your earnings forecast for next year, how much is accretive effects from acquisitions?

Because of the way they rolled in, Jeff, I don't have that detailed out, so I can't give you an exact number on that.

I guess we could work it back if you look at the numbers, but I don't have that exactly.

Probably, we said before that 10 to 15 cents per share would be coming from Spot Shot, and if you look at this rate, that's about what it was.

That's about what it is.

Okay, so, all things being equal, -- I don't know.

I'm surprised then that your earnings forecast isn't more aggressive for next year.

Well, this is the first time that we've given earnings guidance Jeff, so let's get into the year, and hopefully, bring some more fun things to the table as we get into it.

Okay.

Second thing is, in the quarter, sort of what was the sales effect from acquired businesses?

Well, are you talking about newly-acquired businesses, like Spot Shot?

Everything that wasn't in the business last year?

Jeff this is Mike, one way of looking at that, we haven't carved it out exactly in a way that would answer your question.

If you look strictly at acquired businesses, you can look at the hand cleaner part of the business as well as the household products, right.

Add those two together, and that would cover the fast majority of it.

The other segment is lubricants which say combination of WD-40 and 3-in-one.

I guess maybe a last question is the forecast you have for your lubricants' businesses is sort of much stronger than you've had previously.

Is that part of your global growth strategy, or is some of that from currency effects?

Sort of what's behind the move from, you know, maybe growing lubricants being up 1% this year to being up 4% next year?

Well, two things, Jeff.

One is, we're just about to enter our 50th year as WD-40 Company, obviously.

Okay.

I don't know if you remember when we had the 40th anniversary, there was a lot of activity.

Hopefully, there will be some of that this year.

Okay.

Secondly, you'll see that our lubricants' business is growing pretty well in Europe now, and it's starting to, you know, grow from a larger base, so it's becoming more impactful in total.

Okay, thank you very much.

Thanks, Jeff.

And we'll move on to Patrick Winton with the Cigna Company.

Hi, guys.

Good quarter.

Can you talk a little bit and give us more color on Spot Shot and the 16% organic growth?

Yeah.

Basically, we grew the brand 16% over the same period that the old owners owned it in that three-month period.

Okay.

And that was basically due to -- firstly, that time of the year is -- the summer period is a good period for household cleaning products, but as it's starting to pick up a little bit of momentum in our distribution channels, I think it was great given that we acquired it, packed it in and we're able to do that in that whole three months.

I'm very proud of the team on that.

Okay, great.

As we look out and we're going to increased advertising, particularly in the first quarter of next year, can you talk a little bit about that strategy, and you know, what products we're going to focus on that advertising strategy?

Basically, there's TV that's going to be running and it's running on our household brand that it's running now, but also, as we said, we're turning up the volume on Spot Shot, so that's one of the areas that is getting a lot of attention.

You know, we believe that the time to move on Spot Shot is while it's young and fresh with us.

So we're going to, you know, turn up the volume a little in the first quarter to move and get extra distribution as we go into the rest of the year.

Okay.

And would you like to take this opportunity to give us a little bit of a glimpse on line extensions for next year?

Anything you can talk about?

No, unfortunately, Patrick, not only you are listening, but the competitors are listening.

Okay.

Thought we'd try.

Thank you.

))Operator: Our next question comes from David Boyden with Boyden Financial.

Thank you.

Garry, great job.

Question is have you found the NASCAR tie-in to be profitable, and do you foresee expanding that in the future?

When we went into NASCAR, we went into it on a would-year deal, and we have another year to go.

Certainly, the goal of NASCAR was to give us a promotional vehicle to allow us to take the bonus can out of our promotional program, and that's what it did.

We are not a high-flier NASCAR promotor.

NASCAR is great if you want to get brand awareness.

We've got high brand awareness, but it's really used as a promotional tool, and we had point of sale promotions and sweepstakes and a lot of customer involvement at the tracks, and all in all, I would say the NASCAR program has been one, so far, that we're comfortable with and we have another year to run with it at this time.

Thank you.

And once again, as a reminder, press the star one key if you have a question or comment.

And we'll move on to Chris Arndt with Select Equity Group.

Yeah, if I could follow up on the guidance again.

You talked about $1.60 to $1.70 next year.

Garry Ridge*: $1.65 to $1.70.

Okay.

I appreciate that clarification.

If you take out the extraordinary item that you have for the extinguishment of debt this year, you're at $1.58 this year, and you assume that you do get the 10 to 15 cents accretion from Spot Shot, it implies that you're assuming that the rest of the business is down somewhat on an earnings basis.

Is that correct?

Well, you've got to take the 3 cents out for the one hit on the tax.

Okay, starting at $1.55.

You know, I think -- Chris, I think the extinguishment of debt added about 4 cents to earnings per share during the year, and then we had the 3 cents that came in through the tax thing, which was really a one-time event.

Okay.

You mean the extinguishment of debt subtracted 4 cents?

Yeah.

So if a normalized earnings rate is $1.55 and you have the accretion from Spot Shot next year, you're at $1.65 to $1.70, that means you are still implying basically no earnings growth from the core business is that correct?

It's an early time, and as I said, we will update quarter to quarter.

We want to give you solid, factual numbers that we feel as we get into, we'll get better at it.

Okay.

If we do assume that you do make the 4% growth in the core business, the oil and lubricants, would it be fair to assume that you would be growing earnings in that business, or are there other reasons, promotional or margins or so forth, where earnings wouldn't be growing with sales growth?

They should.

You know, some of the things where we've been hit hard this year or in 2003 on the expense line is health costs have gone up substantially.

Insurance costs have gone up substantially.

The cost of absolutely putting in -- of the extra burden of reporting, so, you know, we've got what we believe is a solid sales plan at this time, and you know, as we are clearer of when we will launch new products, we will factor that in.

So we're really giving you a picture of what we see is a solid base of our business.

Okay.

As we get closer to launching brand extensions, as we get a really good idea of what sort of outside growth acceleration we can get from Spot Shot, we will be sharing that with you.

Okay.

Appreciate the feedback.

Thanks a lot and great quarter.

Thank you.

As a reminder, press the star one key if you have a question or comment.

We'll pause a moment.

And we have no more questions in our queue at this time.

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

Thank you very much.

We look forward to seeing you in about 90 days from now.

We have a lot of work to do.

Good afternoon.

That does conclude today's conference.

Thank you for your participation.

This