WD-40 Co (WDFC) 2003 Q2 法說會逐字稿

Good day everyone and welcome to this WD-40 Company second quarter 2003 earnings release conference call.

Today's conference is being recorded.

Now at this time I'd like to turn the call over to the director of corporate and investor relations for WD-40 company, Ms. Maria Mitchell.

Please go ahead ma'am.

Good afternoon, and thank you for joining us for our second quarter earnings call for fiscal 2003.

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 which may cause actual results to differ materially from forward-looking statements, including sales of specific brands, timing of advertising expenditures, impact of line extensions, competition and company's outlook for fiscal 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 S.E.C. including forms 8-K, 10-Q, 10-K, and readers are urged to carefully review these and other documents and research, and to stay up to date with our most recent company developments provided in the investor relations section of our Website at www.wd40.com.

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

Thank you Maria.

Good day to all of you, and thanks for joining us today.

We are pleased with our 26% increase in our net profit for the second quarter and we feel confident we will, in these troubling times, deliver record sales and earnings in this fiscal year.

The results clearly demonstrate the value of our strategy of diversification across brands, borders and business channels.

Today our fortress of brands has more ways to win.

While Q2 was challenging in the U.S. in our household products area, the WD-40 brand performed well, as did 3-IN-ONE.

Our business in Latin America and Canada was also solid.

We had an outstanding performance in Europe, which is where we continue to build our business in the general purpose maintenance products market with our lubricant brands.

Asia also performed very well.

We have revised our full-year guidance to $1.60-1.65 per share, based on two factors.

The write-off of a non-compete agreement, which reduced the second quarter EPS by $0.035 a share, and two, the uncertain markets in this time of trouble for the world and the conditions that may impact our business as a result of that.

We had projected total sales growth for the year of around 15%.

At this time, we feel it is more likely to be in the 10-11% range.

Our marketing investment is currently tracking year-to-date at about 7% of sales.

However, we would expect that to be at around 9% of sales for the full year.

Mike has a more detailed review of the quarter, and I'd like to pass over to Mike Irwin to help us understand that.

Thank you, Garry.

We'll start off with a review of sales and then we'll move on to the rest of the financials.

Starting off with sales, total second quarter sales were $58.3m up 14.5% over the second quarter last year.

Without Spot Shot, which was acquired May 31st last year, company sales for the quarter were $52.3m, up 3% compared to the same quarter last year.

Sales for the six months were $109.7m, up 10% over last year.

Without Spot Shot, our half-year sales were $97.4m, off 2%.

Lubricant sales, which includes WD-40 and 3-IN-ONE, for the second quarter were $37.6m, up 13% from Q2 last year.

We had strong growth from Asia, Canada and Europe.

Lubricant sales for the first six months were $67.1m, up 6% over the first half last year.

Handcleaner sales, which includes the Lava and Solvol brands, were $1.5m in the quarter, off $200,000 from Q2 a year ago.

For the half-year, handcleaner sales were $3.8m, down 7% versus a year ago.

Household products, which includes 2000 Flushes, Carpet Fresh, X-14 and Spot Shot, second quarter sales were $19.2m, up 20% compared to the same quarter last year.

Through six months, household products sales were $38.9m, up 20%.

Without Spot Shot, household products Q2 sales were $13.2m.

And first-half household products sales without Spot Shot were $26.5m.

As previously discussed, our household products business is primarily a U.S. one.

We believe that the weakness in the U.S. economy has influenced the purchasing decisions of our customers, resulting in continued pressure to reduce inventories and reduce promotional buying.

While we've experienced the impact of this during recent months, we expect this to ease as consumer take-away continues to remain strong for many of our brands.

Product categories in household brands continually go through cycles of expansion and contraction, with the introduction of new products in both related and unrelated categories.

We have experienced the impact of this competitive pressure on several of our household product categories, resulting in reduced shelf space allocation for these categories as a whole.

In spite of this category pressure, store scan data reports continue to show growth at store levels in many of our product lines.

Because of this growth at store level sales and growth in market share shown by some of our brands, we feel that we are well positioned as the economy turns.

Moving on to our geographic segments, America Q2 sales were $42.8m, up 9% over last year.

Canada and Latin America performed very well in the quarter, as did the U.S. lubricant business.

The Americas also benefited from the additional sales of Spot Shot this year that weren't there last year.

Through six months, the Americas sales were $82.8m, up 8% compared to last year.

As we talked about the U.S. market before, there are challenges, but looking forward, we are excited for WD-40 50th anniversary promotions, which begin later this year.

Asia Pacific were $3.4m, up by 23%, and through six months, Asia Pacific sales were $6.4m, up 15%.

We've had strong year-on- year results from Asia proper, and in particular China has been an area of robust growth with both distribution gains in the expansion of our Chinese marketing distributor.

European second quarter sales were $12.2m, up 34% against a year ago.

The U.K., France, Germany, Spain, Italy and markets where we sell through a local distributor, all contributed double-digit growth versus Q2 last year.

Half-year Europe sales were $20.5m, up 19% compared to the first half last year, and through six months, we've had growing sales in places like Russia, France, Germany, Spain and Italy.

Gross profit margins in the quarter were 52.9% versus 49.8% a year ago.

The change is attributable to product mix as well as marketing expense, the impact of which is highly variable period to period.

For the six-month period, gross margin was 51.3% compared to 50.1% through the first half last year.

Selling, general and administrative expense for the quarter was $12.7m versus $11.8m in the second quarter last year, an increase of 7.9%, and for the half-year SG&A expense increased by 10.5% to $25.5m.

Advertising promotion expense was $3.6m in the second quarter versus $2.5m a year ago.

The increase is attributable primarily to support for household products.

For the year, A and P expense was $8m against $6.7m a year ago, an increase of 19%.

During the quarter, A and P expense was 6.2% of sales while on a year-to-date basis it was 7.2%.

Even with the uncertainties presented by the economic environment, we are continuing to invest for the long-term health of our brands.

Compared to the prior year quarter, earnings before interest, taxes, depreciation, and amortization grew by 30% in 2Q to $14.9m, and through six months our EBITDA is $23.4m, an increase of 14% against the first half a year ago.

Amortization expense was $879,000 in the quarter, and the rise in amortization expense, as Garry mentioned earlier, reflects the write-off of a noncompete agreement with a former independent sales agent who recently passed away.

The impact reduced our earnings per share by $0.035.

As a result of previous items, operating income for the quarter was $13.7m, compared to $11m in the second quarter last year, and through six months operating income was $21.8m, compared to $19.8 million last year.

Net interest expense for the quarter was $1.7m versus $1.3m in Q2 last year, and for the year, net interest expense was $3.4m versus $2.6m last year.

The higher interest cost reflects funds borrowed for the acquisition of Spot Shot.

Net income on the quarter was $8.2m, compared to $6.5 million in the same quarter last year, an increase of 26%.

And on a diluted per-share basis, earnings were $0.49, compared to $0.41 last year.

For the half-year, net income was $12.6m dollars versus $10.9m last year.

That equates to EPS of $0.75 after six months, compared to $0.68 last year.

Net income was reduced by $0.035 cents for both the core and year-to-date periods, due to the unexpected loss caused by the write-off of the noncompete agreement previously mentioned.

Our weighted average shares outstanding year-on-year has increased to 16.7m shares at the end of the second quarter, compared to 16m a year ago.

The rise in shares reflects those that were issued for the acquisition of Spot Shot as well as employee exercising of stock options over the last year.

Regarding the dividend, on March 25th the directors declared a regular quarterly dividend of $0.20 per share, payable on April 30, 2003, to shareholders of record on April 11, 2003.

A few words about our balance sheet as of Feb. 28, 2003.

Cash and cash equivalents were $23.7m at the end of the quarter, up from $11.1m at the beginning of the fiscal year.

Most of the increase occurred during the first quarter.

Accounts receivable declined due to the timing of sales, and inventories have also declined in fiscal year 2002, and of course inventories remain low relative to a business of this size.

Accounts payable also declined due to the flow of the business.

So that's it for the financial update.

Thanks very much, and I'll turn it back over to Garry Ridge.

Thanks Mike.

As Mike said we were very pleased with the results in Asia, Canada and Europe, and of course we did have some challenges in the U.S. market during the quarter.

While organic growth continues to strengthen our business in many markets, we are a little concerned about the uncertainty of the marketplace during this time of world conflict.

We have stayed focused on our priorities of increasing WD-40 sales internationally and growing Spot Shot, and on our priority of extending brands like Carpet Fresh and 3-IN-ONE Pro.

As well as that we are managing the costs in our business very efficiently.

A prime example is the efficient lean and clean infrastructure at WD-40 Company.

A measurement is our remarkable sales revenue-per-employee, which is in excess of $1m per employee.

This demonstrates the attention we give to the execution of our business model.

Some good news on the new 3-IN-ONE Pro line.

We began shipping it in February as planned, and we are pleased with our distribution thus far.

As of today, more than 11,000 stores across the United States have the new 3-IN-ONE professional line on their shelves, and we add to that number on a daily basis.

Sorry, 1100 stores, and we add to that on a daily basis.

Shipments to the Asian market will start this quarter, and we have launch plans for the brands in Australia, U.K., Spain and France, and expect to launch in those countries in the latter part of this year.

We have also seen distribution gains in our new Carpet Fresh no-vac (phonetic) auto refresher product, which we launched in the latter part of last year.

We have seen positive results from the TV advertising of our Spot Shot brand.

We remain extremely confident that over time, we can materially increase the household penetration of this fabulous brand.

Currently, the brand is in only about eight of 100 households in United States.

All our efforts are focused on generating awareness and trial of the brand.

I am confident we will have increased the household penetration number when we do the next measurement research late this calendar year.

In summary, we see this year with the growth in sales now of around 10-11% and a growth in net income of around 12%.

This growth and our attractive dividend, which is currently showing a yield of about 3.7%, I believe represents a solid investment to our shareholders.

Our brand fortress strategy of diversification across brands, borders and business channels, with products that deliver the consumer above-expectation performance and extremely good value, is certainly showing our strength.

Our people have more ways to win than ever before and win we will this year.

We'll be happy to answer any of your questions.

Thank you very much.

If you would like to ask a question at this time, please press star 1 on your telephone key pad.

If you are using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment.

And once again that's star 1 to place a question, and we'll stop for just a moment.

Our first question comes from Patrick Winton of Siedler.

It was a nice increase in global sales for the lubricants.

Can you talk about kind of what contribution 3-IN-ONE made to that increase or was that primarily all the WD-40 brand?

Hi, Pat.

The new 3-IN-ONE product says they only started to ship at the last week of February had virtually no impact on the lubricant results in that quarter.

Right, and the existing 3-IN-ONE?

I think we shared before, it's about 10% of the total, I believe.

So it's -- you know, the major brand there, globally, is WD-40.

Okay.

And is it right for me to think that we haven't really seen the full effect of the marketing program on Spot Shot, television ads?

I would absolutely believe that.

As I shared, the research we got back from the TV advertising showed substantial and significant upswings in consumer off-take at the time of the TV.

We ran TV in January.

We had another flight of TV scheduled in April.

We've actually moved it into March.

And the indications we see are that, you know, we're yet to see the shelves being refilled from the consumer's response to that.

Okay.

And within the household products segment, X, Spot Shot, we're down on a year-over-year comparison, I mean quarter-over-quarter.

We talked about what's driving the decrease, but it really seems that Spot Shot is bucking that trend.

Can you talk about that?

Yes, Patrick, this is Mike.

With respect to household products, there are a lot of dynamics that come into play there.

But I'll give you kind of an example of one that typifies what we're talking about.

Let's take the automatic toilet bowl cleaner category.

The entire category is off in sales.

According to Neilson, our share of the category, which is 2000 Flushes and X-14, has risen in the past 12 weeks, and at the same time, we have store scan data that shows growth on those brands as well.

And so there are dynamics at play there that are affected by other items that are unrelated to categories that we sell, and there's just a lot going on there.

And in the case of Spot Shot, as Garry mentioned before, we believe that the best is yet to come.

Okay, great.

Probably one other question for you, Mike.

On the gross margin, you know, up to 52.9%, that was a nice increase.

You did talk about how that will vary, and we clearly see that in our modeling.

How should we look at that in the next half of the year?

More normalized again?

Thinking about gross margin again, the big variables that play in the recent past for us have been the impact of mix, as well as the reclassification of marketing expense.

And both of those will have some swings in it.

And a big one is, how do we choose to deploy the marketing investment.

As you know, some of that, Patrick, reduces our sales, and some of it ends up hitting on the A and P line on our income statement, and those decisions we make on the fly as the opportunities present themselves.

And so we'll see a wide variation.

And so you know, if you compare this quarter to past quarters, our gross margin was fairly high.

What happens in the future is going to vary over time.

Okay, great.

Thanks a lot.

Thanks, Pat.

The next question comes from Jeffrey Zekauskas with J.P. Morgan.

This is Silke Keuk- Valdes.

Hello.

Spot Shot sales were up 3%; is that what you said?

I'm sorry.

Could you repeat the question?

Excluding Spot Shot your sales were up 3%; is that correct, is that what you said?

Yes, for the quarter, yes.

For the quarter.

How does -- what are the components, what is like -- is there still the acquisition benefits, organic growth, price mix effect or currency or anything like that?

The major part of the growth in the quarter came from the lubricant business.

There's no pricing in it.

There's equalization other than Spot Shot as far as acquisitions are concerned.

So if you look at the growth outside of Spot Shot, it came from the growth of our lubricant brands.

And they I think we quoted they grew what, Mike?

13%.

They grew 13% in the quarter.

And the majority of that came from Europe and Asia.

Okay.

What were your capex numbers, and depreciation and amortization numbers for the quarter?

Let me get that really quick.

Depreciation and amortization on a combined basis was $1.8m on the quarter.

And which includes the write-off of the noncompete agreement, which I think in the quarter we had already reflected on showed up as $899,000.

And for capital expenditures we had -- I'm sorry, what I just gave you was for the six months.

And for the half-year capital expenditures were $789,000.

Thank you.

And again like touching on the gross margin, I think the results, year-over-year and sequentially, they look really good.

You know marketing investment really the, you know, the big swing factor or, you know, does it mean when your margin is lower that you just, you know, invest less in marketing or are there other factors?

As I mentioned before, Sile Keuk- Valdes (phonetic), certain of the product mix is factored into that.

Again, if we look at the gross margin percentage for this quarter, it was substantially higher than it had been in prior quarters, and that was unusual for us.

But we'll continue to see big swings in that potentially, depending upon the way that we deploy our marketing investment.

And so we feel like this quarter, on a gross margin basis, for that reason was fairly unusual.

Thanks very much.

I'll get back into queue.

Thank you.

And one final reminder, that is star 1 if you would like to ask a question.

And there appear to be no further questions at this time.

I'll turn the conference back to you.

Thank you very much.

Wish everybody a safe and healthy rest of the day, and let's hope that things around the world are better tomorrow.

Have a nice afternoon.

Good afternoon.

And that concludes our conference call.

Thank you very much for joining us and have a great day.