WD-40 Co (WDFC) 2003 Q4 法說會逐字稿

Please stand by good day and welcome to this WD-40 Company fourth quarter 2003 earnings release conference call.

Today's call is being recorded.

At this time I would like to turn the call 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 fourth 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 involved risks and uncertainties which may cause actual results to differ materially from forward-looking statements including impacts of line extensions, impacts of promotional programs, the uncertainty of global market conditions and the company's outlook for the fiscal year.

The company's expectations beliefs and projections are expressed in good faith and are 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.

Please note that the company updates the Website on company earnings on a quarterly basis and readers are advised to review the most recent earnings calls and releases [Inaudible] day after the companies performance.

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

Thank you Maria good day.

Today as we celebrate the 50th anniversary of WD-40 Company we are pleased to report our quarterly earnings and announce record sales and earnings for fiscal year ending August 31, 2003.

We are very pleased with our performance for both the quarter and the year, and are proud that our activities surrounding the global celebration of the 50th anniversary have been very successful.

It was certainly very exciting to open the NASDAQ stock market earlier this week and to celebrate this golden milestone with our people customers and business partners around the world.

Despite a difficult economy and uncertain business times our mission to deliver consumer products that have above expectation performance at extremely good value continues to provide a platform for good results.

We are in the squeak, smell and dirt business with products that have won and continue to win the support of consumers because they deliver.

Our categories are dynamic, and over the year we saw we saw varying results by brand.

Spot Shot was the growth engine in our household products business.

We continued to be pleased with the opportunities this brand shows us.

We are not happy with the way X-14 and Lava brands performed and we need to do a better job of growing these brands and we will.

We are all -- we are well into a complete review of how we can unlock new revenues from these great consumer brands and we will share those plans with you in the coming months.

Our base business of WD-40 and 3-in-One was extremely solid for the year.

During the year we saw growth in our lubricant business in every major region of the world.

I will now pass over to Michael Irwin who will talk about the results in more detail.

Thank you Garry.

We'll begin with a review of sales an then on to the rest of financials.

Starting off with sales many fourth quarter sales were 73.4 million, up 11% over fourth quarter of last year.

Physical sales came up at $238.1 million up 9.9% over last year.

Lubricant sales which for us include WD-40 and 3-in-One for the fourth quarter were $45.5 million up 17.5%, from Q4 last year.

Each of our geographic segments, the Americas, Asia Pacific and Europe, achieved strong year on year lubricant sales growth led by Europe.

Lubricant sales for the full year were $145 million up [7.9%] over last year.

We achieved sales growth in emerging markets like Europe, some favorable benefits of foreign exchange as well as sales increases in developed markets like the U.S.

Canada and Australia.

Hand cleaner sales which include Lava and Solvol were 2.2 million in the quarter off 11.4% from Q4 a year ago.

For the year hand cleaner sales were 7.5 million down 25.7% versus a year ago.

And last year's third quarter we did a major Lava promotion that we did not repeat in this fiscal year.

Household products, 2000 Flushes, Carpet Fresh X-14 and Spot Shot fourth quarter sales were 25.6 million up 4% compared to the same quarter last year.

This is the first quarter where the comparable results include Spot Shot.

While the sales growth is modest it is important to note that each of the brands individually achieved a sales increase in Q4, versus the same quarter last year.

For the year household products sales were 85.6 million up 18.4%.

Full year household products sales without Spot Shot were $57.4 million off 11.6%.

As previously noted our household product lines in the categories we compete have been challenging this year.

We've experienced the negative impact of competitive pressure on several of our household product categories resulting in shelf space -- reduced shelf space allocation for these categories as a whole.

In addition the introduction of new direct competitors in the hard surface cleaning category has eroded market share of our X-14 brand.

Despite the category in competitive pressure, store skin data continue to report stable market share for our other household brands despite the lower sales.

We are aware of the dynamics of the house of product market and the competition.

We are continually pursuing ways to improve product packaging promotion and distribution in order to address both the opportunities and the threats.

Garry will comment on our activities planned for FY '04 in just a moment.

Americas Q4 sales were $54.8 million sales up 10.7% against last year with the exception of Lava each of our brands in the Americas recorded sales growth for the quarter compared to the prior year.

Once again this is the first quarter to include Spot Shot in the comparable period.

For the full year Americas sales were $178.5 million up by 8.1% compared to the same period last year.

Americas result in FY '03 include a full year of Spot Shot due to the timing of the acquisition which closed May 31st, 2002, Spot Shot was included in the fourth quarter of the results last year.

We began the promotions in marketing for WD-40's 50th anniversary during the quarter, and those programs will continue into FY '04.

Asia Pacific Q4 sales were $4.5 million up 13.1%.

For the year, Asia Pacific sales were $14.4 million, up 12.7%.

Year to date we've had strong results from Australia and Asia proper compared to last year.

Europe fourth quarter sales were $14.1 million up 13.7% versus a year ago.

Full year Europe sales were $45.2 million up 16.3% compared to last year.

France Germany Italy and Spain each delivered sales growth of greater than 30% on the year.

In the current year we also achieved a benefit from foreign exchange.

In European sales and local currency that would be pounds sterling were up 8.4% in Q4 and 8.9% year to date.

Gross profit margin in the quarter was 51.9% compared to 51.4% a year ago, the change is attributable to product mix and for the year gross margin was 51.3% compared to 50.1%.

I think as we've said before as a business with supply leverage in aerosol products we are able to take advantage of efficiency with the higher proportion of sales in aerosols an event occurred this year with the addition of Spot Shot and the lubricant business as you know is primarily in aerosols.

Selling general and administrative expense for the quarter was $15.5 million versus $15.9 million in the fourth quarter last year decrease of 2.6%.

For the year, SG&A expense increased by 6.6%, to $54.1 million.

The rise in SG&A expenses related to higher selling costs due to higher sales as well as increases in costs for insurance, R&D and accounting and legal fees associated with regulatory activities.

Looking ahead we expect those costs to continue to rise.

Advertising and promotion expense was $4.9 million in the fourth quarter versus $4.3 million a year ago.

The increase is attributable primarily to support for household products.

For the year A&P expense was $17.4 million against $15.2 million a year earlier, and increase of 14.5%.

During the quarter A and P expense was 6.7% of sales while year to date it was 7.3% of sales.

Last year it was 7% of sales.

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

We had no amortization expense in the quarter.

For the year amortization expense is $72,000 compared to $285,000 last year.

As previously discussed during the second quarter we also incurred a loss of $879,000 on the write-off of a non-compete agreement with a former independent sales agent who passed away.

As a result of the previous items prettying income for the quarter was $17.7 million compared to $13.6 million in the fourth quarter last year and through 12 months operating income was $49.8 million compared to $42.4 million last year.

On to other income and expense net interest he can pens for the quarter was $1.6 million versus 1.8 million in Q4 last year.

For the year, net interest expense was $6.7 million versus $5.8 million last year.

The higher interest cost reflects funds borrowed for the acquisition of Spot Shot which I said closed in May of 2002.

The tax rate for the year came in at 34% compared to 31.1% last year.

Last year's tax race was favorably affected by the resolution of some outstanding tax matters.

As our income grows the income of our tax credits lessens and outpace the credits available and left us with the higher tax rate.

We anticipate that the 34% tax rate will continue into FY '04 however as taxable income continues to grow the 34% rate may not be sustainable.

Net income in the fourth quarter was 10.3 million compared to $8.6 million in the same quarter last year an increase of 19.8%.

An on a diluted per share basis earnings were 61 cents compared to 52 cents in the quarter last year.

For the year net income was $28.6 million versus $24.7 million last year an increase of 16.1%.

And that equates to earnings per diluted share of $1.71 compared to $1.53 last year.

You'll also notice that our weighted average shares outstanding has increased to $16.8 million shares at August 31st, compared to $16.2 million shares a year ago.

The rise reflects the shares issued for the acquisition of Spot Shot, as well as employee exercises of stock options.

Regarding the dividend on September 23rd the boards of WD-40 Company declared a dividend of 20 cents per share payable to shareholders of record on October 10th, 2003.

Little bit about our balance sheet at August 31st, 2003, cash and cash equivalents were 42 million up from 11.1 million at the beginning of the fiscal year.

The substantial rise is related to higher operating cash flow and exercise of stock options.

In FY '04 we will begin repayment of the principal on our debt with a $10 million principal payment due on May 31st, 2004.

Accounts receivable was $41.5 million down by $2.2 million compared to last year.

Inventories were down $1.4 million at $4.7 million, over the year.

Once again inventories remain low relative to a business of this size.

The current portion of long term debt stands at $10 million due to the aforementioned principal payment.

That's it for the financial update.

I'll turn it back over to Garry Ridge.

Thanks Mike.

With the year end us we're now looking forward to a solid result in fiscal 2004.

We are turning up the volume on some of our brands with an increase in marketing support in fiscal 2004.

Investment in global advertising and promotional expenses for the year is expected to be in the range of eight to 10% of net sales up from 7.3% in fiscal 2003.

In particular, we have three major initiatives planned in the U.S. market.

We will be embarking on a U.S. advertising program to educate consumers on increased consumption uses for our flagship brand WD-40.

Starting in January full page color ads will be seen in many publications in the U.S. and our goal is to increase consumption of WD-40 and shorten the repurchase cycle.

We have commenced a TV campaign for Spot Shot.

As I shared with you in the last conference call, the brand responds positively to our TV campaign in the last six months so it's time to turn up the volume.

We are planning a major launch of a new product in our household cleaning business early in 2004 and this will be supported with the appropriate marketing activity.

Globally we will continue to build the WD-40 brand fortress.

WD-40, and the flank of 3-in-One professional line products provide us with what it takes to own the multipurpose maintenance products category around the world.

In fiscal year 2004 we expect to increase sales, net sales in the order of 9.5% over 2003.

By geographic segment we expect sales increases in the Americas of about 9%, in Europe of about 12%, and [Inaudible] of about 12.2%.

By product line, we expect sales growth of 8.5% in lubricants, 11.5% in household products, and 2.6% in hand clearance.

We would expect at this time to increase net earnings of between 5% and 10% in 2004, achieving earnings per share of somewhere in the $180-190 range for the year based on an estimate of $16.9 million shares outstanding.

Our vision is to continue to build global sales and increase the value we generate from existing brands by unlocking new revenues from our current brands and identifying and capitalizing on opportunities to extend and expand the Spot Shot business in all areas of the world.

Further line extensions across the company's brand are currently under review.

WD-40 Company was named as a defendant in two substantially similar lawsuits relating to its automatic toilet bowl products.

Superior court of San Diego, a California and the second in the superior court of the county of Alameda, California.

The complaints both asked to be certified as class actions, both were filed by the same law firms.

The allegations are in essence that the automatic toilet bowl cleaner sold by WD-40 Company damaged the plastic and rubber of toilets resulting in a need to repair and water loss.

No specific amounts have been determined.

The complaint has not yet been served.

We have not had opportunity to review the allegations with our counsel bit we intend to vigorously defend the lawsuits.

At this time we would be happy to answer your questions.

Fine, if anyone has a question, star one, question or comment.

Take as many questions as time permits.

Again that's star 1 and we'll pause for just one moment.

And we'll take our first question with Mimi Sokolowski with Sidoti.

Hi Garry, hi Mike.

Hi Mimi.

Spot Shot, information you gave out looks like you did a little over $28 million in its first full year, is that correct?

Yeah, based on the information we provided.

Okay.

And is that in line with your forecast or were you expecting something closer to something north of 30?

I believe that when we issued our expectations, we issued them on a category basis, and not on a brand basis.

Okay.

And Garry, you said you recently, or I don't know about recently but commenced a campaign, advertising campaign for Spot Shot.

And that's something I think started early last winter, correct?

Well, it's been running all through the year.

But in September we turned up the volume on it, and for this fiscal year, it will be a more heavy weight campaign right through the year.

Okay.

Can you describe what you mean by more heavy weight?

Just more commercials, more frequently?

Yes, more commercials, more frequently.

Okay.

And how long do you see that campaign running now?

We're going to [Inaudible] right through the year.

Okay.

At varying times in the year.

It's currently running in September.

I don't recall when the next slide absolutely is but right through the year there are different flights.

Okay.

What kind of an impact is that going to have on your operating expense as a percentage of sales?

Well, you might note that we did share this year our actual marketing and advertising promotional expense was 7.3%.

We're saying that in the full year that activity coupled with the activity that we're doing with WD-40, coupled with the anticipated expenses in relation to launch of a new product in the first half of the calendar year of next year, will raise those marketing expenses to somewhere within a range of eight to 10%.

Okay.

All right.

And that $1.80 to $1.90, had you given guidance on a fiscal year '04 previously?

No.

This is the first guidance we've given.

Okay.

And can you give any more information regarding the new product launch that you're anticipating in early 2004?

Only that it will be a product in our household products segment and we will obviously be informing you more about that as we get closer to the launch.

But certainly, we would not want to be talking about it to identify to our competitors what that might be at this time.

Okay.

And did you say that there would be advertising to support that product?

There will be the appropriate marketing spin to support it.

And that spend is captured in our forecast of marketing investment of between eight and 10% of sales.

Okay, great.

And I believe that's it.

Thanks a lot and congratulations on a good quarter.

Thank you.

And once again I would like to remind our audience that is star 1 if you do have a question.

We'll pause just a moment.

And we'll take our next question from Jeff Zekauskas with J.P. Morgan.

Hi, good afternoon.

Hi Jeff.

The first question is, can you disaggregate the effect of currency on your sales in the quarter?

I think you had that, Mike.

Yeah, I'm flipping through to Europe.

Europe's just to recap on the quarter, Europe's sales were $14.1 million up 13.7%.

And sales in local currency were up 8.4% in the quarter.

Okay.

What about doesn't it affect Asia as well, or no?

No.

No, in Asia we sell in U.S. dollars primarily.

Second question is, the projections that you're -- well, second question is, can you give us an idea of the performance of [Inaudible] business by geography, excluding currency effects?

We haven't discussed that and that's something that we typically describe in the K filing.

Okay.

Having said that we did say, Jeff, that the lubricants business was positive in every major market of the world for the year.

Right.

Really, the benefit from both the WD-40 extension and then of course the flanker brands that we've brought out with 3-in-One Professional.

Okay.

If -- you know in looking at the projections that you guys have for next year, in terms of, you know, lubricant sales, of 11.5%, like you know, maybe the global lubricant market gross a couple grows a couple of percent a year, so in order to grow it you would have to grow it three or four or five times the market growth rate.

What is the strategy for doing that?

There are two things going on, number one, we have got a business internationally that is growing off a larger base.

Our business in Europe is primarily -- is primarily the lubricant business.

And you know, it's growing at double-digit rates now off a larger base, so that's got an impact.

We certainly believe that our activities in Asia and in Latin America are solid.

Given the introduction of the flanker brands that we have with 3-in-One.

Actually, we're projecting that lubricant sales were going to increase 8.5% globally for the year, not 11.

Oh, forgive me.

The other thing we're doing Jeff is we've had a solid year of WD-40 in the United States and we're embarking on a new marketing program starting in the first half of next calendar year, primarily focused at increasing the consumption of WD-40 in areas that we've identified as being large consumption areas.

Uh-huh.

The other thing that's happened is, you may remember, we discontinued our bonus-ounce can program in the U.S. about two years ago.

And although we're not -- we don't have hard data on this, it is our belief that that has delivered our expectation of shrinking the repurchase cycle.

Around now that we've cycled nearly two years of that obviously if we were giving 20% away free and we're not doing that, the consumer is coming back to shop a little sooner.

And that was the whole goal of that strategy.

Now, I guess lastly, can you talk about your -- can you talk about the growth rate, I guess, of 11.5% that you expect in household products for next year, and how you expect to achieve that?

Is that a particular channel that you expect to grow, is that largely from a new product?

Is it from your advertising, or a combination of all of these factors?

I think, Jeff, it's all of the above.

Certainly, we have shared and continue to share our optimism with the Spot Shot brand.

We're encouraged in the last quarter as Mike shared, that now we're backing up against comparables.

And in this quarter, all of our household products had better quarters, better sales than in the comparable quarter last year.

So we did see some deterioration during the year, and I think we shared last call that we felt that was coming to an end.

Yes, there is a new product launch in there, and we'll talk a bit more about that as we get closer to it.

But that's slated now.

So and then of course we continue to want to drive distribution of our brands through multiple trade channels.

And you know, the retail environment is dynamic and I think we're well equipped to make sure that we make our products as easy for the consumers to bias we possibly can through multiple trade channel distribution.

Thank you very much.

Thanks Jeff.

Next we will hear from Ruth Ann Williams from, RedChip Co.

Many of my questions have already been addressed.

I wonder if you could speak for a moment about the projections for hand clearance.

What is that going to turn that around?

The increase is really modest when you look at it, it's 2%.

We believe that the stabilization of the Lava brand in the U.S. is there.

Solvol continues to perform reasonably well down in Australia.

So it's not a huge increase off the base of the business.

And as I've shared with you all before, we're not at all happy with the performance of Lava, and it's about time that we got better at that.

And we're going to do that this year.

Okay.

We had some projections earlier, which unfortunately I've not been able to put my hand on during the course of this call.

But there were some revenues targets that you had shared with us on one of the earlier calls for the end of the -- of fiscal year '04.

Are -- have those been revised or what is your thinking now on those?

They weren't EPS targets, they were just revenues targets.

I don't believe we did share those.

We've just been sharing annual guidance, and I don't believe we did share anything for 2004.

Okay.

It is possible that my memory is playing me false here, since I haven't been able to get my hand on the exact thing I was looking for.

Thank you very much.

Thank you.

Once again I would like to give our audience a reminder, that is star-1 if you do have a question or comment.

We'll pause for just a moment.

And we'll take our next question from Liam Burke with Ferris Baker, Watts.

How are you?

We're fine.

Mike $41 million in cash at the end of the year, you should be generating a fairly decent amount next year.

You've got a $10 million principal payment, your interest coverage -- I mean your dividend looks okay.

You have spare cash there.

Yeah, I think it's a good situation to be in to have cash on the balance sheet.

And I take it Liam, you're probably asking what are we going to do with it?

Yes.

Okay.

As we look -- look ahead, you know, we're going to be looking at ways to deploy the cash in a way that's most meaningful to shareholders.

And at this point, we're not ready to describe that in any detail.

But clearly, there are a number of real obvious options that would range from acquisition to prepayment of debt to changing the dividend to a lot -- things like that.

But at this point we haven't specified which direction we're taking.

Okay.

I guess the last time we spoke, or Garry has mentioned that, you know, you've got an eyes-open policy on acquisition.

That's fairly clear.

But is there any priority across the board in terms of what you might do with it?

Well, firstly as far as prepayment of debt is concerned, we're really, we have that solid piece of debt underneath us, the repayment schedule.

Right.

We are still looking around and you know if we could find another acquisition that was similar to the one of Spot Shot, and that it suited our business, we'd certainly be interested.

So you know, there's no real discussion on changing of our dividend policy.

Really, we I think as Mike said, it's a high-class problem that we have.

Sure.

And we need to deploy that in the best way we can to benefit our shareholders, and you know, we're not here as money managers.

We're here to increase our earnings, and we need to do that the best way we can.

And that's probably where we'll be.

Great, thank you.

Thanks Liam.

And we'll hear a follow-up from Mimi Sokolowski.

Okay, another high-class, I wouldn't say it's a high-class problem but DSO is down significantly year over year.

To what would you attribute that to and also, to what would you attribute the growth from the household products, aside from Spot Shot for the fourth quarter?

What happens with our receivables, Mimi, is that we have a couple of different categories that we -- well a number of different categories that we deal with.

And those have varying degrees of terms that are allowed in grocery as an example, terms you know tend to be more common at ten days.

In other channel classes of trade they're different than that and as we ship to distributors in other countries to some extent terms may vary there as well.

But the biggest swing we see in terms of days sales outstanding have to do with the timing of the sales that take place relative to the end of the quarter.

And in this particular case, we had a higher weighting of sales that occurred earlier in -- earlier in the month of August, as opposed to last year, which they tended to be more towards the middle.

So as a result, we see this wobbling around of our days sales outstanding.

But we are in a good position we feel like in terms of our managing of the credit and of the choices we make as to whether or not to extend credit to customers.

And so we're pleased with where we stand on our receivables and we're not really overly thrilled one way or the other about small swings in our days sales outstanding.

Okay.

And if you could get to household products in a second, but also, somewhat related, and on the balance sheet anyway, inventory turnover is higher than last year.

Yes, that's --

Anything going on there?

We -- you know as you know inventory is not a big number for us.

Right.

And so the overall, you know, impact on inventory turns you know isn't all that significant.

But it's really you know overall it's really not an issue so I don't have any comments to say to deliver any great news or anything else on inventory except that it's a small number.

We intend to manage it in a way that keeps it a small number but it's going to bounce around here and there.

Good enough.

Now the other household products.

Okay, I'm sorry I missed the question.

For the fourth quarter, I think you said that aside from Spot Shot, all the other products showed some growth?

Is that correct?

Well, actually, including Spot Shot, all of them showed growth quarter to quarter.

It was a good quarter for us.

And you know, one of the things that we faced this past year is some dynamics in the way our customers make decisions and what goes on.

So in this particular quarter, we were intent on doing the good things in household products like we are every single quarter of the year.

And for whatever reason, we got better results year on year.

But I think if there's something that we've learned through this year about our household products business is that it's really dynamic and it's fairly unpredictable as well.

Okay.

Thank you.

Thanks.

Thanks.

I would like to give our audience one final reminder, that is star-1 if you have a question or comment.

And it appears there are no further questions.

Mr. Ridge, I'll go ahead and hand the conference back to you for any closing comments you might have.

Thank you very much.

Thank you for listening in and we look forward to talking to you at the end of our first quarter of 2004, and have a little birthday cake for us because we were 50 this year.

Thanks, good afternoon.

That does conclude our conference.

We thank everyone for their participation.

We hope you have a good day.