WD-40 Co (WDFC) 2004 Q1 法說會逐字稿

Good day, and welcome to this WD-40 Company first quarter 2004 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. Maria Mitchell.

Please go ahead, Ms. Mitchell.

Good afternoon, and thank you for joining us for our first quarter earnings call for fiscal 2004.

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 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 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 followed 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, and to stay up-to-date with our most recent Company developments provided in the Investor Relations section of our website at WD-40.com.

Please note that the Company updates the Web site on Company earnings on a quarterly basis and readers are advised to review the most recent earnings calls and releases to stay up-to-date on the Company's performance.

Please also note that our second quarter conference call is scheduled for April 13, 2004 at 2 PM Pacific time.

Also, the Company's next road show is scheduled for the week of February 12th in Boston.

The management team is also scheduled to travel to Denver on March 11th.

Please contact us if you wish to set up meetings with Company management on those days.

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

Thank you, Maria.

Good Day.

Thanks for joining us and a Happy New Year to you all.

Our first quarter results put us in a good position to reach our fiscal year 2000 goals, which I shared with you in September last year.

Let me share our annual goals with you again.

In fiscal year 2004 we expect an increase in net sales of 9.4 percent over fiscal 2003.

By geographic segments, we expect sales increases in the Americas of 9 percent, in Europe of 12 percent, and in Asia of 12.2 percent.

By product line, we expect growth of 8.5 percent in our lubricant brands, 11.5 percent in our household products, and 2.6 percent in hand cleaners.

We expect net income to increase between 5 and 10 percent in 2004.

And we expect that we will have earnings per share of between $1.80 and $1.90 for the year based on an estimated 16.9 million shares outstanding at that time in September.

I will pass over to Mike Irwin, who will talk to you about the results for Q1 in a little more detail.

Thank you, Garry.

I'll start off with sales.

Total first quarter sales were $52.5 million, up 2.3 percent over the first quarter last year.

Lubricant sales, which are the WD-40 and 3-IN-ONE brand in Q1 were $31.3 million, 6 percent ahead of Q1 last year.

Hand cleaner sales represented by the Lava and Solvol brand were $1.7 million in the quarter, down 27 percent from the first quarter last year.

Household products, which are comprised of 2000 Flushes, Carpet Fresh, X-14 and Spot Shot, sales were $19.6 million, off $60,000 from the first quarter last year.

Moving over to graphic segments, the Americas' first quarter sales were $39.7 million, down 0.7 percent against the first quarter last year.

Within the Americas, lubricant sales were up 2 percent, hand cleaner sales were down 30 percent, and household product sales were off 0.5 percent.

Sales growth in Spot Shot and the automatic toilet bowl cleaner brands was offset by sale declines in X-14 and Carpet Fresh.

Asia-Pacific first quarter sales were $2.7 million, down 12 percent.

Australia achieved strong growth versus the first quarter last year, while Asia sales were temporarily slowed by transitions in our marketing distributors.

We expect Asia sales to get back on track as three new distributors settle in over the coming months.

Europe first quarter sales were $10.1 million, up 22 percent versus a year ago.

We have had solid year on year sales growth in the UK, Spain, Germany, and distributors in Europe, the Middle East and Africa.

The impact of translation to U.S. dollars accounted for 10 percentage points of the increase in Europe.

Gross profit margin in the quarter was 53.2 percent versus 49.4 percent in the first quarter last year.

The improvement in gross margin in the quarter was driven by reduced A&P discounts, supply chain savings, product mix and a slight effect from the U.S. price increase.

The timing of certain promotional activities and shifts in product mix may continue to cause significant fluctuations in gross margin from period to period.

The Company expects that its fiscal 2004 gross profit percentage will remain in the range of that achieved in fiscal 2003.

Going forward, we see pressures on component and finished goods pricing increases.

We are a Company that dislikes cost that doesn't add value, so we continue to work with our suppliers to help mitigate the impact of rising costs.

Selling, general and administrative expense for the quarter was $14.1 million versus $12.9 million in Q1 last year.

G&A costs were up $800,000 due to higher accounting costs, corporate insurance costs, legal fees, R&D activities, meeting expenses and a change in the European selling structure.

Selling expense was up by 12.9 percent due to added sales staff in Europe and the impact from foreign currency translation.

Advertising and sales promotion expense was $5.4 million in the first quarter versus $4.3 million a year ago.

As a percent of sales, A&P was 10.4 percent of sales in the first quarter this year compared to 8.4 percent in Q1 last year.

The difference reflects added support for Spot Shot, something we have previously discussed.

A&P expense will fluctuate quarter to quarter based on the timing of advertising and promotional campaigns, some of which are executed on an opportunistic basis.

Nonetheless, we expect that A&P for the year will follow in the range of 8 to 10 percent of sales.

Amortization expense was zero on the quarter compared to $71,000 in the first quarter last year.

As a result of the previous items the operating income for the quarter was $8.4 million compared to $8.1 million in the same quarter last year.

Net interest expense for the quarter was $1.6 million versus $1.7 million in Q1 last year.

Net income in Q1 was $4.4 million compared to $4.4 million in the same quarter last year.

And on a diluted per share basis, quarter earnings were 26 cents, the same as in the first quarter last year.

At the end of the first quarter our weighted average shares outstanding, including the effect of delusion, have increased to 17.1 million shares versus 16.7 million shares last year.

The increase stems from employee exercises of stock options and higher share price.

You may recall that our fiscal year earnings per share guidance of $1.80 to $1.90 per share assumed 16.9 million shares outstanding.

Regarding the dividend on December 16, 2003, the Board of Directors of WD-40 Company declared a regular quarterly dividend of 20 cents per share, payable on January 31st, 2004 to shareholders of record on January 8, 2004.

A few words about our balance sheet;

On November 30th, 2003 cash and cash equivalents were $50.6 million at the end of the quarter, up from $42 million at the beginning of the fiscal year.

Strong cash from operations and $5 million from the exercises of employee stock options contributed to the rise in our cash balance.

Accounts receivable decreased to $33.5 million due to the phasing of sales quarter to quarter.

Inventories were $5.1 million, up $400,000.

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

And looking at our debt position, we have $85 million in long-term debt outstanding, and $10 million in the current portion of long-term debt.

Our debt repayment schedule is as follows.

The first $10 million payment is due on May 31st, 2004. $10 million more is due the following May 31, 2005, and then $10.7 million is due starting October 18, 2005 and for a six year period after that.

That's all for the financial update.

Thanks, I will turn it back over to Garry Ridge.

Thanks, Mike.

As I shared with you in September, we're not at all happy with the way the X-14 and Lava brands are performing, and we need to do a better job at growing these brands, and we will.

We are well into a complete review of how we can unlock new revenues from these great consumer brands; with X-14 it has already started.

For X-14 we're in the roll out stage of a new package for our mildew product.

This new pack should start showing up in stores in the next 60 days.

The pack communicates the X-14 advantage, prevents mildew and stains up to two weeks.

We are leveraging the new packaging to highlight a dramatic performance claim that will reinforce X-14's unique position as the most effective product in the category.

We are well into our new opportunity evaluation for the Lava brand, and we will share those plans with you when they're done.

Our base business of WD-40 and 3-IN-ONE continue to strengthen globally during the first quarter, coming off an extremely strong year last year.

In September I shared with you that we were going to turn up the volume of marketing of some of our brands, and with the increase in marketing support.

Investment in global advertising and promotion expenses for the year is expected, as Mike said, to be around 8 to 10 percent of net sales, up from 7.3 percent in 2003.

In particular, we have three major initiatives planned in the U.S. market that I shared with you earlier, and would like to update you on.

In the U.S. our WD-40 brand advertising campaign commenced as planned.

We also rolled out the WD-40 Big Blast Can.

And if you haven't seen it, go to our website at WD-40.com and check it out.

Aimed at making it easier to apply WD-40 to wide areas like equipment, it should help increase consumption.

This is the first major change in the WD-40 delivery system since we have put the product in an aerosol can in 1958.

Not to be confused as the son of WD-40, Big Blast is the same formula that you know and have known for years.

We executed on our plans to turn up the volume on the Spot Shot TV campaign in the first quarter.

As I shared with you in the last conference call, the brand responds positively to our TV campaign in 2003.

We saw good results from the first phase of the TV campaign, and it starts again later this month.

Another new product is our 2000 Flushes in-bowl, clip-on automatic toilet bowl cleaner, which we started to ship on plan in late December.

This is the first new product launch for 2002, and takes the number one brand, 2000 Flushes, into the in-bowl category.

Our marketing support will commence as we build distribution.

On our website, we have published what are our four-year goals.

It is our goal to grow sales at a compounded annual growth rate of between 6 and 8 percent, and our net income at a compounded annual growth rate of between 8 and 11 percent through to fiscal year 2008.

This growth does not include any acquisitions that may occur over that time; the growth is organic.

Our vision is to continue to build the global sales in our lubricant business and increase the value we're generating from existing brand assets by unlocking new revenues from our current brands and identifying and capitalizing on opportunities to expand the Spot Shot business in other areas of the world.

Further line extensions across the Company's brands are currently under review.

Lastly, you'll recall that WD-40 Company was recently named as a defendant in two substantially similar lawsuits filed in mid-September relating to its automatic toilet bowl cleaning products.

Based upon information that has been provided to date, the Company believes it has meritorious defenses, and based upon that, WD-40 Company intends to vigorously defend against these allegations.

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

(OPERATOR INSTRUCTIONS) Jeff Zekauskas with J.P. Morgan.

What was the volume growth of the global lubricants business in the quarter?

Sales volume, 6 percent.

No, I understand that sales increased 6 percent.

What was the volume X currency?

We have not described that.

No, I understand that.

That's why I asked.

At this point we don't have the information.

Secondly, I missed the first part of the sentence that you said, Mike.

You were talking about a $10.6 million that was being paid annually.

What was that for?

I think that that -- what you are referring to there is probably is our debt repayment schedule.

The debt repayment schedule.

Okay.

Thirdly, are Asia sales affected by currency at all?

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

The only impact is the translation from Australia, the Australian dollar to the U.S. dollar.

But primarily all Asian sales are in U.S. dollars.

And I guess lastly before I get back in the queue, can you describe your success in Europe?

That is, how are you engineering -- it looks like you have got something like 12 percent volume growth in the quarter?

Correct.

Can you sort of analyze that for us?

Yes.

Over the years we have been steadily building a competent sales and distribution base in Europe.

We now have direct operations in the UK, France, Germany, Spain and Italy.

We have direct operations we have just opened in Holland, Austria and in Portugal.

We have 72 people based in Europe now.

And basically this is just a growth of an ever-expanding base.

It is new distribution.

It is new customers.

It is new consumers.

And it is the old business staying in place as it builds.

So we have said for a long time, Jeff, that we have got a lot of faith in Europe.

This is the second or third year now of double-digit growth.

And the good thing is, it continues to grow off our ever-increasing base.

So we are very happy with what we're doing over in Europe, and we like the lubricant business.

We have launched the 3-IN-ONE pro product over there now.

So it is steady as she goes.

It is the old WD-40, if you will.

It is building the brand fortress.

So if what you did is tried to sort of break it into the UK, the continent and Eastern Europe in terms of your growth pattern, sort of what would that look like?

I'm sorry, I didn't understand the question.

If you took your European sales, your European sales growth, or your European volume growth, and you sort of divided it a little bit more sharply into Eastern Europe, Continental Europe and the UK, are the growth rates very different in those jurisdictions?

Well, each country is at a different stage of development.

I know that we shared last year, for example, somewhere like Germany was growing at 22 percent a year.

The UK is growing at a little less than that because it is a more mature market.

Our awareness and penetration in the UK is approaching that of the awareness and penetration of the U.S., where our awareness and penetration in places like Germany, France and Spain is a lot lower, so there is still a lot more growth there.

In Russia, for example, where we shared last year that we were approaching the 3 million can mark there per annum.

That is probably gone from about zero five years ago.

So some of the more developing countries are a little faster.

Continental Europe is going quicker than the UK business.

Mimi Sokolowski with Sidoti.

I have a couple of questions, but I will keep them brief, and if I run long I will get back in the queue.

First, what was the impact of currency on a per-share basis?

We haven't calculated that.

I wanted to ask about Spot Shot.

If you could provide year-over-year growth, or provide me with an annual run rate, or somehow in a quantitative manner convey to me how advertising has benefited the sales of Spot Shot?

We haven't disclosed Spot Shot out on its own, Mimi.

What we have said is that the Spot Shot brand did grow in the quarter, which was offset by some declines in X-14 and Carpet Fresh.

We did share some Nielsen numbers last conference call.

We'll do that again on the next conference call, which is really a measurement of off shelf movement.

But I can tell you that Spot Shot is growing, and that it is on target for us to meet some of the expectations we had.

So we're happy with Spot Shot.

Okay.

Could you, Mike, you did gloss over the gross margin and it extended significantly.

Could you over the list of reasons again and how that was accomplished?

Yes.

There are really a number of areas.

Number one, the gross margin was enhanced by reduced advertising promotional discounts.

And some color on that.

Advertising promotional discounts that would impact gross margin are things that are reclassified as a reduction in sales.

Those are things like slotting, coupons and incentives given to customers for selling the products.

And those kinds of things will tend to fluctuate from quarter to quarter based upon the activity that we employ.

And just by way of example, in a time period when we have a product launch going on, as we did during the first quarter last year, we would tend to have higher slotting costs because we're trying to get a new product into distribution.

Going forward, as we have products into a kind of launch mode, as we do with the 2000 Flushes clip-on product, we would expect to incur more slotting costs as we try to get those into distribution.

That was going to say segue into my next question, how versus last year this is a period when the gross profit was at its lowest in the fourth quarter.

But it is not seasonal, it is related to whatever the schedules of the project launches are.

That's one of the reasons.

And what were a couple of the other reasons?

Some of the other ones would be product mix.

And I think as we have described it, as we sell different items in different mixes of items within our family, we would see different margins from that.

The growth in -- we have also shared the area of volume in aerosols is the mix of our aerosol products is higher than the others then that also impacts the mix.

Favorably?

Favorably.

Yes.

And we had good WD-40 growth, and we had good Spot Shot growth.

There were a couple of others too, Mike.

Yes, the other one -- the other one was a slight effect of the U.S. price increase, which took effect in October.

And that we haven't quantified.

There is some benefit from that, but that is just one of the other factors in it.

And the last question is real easy.

I don't know if you can disclose it, or if you did already, the percentage of revenue that is derived from Europe?

It was -- it's in the release here.

Europe in this quarter was 19.3 percent.

(OPERATOR INSTRUCTIONS) Jeff Zekauskas.

Can you talk about what you are attempting to achieve with your price increases in the United States?

And also you spoke of rising component costs.

Can you describe what the areas are in some rough magnitude in both cases?

As far as price increase is concerned, it was really a maintenance issue to make sure that we maintained the margins.

We've had some pressures that have come to bear on can prices.

We fortunately do have good contracts and some leverage there because of our volume.

But basically it is more packaging related cost increases that flow in and out of the supply chain.

And again, as I said with the price rise there was a little bit of maintenance of the margin, if you will.

So these are rises in tin costs?

And steel.

Steel?

Yes.

We have had steel cans.

There have been some fluctuations.

The other thing too, Jeff, that did rise our costs, and I think we mentioned this on the last call, was that we had to reformulate WD-40 to meet the new Californian Air Resources Board regulation, reduce its VOC level one more time.

And we did that reformulation during the last quarter, I think it was.

And that did also rise our costs -- caused a cost increase as we have to change one of the solvents in the product that is a more expensive solvent.

So this was an across the board price increase in WD-40 or a more limited increase?

It was implemented in the U.S. market specifically.

We didn't have to change the formula anywhere else in the world, so we didn't.

What is the order of magnitude of the price increase?

I think that we have done around 4 to 5 percent.

4 to 5 percent?

So does that mean that lubricant volumes in the U.S. in the quarter were down 4 to 5 percent?

No, because the flow-through hasn't come through yet.

It only happened late into the quarter, and it was very limited as it came through.

Okay.

In terms of litigations, you said there were two litigations.

And I'm sorry my memory isn't very good, this so-called balancing action -- Brown action, and then the case in Florida?

I'll let Maria answered that because she is the expert there.

Jeff, yes, there is the Florida one that what was -- actually that has been going on for over a year.

And then there is the Brown and Valentine, yes.

So there are three?

There are three total.

Yes.

Have any of these been certified as classes?

None of these have been certified as classes.

Are any of these going to go to trial over the next twelve months?

We don't know yet at this point.

That is, has the judge scheduled a trial date?

No, we are currently in discovery at this point with the two most recent ones, so we're just furnishing information.

Which is the oldest litigation?

The oldest is the Florida one.

And so where do you -- so you are still in pretrial motions concerning whether it is or it isn't a class?

That is correct.

There has been a series of motions dismissed by the judge.

And they keep appealing, and it has not been certified as a class.

(OPERATOR INSTRUCTIONS) Ben Robertson with Duruma Asset Management (ph).

I guess it is the same question as far as X-14 is concerned.

You haven't really broken that out, but can you talk a little bit about what is going on with that?

If you have launched distribution, if there are any stores where you no longer have a presence, or if it is just that you're not selling as much through the existing channels?

Can you give a little more color as far as what is going on with that product?

Well, a couple of things.

Firstly, the volume is down, and it is really competitive driven.

We have had no material loss of distribution.

What we have done, though, is repackage the product to strengthen our claim of being a product that will drive out mildew and keep it away for two weeks.

Some of our competitors got too close to our claim.

So we are going to be rolling that new product out within the next 60 days.

We have added a tweak to the formulation as well.

So really it is really competitive activity.

We probably didn't act as fast as we should have in the latter part, or the middle of last year, when some of this started to happen.

The other side, too, as you know the grocery trade channel, particularly in the Californian area, has been going through a fair bit of drama with the labor dispute that is on.

That hasn't helped.

So we're on top of the X-14 product.

And like anything, products go up and products go down, and it is a matter of paying attention to them.

And I think the two areas of both Lava and X-14 are ones that we are now laser focused on, and our team is working on it.

And we need to do better, and we will do better.

Will you accompany the new packaging with new advertising as well?

Yes that will happen as the distribution builds some time into the future.

So there's no current plan for a new advertising campaign on that?

There is a plan, yes.

But I'm not prepared to -- I'm not saying when it is going to start, but certainly the plan is there.

Do have any idea what your market share is on X-14 now?

We do, but we haven't disclosed it.

It sounds like you've lost market share?

I don't have the numbers in front of me.

And what about Carpet Fresh, because that was also down?

Yes, Carpet Fresh -- we're in the stages now of releasing another new fragrance in Carpet Fresh.

And we have also upgraded it in putting in a new spray through top.

So we believe that that will bring us back in line.

We've also lost a little bit of shelf space because we have been getting a squeeze from the other room deodorizer products in the supply chain.

There has been quite a plethora of new types of room deodorizers.

And we lost a little shelf space there.

But I think we're going to be okay in the end, and it's just, again, another way of managing the brands.

As I said, overall the performance is not going to change our estimate that we're going to meet our goal of $1.80 to $1.90 for the full year.

So you're expecting it to have some significantly better quarters going forward?

Not to (indiscernible)?

Well, traditionally our first quarter of every year is never one that is a big movement.

So if we are going to meet $1.80, $1.90, you would have to assume that the quarters that are coming up are going to be different.

But again, we don't run the business on a quarterly basis.

We run our business on an annual basis.

I can't run it in 90 day intervals.

We have to report it in 90 day intervals, but we're not a quarterly -- quarter to quarter Company.

We are an annual Company, and we put our plans down that way.

In the first quarter of this year you will see that we had substantial investment in Spot Shot and WD-40 from a media standpoint.

I could have chosen not to do that and had a different quarter.

But we have chosen to do it, because it is the right thing to do for the brands.

And on WD-40 overseas is that -- the European sales -- how much of that was direct pull through in the channel?

Was that --sales to new distributors that haven't been pulled through yet, or are you experiencing that level of pull through?

No, they are current sales.

This is not loading.

It is where we have our own direct operations in France, Germany, Spain, Italy, Portugal, Austria, and Holland.

We sell directly to the retailers and trade channel ourselves.

So there's no distributor loading in there.

In Asia is that a drop in pull through or was that --?

No.

We swapped out -- in Asia the majority of our business, except for Australia, is executed by what we call a marketing distributor.

They are geographically -- they are geographically based distributors.

We swapped three of those out, and they have annual contracts that end in December.

In three countries we swapped them out.

So it slowed us up in December, but we are very confident we will be right back on track at the end of the second quarter, because we have appointed new distributors in those countries that we swapped out.

Did you say which countries those were?

No.

Would you mind saying that or is that --?

I don't think that is probably something we want to disclose.

I don't see any value in that.

Gentlemen, that appears to be our final question.

Mr. Ridge, I'll turn the conference back to you for any closing comments you may have.

Thank you very much, and we will see you again in April.

And keep spraying and stopping squeaks and cleaning.

Thank you.

Good afternoon.

That does conclude our conference.

We thank everyone for their participation.

We hope you have a great day.