WD-40 Co (WDFC) 2004 Q2 法說會逐字稿

Hello, everyone.

Thank you for holding, and welcome to this WD-40 Company second-quarter 2004 earnings release conference call.

This 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.

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

Today we're 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 our 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 new product introductions, impacts of exchange rates, changes in the marketing search (ph), and the uncertainty of international marketing 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 filed 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, including the most recent earnings calls and releases provided in the Investor Relations section of our website at WD-40.com.

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

Thank you, Maria.

Good day and thanks for joining us.

Well, we had a few timing setbacks in the domestic business during the second quarter.

We continued with solid growth in our international markets.

We will continue to build on the strong platform that we've created and to manage our business for the long-term growth.

A little update for this fiscal year.

We now expect an increase in net sales of 7.2 percent over fiscal 2003 compared with the previous guidance of 9.4 percent increase for the year.

We now expect net income to be 30 million for the full fiscal year of 2004, $400,000 short of our original guidance issued in September 2003.

However, due to an increase in the number of shares outstanding from 16.9 million to 17.2 million, earnings per share for the year are expected to be $1.75.

Our guidance is in line with our published four-year goals.

At our regular schedule board meeting on April 6, 2004, the Board of Directors approved an open-ended buyback of company shares up to 15 million over the next twelve months.

I will pass over to Mike Irwin, our CFO, who will give a little more detail to the results.

Thank you, Garry.

We will begin with a review of sales and then on to the rest of the financials.

Starting off with sales, total second quarter sales were $58.5 million, up 0.2 percent over the second quarter of last year.

Sales for the six months were $111 million, up 1.2 percent over the first half last year.

Lubricant sales, which is WD-40 and 3-IN-ONE, for the second quarter were $40.4 million, up 7 percent from Q2 last year.

We had strong growth in Asia, Australia, Canada, and Europe in our lubricant business.

Lubricant sales for the first six months were $71.7 million, up 7 percent over the first half last year.

Hand cleaner sales, which are the Lava and Solvol brands, were $1.3 million in the quarter, off $100,000 from Q2 a year ago.

And for the half year, hand cleaner sales were $3 million, down 20 percent versus a year ago.

Growth in Australia was offset by declines in the U.S.

As previously discussed, we're in the process of determining our next steps with the Lava brand.

Household products, which are Carpet Fresh, 2000 Flushes, X-14 and Spot Shot, second-quarter sales were $16.8 million, down 13 percent compared to the same quarter last year.

Through six months, household products sales were $36.3 million, off 7 percent.

A word about that -- sales declined in the U.S. and were evident in Carpet Fresh rug and room deodorizers, X-14 hard surface cleaners, and the 2000 Flushes X-14 automatic toilet bowl cleaners.

These declines are a result of a variety of reasons, including increased advertising and promotional discounts compared to the prior-year quarter, along with the effects of competitive factors within and among the product categories.

These declines were partially offset by growth in Spot Shot, due to the benefits from television advertising, other advertising investments, and a bonus can promotion.

The categories where the Company's household product brands compete have experienced competitive pressure from a variety of new product introductions in both related and unrelated categories.

Retailers have cut back shelf space for traditional rug and room deodorizers and have reallocated space to other air-care products.

As a result, the rug and room deodorizer category as a whole has declined.

Although sales of the Carpet Fresh brand have declined due to losses in distribution resulting from the events I just described, the brand has increased dollar share of the grocery segment.

The X-14 hard surface cleaners have been negatively affected by competitive product introductions within their categories.

Two other competitive brands have been introduced in the mildew-stain remover category, which has negatively impacted X-14's market share within the category.

The Company has repositioned the X-14 product to respond to the competition by recently introducing a larger size and a long-lasting mildew prevention claim.

This repositioning highlights a proven claim that enabled X-14 to have a competitive advantage over products in the category.

Sales of 2000 Flushes X-14 automatic toilet bowl cleaners are down in the current quarter compared to the prior-year quarter due to increased advertising and promotional-related costs associated with the launch of the 2000 Flushes clip-on product during the quarter.

These costs include slotting fees paid to gain shelf space for the new product and are expected to continue through the fiscal year.

These increased costs are considered long-term investments into the launch of the new product in order to build distribution as it is introduced across the various trade channels.

The Company expects to address challenges and opportunities that exist within the competitive environments of the household product categories through both product and promotional innovation.

Moving onto the business areas, the Americas' Q2 sales were $39.5 million, down 8 percent against last year.

Growth in Canada was offset by declines in the U.S. and Latin America.

Through six months, America's sales were $79.2 million, down by 4 percent compared to last year.

Both Canada and Latin America first-half sales are above the prior year, while the U.S. trailed due to the household products as previously discussed.

In addition, we had the effect of a U.S. price increase implemented in the first quarter on certain products.

Our company has long been focused on maintaining efficiency in our operation and on delivering above-expectation performance at extremely good value to consumers.

As a result, price increases are a fairly rare event around here.

Prices on WD-40 have been increased only nine times in its 50-year history.

In this past quarter, certain customers responded to price increase by limiting promotional emphasis of our brands.

While it does affect short-term sales, we believe that the situation will shift over time due to continued consumer demand and continued promotional and packaging innovation.

Asia-Pacific Q2 sales were $4.7 million, up by 39 percent.

Australia achieved strong growth across lubricant and hand cleaner lines and also had the addition of Novak, part of the Carpet Fresh line which has been introduced in Australia as a unique product into the market.

Asia sales were up by 33 percent as we had the integration of new marketing distributors in that region.

Through six months, Asia-Pacific sales were $7.3 million, up 15 percent.

Following a difficult first quarter, Asia sales are slightly above last year, while Australia has continued its robust growth with half-year sales up 62 percent versus the six months last year.

Australia results also reflect the impact of exchange rates.

Europe's second-quarter sales were $14.4 million, up 18 percent versus a year ago.

The UK, France, Germany and Spain all contributed double-digit growth versus Q2 last year in U.S. dollars.

Half-year Europe sales were $24.5 million, up 20 percent compared to the first half last year.

And through six months, we had growing sales in the UK, Russia, France, Germany, Spain, and the Middle East.

Gross profit margins in the quarter were 51.9 percent versus 52.9 percent a year ago.

The change is attributable to an increasing in advertising and promotional discounts in the quarter as well as product mix, partially offset by the effect of the U.S. price increase and changes in other supply chain costs.

The introduction of the new 2000 Flushes in-bowl product triggered slotting allowances that reduced sales revenue and therefore impacts gross margin.

For the six months, gross margin was 52.5 percent compared to 51.3 percent through the first half last year.

The 1.2 percentage point increase in gross margin is primarily due to product mix, the U.S. price increase, and changes in other supply chain costs.

Selling, general and administrative expense for the quarter was $14 million versus 12.7 million in the second quarter last year, an increase of 10.8 percent.

The lift is related to increased exchange rates, higher accounting fees, insurance costs and freight.

For the half year, SG&A expense increased by 10.3 percent to $28.2 million.

Some factors contributing to that increase include exchange rates, which accounted for $1 million of the increase; legal and accounting fees; insurance costs; and activities related to the Company's 50th anniversary.

Advertising and promotional expense was $5.1 million in the second quarter versus $3.6 million a year ago.

The increase is attributable primarily to support for household products.

For the year, advertising and promotion expense was $10.5 million against $8 million a year ago, an increase of 32.5 percent.

During the quarter, the A&P expense was 8.7 percent of sales, while year to date it was 9.5 percent.

We are continuing to invest for the long-term health of our brand.

As a result of the previous items, operating income for the quarter was $11.2 million compared to 13.7 million in the second quarter last year, and through six months, operating income was $19.6 million compared to $21.8 million last year.

Net interest expense in the quarter was 1.7 million, which is even with the second quarter last year.

And for the year, net interest expense was $3.3 million versus $3.4 million last year.

Net income in the quarter was $6.2 million compared to 8.2 million in the same quarter last year, and on a diluted per-share basis, earnings were 36 cents compared to 49 cents last year.

For the half year, net income was $10.6 million versus 12.6 million last year.

That equates to earnings per diluted share of 62 cents after six months compared to 75 cents last year.

Diluted shares outstanding have increased to 17.2 million shares for the year to date compared to 16.7 million for the prior year to date.

And regarding the dividend on April 6, the Board of Directors of the Company declared a regular quarterly dividend of 20 cents per share payable on April 30, 2004, to shareholders of record on April 19, 2004.

A few words about our balance sheet -- at February 29, 2004, cash and cash equivalents were $58 million (ph) at the end of the quarter, up from 42 million at the beginning of the fiscal year.

Accounts receivable declined during that time due to a lower level of sales in the second quarter compared to sales in the fourth quarter.

Inventories rose slightly to $5.9 million, up from 4.7 million at August 31.

The changes reflect the flow of our business, and current inventory levels are in line with what we would expect.

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

Accounts payable declined due to the flow of the business, as well.

We are also in the process of taking a number of steps to deploy cash.

The acquisition of the 1001 brand of carpet and household cleaners in the UK closed on April 2nd.

The purchase price of GBP6.2 million or approximately $11.3 million.

The first principal payment on our debt is due May 31, and that will be for $10 million.

And as announced, our Board declared the regular quarterly dividend of 20 cents.

That cost will be approximately $3.4 million.

As announced, our Board has also authorized the repurchase of up to $15 million in Company shares over the next 12 months.

That's it for the financial update.

I'll turn it back over to Garry Ridge.

Thanks, Mike.

I'd like to talk a little more about some of the activities that happened during the quarter.

In the Americas, we experienced solid growth in the Spot Shot brand being supported by our marketing investment and increased distribution.

Sales of household products, excluding (ph) Carpet Fresh and 2000 Flushes, were down compared to the previous year's quarter.

We also had an expected increase in marketing and advertising expenses and promotional discounts across several brands in the U.S.

Our commitment is still there for the long-term build of our brands.

Interesting with Carpet Fresh -- it is the only brand in the category being supported by consumer activity, and this reflects as the brand continues to strengthen its category position.

Talking a little bit about X-14.

During the quarter, we also suffered from the effects of the phase-out of the old X-14 packaging, which caused some temporary distribution delays -- the new packaging, a 32-ounce size replacing the old 16-ounce size.

This communicates the X-14 stain remover unique benefit of prevents mildew stains up to two weeks, and is the first phase of the brand's repositioning.

Our first 2000 Flushes in-bowl automatic toilet bowl cleaner product started to hit the stores in the quarter.

Initial slotting fees impacted sales for the product in the quarter.

Slotting fees are accounted for as a reduction in sales.

During the quarter, we also introduced in three new products in the 3-IN-ONE professional lines of the trade.

You can see all our new innovations on our website at www.WD-40.com.

Another impact in the quarter, as Mike mentioned, was several of our key U.S. customers responding to our price rise we initiated in the first quarter with decreased promotional activity in the second quarter.

This had an impact on sales of several brands, but most notably WD-40.

Talking about Europe -- in the second quarter, sales were up 18 percent from the comparable period last year.

Changes in foreign currency rates between the British pound and the U.S. dollar contributed about 15 percent of the 80-percent growth as well as the growth of expenses equivalently in Europe.

We continue to build our solid base in continental Europe.

Our new direct operation in Holland is progressing as planned.

The 1001 acquisition in the UK closed as planned, and we are well into the development of the Carpet Fresh and Spot Shot technology under the 1001 brands.

In Asia-Pacific, total sales were up 39 percent.

Changes in foreign currency rates between the Australian dollar and the U.S. dollar contributed only about 8 percent to that 39 percent growth.

As anticipated, we saw the benefits of the changes we made with new marketing distributors in several of the Asian countries.

We also continue to see solid growth in Australia.

Our lubricant sales globally, which is WD-40 and 3-IN-ONE (ph), were up 7 percent in the quarter.

While we suffered a little due to the decreased promotional activity from the price rise on some of our lubricants we implemented in the USA during the first quarter, global sales of lubricants have continued to rise.

We continue to be encouraged by the performance of the new 3-IN-ONE professional product lines we released last year.

Sales of Solvol and Lava were down 9 percent.

We continue to see solid growth in Australia, but are struggling with the Lava sales, and we are currently developing a plan for future alternatives for the Lava brand.

Sales of our household products -- X-14, Carpet Fresh, 2000 Flushes and Spot Shot -- were down compared to the previous quarter.

But we continue to introduce new products and make the necessary changes to existing products to ensure their longtime success.

We now would be pleased to take any questions.

(OPERATOR INSTRUCTIONS).

Liam Burke, Ferris Baker Watts.

You moved your guidance down from the range to, I guess, $1.75 now.

It puts a lot of pressure on revenue increases for the second half of the year.

If you look at the second quarter results, I know you had a lot of moving parts.

But where do you see the second half revenue growth?

Well, overall, we see that the launch of the 2000 Flushes products that we have launched in this quarter will start to hit fully in the third and the fourth quarter, continued growth of the Spot Shot brand.

We're feeling comfortable that the repositioning of X-14 with a 32-ounce product will stem the decline in that brand. 3-IN-ONE Pro -- we re-introduced three new lines of that, and that's gone into full distribution.

And of course, we continue to see growth in Europe and in Asia.

The other thing is, too, the second half of our year has always been bigger than the first half of our year.

If you look at what happened in the second quarter, it really was we continued our investment on Spot Shot, WD-40, and 2000 Flushes with the new products.

We had the phase-in and the phase-out of X-14, which hurt us a little bit.

And with WD-40, we had some stalling in the promotional activities that we would normally have in January and February, where a couple of our larger customers who didn't take kindly to some of the price movements decided that they wouldn't promote us, which is normally what happens.

Do you have any -- at the beginning of the year, you basically had a range of sales increases for this fiscal year.

Have you adjusted those, and are you going to release them?

We adjusted the overall from nine point (multiple speakers) to seven point something.

We haven't done the adjustments on the product lines themselves at this time.

Mimi Sokolowski, Sidoti & Company.

I just have one question, because that first question was exactly mine, as well.

I was wondering if you could provide any more information with Spot Shot in the quantitative sense, and give us something to hang our hat on for the second half of the year.

With the way household products is going, that's a little dicey.

Hand cleaners continues to hurt, and with lubricants, a price increase isn't going over well.

So it does sound like there's a lot of pressure on Spot Shot specifically.

Can you say what percent of revenue it is now versus what it was a year ago?

Or the type of revenue growth that you saw in the quarter?

Let's just put that in perspective for a second, particularly the comment about lubricants.

Lubricants are, as you know, probably half or more of our business, and are growing at 7 percent.

The pricing pressure that we had on the promotional side is something that, when we've had rises before, has happened.

And we moved forward from that.

So our lubricant business -- A, with WD-40, and also with the introduction of 3-IN-ONE and the 3-IN-ONE Pro, is strong.

But pricing pressure also happened in the U.S. only.

So I think that's right.

I think you're right; in the household products area, the X-14 brand and the 2000 Flushes brand -- this quarter was the first launch of the new initiatives into those.

And we have slotting fees going into 2000 Flushes which also reduce sales.

We have not released the actual growth rates on Spot Shot.

We did have good growth.

We are continuing our marketing support on it.

So I don't think that the world of WD-40 is on the back of Spot Shot.

I think that what we had was a number of things that impacted us, and we had some timing issues that we kind of were unhappy about.

But that's the life.

We need to just move forward on them.

Can you elaborate a little bit more on the timing issues?

Well, the timing issues were one, the phase-in and the phase-out of the X-14 products.

We had to take the 16-ounce product off the shelf and replace it with a 32-ounce product.

So you lose some momentum there.

The other timing issues was the WD-40 U.S. business, where typically it would have been a little stronger in January and February if we would have had the promotions that we normally have with some of our big customers.

A couple that didn't happen had an impact on us.

So those have got to move into the later part of the year.

Okay.

I don't suppose it's possible to quantify the impact of the delay with distributors of X-14?

Not really.

We measure it by ACV, which is all commodities volume in stores, and it dropped down.

And now we have to rebuild it.

And if you go into grocery stores now and distribution, you will see that the -- for a couple of weeks, you would have seen that the blue bottle, the old one, had disappeared, and there was sort of nothing there.

And now the 32-ounce, which is the new white bottle, has started to go back in again.

Now the 32-ounce is twice as much volume in one bottle, and now in aligning with the products that we are competing against, except we've got a much stronger consumer claim (ph) that came out of the recess that we conducted (ph).

Okay.

And the last point is, do you think it wouldn't -- would it be safe to say that a couple of things that went wrong in this February quarter or that surprised you are not necessarily going to happen in the remainder of the year?

Well, I think we did reduce down our total sales estimate by about two percentage points.

So a couple of those did go away, but then our full-year guidance we reduced by only 400,000 net.

What really happened to us on the EPS side was, as the shares outstanding grew -- and our net income on projection was 30.4 million, and our net income projection now is 30 million.

So I think, yes, we're going to have some drop in sales.

We are going to have an offset of that in some of the marketing costs that would have been attributed to those sales, and then we're going to have the regular promotional activity that would go on.

Jeff Zekauskas, J.P. Morgan.

Can you quantify the amount of price increase in North America on WD-40?

Mike?

With respect to the price increase, we would look at that from the standpoint of its impact on gross margin.

And we believe that -- as we look at the impact the price increase had was 1 percentage point in the quarter.

It benefited you buy one percentage point?

Yes.

Can you quantify the effect of FX on consolidated sales?

Well, it would have had an impact in Europe of about -- Mike?

Yes;

I think we have that.

If we take a look at -- where foreign exchange would primarily affect us would be the Asia-Pacific region, specifically with regard to Australia.

And that, we believe, in the quarter had about a $300,000 impact on sales for Asia-Pacific, and about $500,000 impact on sales for the year to date for Asia-Pacific.

In Europe, we had about a $1.8 million impact on sales in the quarter and about a $2.6 million impact on sales for the year to date.

Okay.

The third thing is, can you -- two things.

Have you changed your long-term view of your opportunities in household products, given either competitive pressures or a change in the market?

Or do you feel that the longer-term opportunities in household products are more or less the same, and what we are doing is we're just going through a difficult period?

I think the latter, Jeff.

We've demonstrated our faith in those by the launch of new products in the 2000 Flushes area, by the repositioning of the X-14 brand.

Certainly, the turmoil that continues and did happen in the grocery trade channel is something that we would like not to have.

That business is a lot more volatile than the normal business that we operate in, given that the consumers repurchase cycle is shorter.

We certainly also still see and continue to be confident about Spot Shot.

It maybe is a bit slower than we would have liked, but certainly we believe that we have got brands that have value and we can build revenues from those brands.

I guess, lastly, in order to hit the earnings guidance that you have, either your third or your fourth quarter has to be sort of a blowout quarter in comparison to the year ago.

Are you comfortable with that?

Jeff, this is Mike.

I think, as Garry had mentioned earlier, historically, the second half of our year has been larger than the first, anyway.

So in comparison to a year-on-year basis, yes, the second half would need to be bigger than last year.

But we feel like that's realistic with all of the things that we have (technical difficulty) works.

So, all things being equal, will we see the big strength in the third quarter or the fourth quarter?

Well, last year, if you did look at it, we had a 61-cent fourth quarter and 35-cent third quarter.

And I think that you're going to see --now we're looking at about $1.10 for the rest of the year, $1.12 -- two 55-cent quarters, or whatever they end up that.

But certainly, we have always had a bigger second half than the first half.

That would not be that I am giving any quarterly guidance here.

No, I know; just order of magnitude.

So, in other words, all things being equal, your best shot is in the third quarter for a really good comparison?

I think our best shot is in the second half of the year.

(OPERATOR INSTRUCTIONS).

Frank Magdalene (ph), Robbins Group (ph).

Can you give us any help on how much the slotting allowances are really costing you?

Or if you feel uncomfortable for competitive reasons --

We have not quantified that at this point.

I mean, we obviously know, but we would be uncomfortable sharing that at this point.

And I guess the second part of the -- second thing I would like to ask is what's happening on your cost side?

You had some price increases, and you haven't had them for a long time.

And it was because certain component costs were going up.

Have they abated, or are you still looking at some pressure there?

Well, I think that there's a combination of things.

Over time, there have been rises in a variety of component costs, but component costs may go up and may go down over time.

But we also see rises in just the simple cost of doing business.

And we alluded to that as we were describing some of the added costs in our overhead that come to us as a result of being a public company for things like accounting fees and that sort of thing.

In addition, there are also regulatory costs that we face.

And the California Resources Board has a tax fee that they charge for companies that do business in the state of California, as well.

And we see other regulatory costs in other countries that are related to those kinds of things as well.

So we see -- I guess what I am trying to say is we've seen changes in our cost of goods sold, but we also see changes in our overheads as well.

And I think today, as a blanket statement, I think our feeling is there are more cost increases that are imposed on us that are out of our control that are not product-related than there are cost increases that, A, we control, or are product-related -- that certainly, it's not a haven for everyone to hide, but the cost of implementation of all of the regulation that we have had to do in the past year has been something that we certainly would have liked to have been different.

But we have to find ways to cope with those things. (multiple speakers)

Basically, when you have an organization like ours that's lean and mean -- you know, there's only 213 of us around the world, and it's not like we have an army of finance people that would sit around waiting for something to do.

We have got a very efficient team of people that we believe are well-versed, and this new workload comes in.

Where does it come from?

You've got to pull in some resource.

Do you feel that the California supermarket strike impacted you significantly, or is that channel pretty -- is that back to normal?

I think it impacted everybody.

You can see that by the people that were not in the stores.

I think it is getting back to normal.

There's merchandise in the stores, the consumers are shopping back there again.

Certainly, I think it's easier to buy groceries in California today than it was a month or so ago.

There are no further questions at this time.

Mr. Ridge, I'll turn it back to you for any closing remarks you may have.

Okay, thank you very much, and we wish you well.

And we will talk to you in 90 days or so.

Good afternoon.

That will conclude today's conference call.

Again, we do thank everyone for their participation.