WD-40 Co (WDFC) 2005 Q1 法說會逐字稿

Good day and welcome to the WD-40 Company first quarter 2005 earnings release conference call.

Today's call is being recorded.

At this time I would like to turn the call over to the Vice President of Corporate and Investor Relations for WD-40 Company, Ms. Maria Mitchell.

Please go ahead.

Thank you for joining us for our first quarter earnings call for fiscal 2005.

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 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 impact of promotional programs, impact of new product introductions and line extensions, increases in raw material costs, and the uncertainty of market conditions both in United States and internationally.

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

During today's call Garry will read -- I'm sorry, excuse me.

Please log in to WD-40.com on the Investor Relations site to access the press release.

Please also note our second-quarter fiscal 2005 quarterly earnings conference call is scheduled to take place on Wednesday, April 6, 2005 at 2 PM Pacific time.

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

Thank you, Maria, good day and happy New Year to you all.

Today we reported net sales for the first quarter ended November 30, 2004 of $60.7 million, an increase of 15.5 percent over the first quarter of last fiscal year.

Net income for the quarter was 5.6 million, up 28.4 percent compared to the prior year's quarter.

Earnings per share was 34 cents in the first quarter compared to 26 cents per share in the same quarter last year.

We had a good start to our year, and we are in line with meeting our expectations.

At the same time, we are very concerned about rising costs of steel, chemicals, and packaging components which are affecting many manufacturers.

While containing cost is always a priority of WD-40 Company, we will have to raise prices during fiscal year 2002.

Rising -- sorry, 2005 -- rising costs will likely have some effect on margins before we can put a price rise increase into place.

As far as fiscal year guidance, in fiscal year 2005 we still do expect net income to increase 5.5 percent to 27 million.

And we do expect to earn earnings per share of $1.62 based on an estimate of 16.7 million shares.

This is consistent with the guidance we gave in October 2004.

Looking broadly, we are pleased with the work done in the area of product innovation and continue to develop and introduce new products and brand extensions across the world.

And we will provide further updates when we can estimate the impact of these -- that these products will have on the year.

We're also pleased with the 1001 brand and the introduction of the new 1001 items in the United Kingdom.

We have also had good success with the introduction of the 3-IN-ONE Pro Professional Line in Europe, particularly in Spain in the last quarter.

Asia-Pacific has done well with household products, particularly the Carpet Fresh No Vac brand in Australia.

Sales of our lubricants were up 18.4 percent in the quarter.

We had strong performance from WD-40 across almost every region, and are seeing strong global growth from the 3-IN-ONE brand as well.

The 3-IN-ONE Professional Line continues to perform well as we position that brand to maintain our overall category strength.

It is also encouraging to report that sales of our heavy-duty hand cleaners, Lava and Solvol, were up 9.2 percent the in quarter.

Sales of our household products increased 11.4 percent compared to (technical difficulty) year's quarter.

Excluding 1001, which was acquired in April 2004, household products sales were up .7 of 1 percent versus the first quarter last year.

It is good to see growth back in our household products which are starting to benefit from new product innovations in the X-14 and 2000 Flushes brand, in addition to the 1001 brand in the UK.

I will now pass to Mike Irwin, who will discuss the financial results for the quarter in more detail.

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

For the first quarter sales as Garry mentioned were $60.7 million, up 15.5 percent versus Q1 last year.

Lubricants sales, which include WD-40 and 3-IN-ONE, for the first quarter were $37.1 million, up 18.4 percent from the first quarter last year.

In lubricants we had strong growth in Australia, Canada, Eastern Europe, Germany, Italy, Latin America, Spain and the Middle East.

Hand cleaner sales, which are the Lava and Solvol brands, were at $1.8 million in the quarter, up 9.2 percent from Q1 a year ago.

And household products, which include 2000 Flushes, Carpet Fresh, X-14, Spot Shot and 1001, first quarter sales were $21.8 million, up 11.4 percent compared to the same quarter last year. 1001 contributed $2.1 million to the Q1 sales.

Household products sales without 1001 were $19.7 million, up $134,000.

America's Q1 sales were $42.8 million, up 7.8 percent against last year.

We achieved sales growth in the U.S., Latin America, and Canada.

And the foreign exchange impact on Canada's sales was $144,000.

Asia-Pacific Q1 sales were $3.2 million, up by 18.8 percent.

Australia achieved strong growth in lubricants and household products with overall Q1 sales up by 39.7 percent.

Asia Q1 sales were up by 2 percent.

The foreign exchange impact on Australia's sales were $50,000.

Europe first quarter sales were $14.7 million, up 44.9 percent versus a year ago.

Q1 sales in Europe without 1001 were $12.6 million, up 24.3 percent.

Good sales growth in a variety of areas including the UK, Russia, France, Germany, Spain, Italy, Eastern Europe and the Middle East.

And the foreign exchange impact in Europe sales was $1 million.

Gross profit margin was 50.4 percent of sales in the first quarter compared to 53.2 percent of sales in Q1 last year.

The 2.8 percentage point decrease is due to a number of items including higher cost of components, raw materials and finished goods, product and customer mix, and an increase of advertising and promotional discounts and other discounts during the current quarter as compared to the same prior year period.

The increase in the cost of products sold contributed a 2.3 percentage point decrease to the gross margin percentage in the first quarter versus the same period last year.

The increase in cost of products negatively affected gross margins in all of the Company's trading blocks.

These increases were primarily due to the significant rise in steel and petroleum prices which increased the cost of components and raw materials.

We remain very concerned about the rising cost of components, raw materials and finished goods.

We have long had a rigorous approach to managing expenses.

Nonetheless we'll have to raise prices during this fiscal year because of the magnitude of cost increases we're seeing from suppliers.

The remaining gross margin percentage decline was due to increases in advertising and promotional discounts and other sales discounts related to product introductions in the current year first quarter.

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

Selling, general, administrative expenses for the first quarter increased to $15.4 million from $14.1 million in Q1 last year.

The increase in SG&A is attributable to a number of items including $300,000 related to exchange rates, a $700,000 increase in freight expenses, a $500,000 increase in employee related costs.

Freight costs have increased versus the prior year due to fuel surcharges and changing customer purchasing patterns which have resulted in higher frequency of shipments at lower volumes.

Employee related costs rose due to such items as salaries, payroll taxes, medical insurance costs, accrued profit-sharing and accrued bonuses.

As a percentage of sales SG&A decreased to 25.3 percent in the first quarter compared to 26.9 percent in the same period last year.

Advertising and sales promotion expenses were $5.3 million in the quarter versus $5.4 million in Q1 last year, and as a percent of sales decreased to 8.7 percent of sales in the current quarter from 10.4 percent in the first quarter last year.

The decrease is mainly related due to timing of investments in the TV media product demos, print media and market research versus the prior year quarter.

As a percent of sales, A&P expense may fluctuate period to period based upon the type of marketing activities employed by the Company, as the cost of certain promotional activities are required to be recorded as a reduction to sales and others remain in the A&P expense.

Investment in global advertising promotion expense for 2005 is expected to be in the range of 8.5 percent to 10.5 percent of net sales.

Operating income for the quarter was $9.8 million compared to $8.4 million in Q1 last year.

Amortization expense in the quarter is a result of the 1001 acquisition.

A portion of the purchase price has been allocated to the customer base acquired, which is being amortized over the expected life of the customer relationships.

Net interest expense for the quarter was $1.5 million, down $160,000 versus Q1 last year, a reflection of the first principal payment that we made on our debt in last fiscal year.

The provision for net income taxes was 35 percent in the current year quarter, up from 34 percent in Q1 last year.

As we said in the last call we had expected a higher tax rates in fiscal 2005 primarily due to declining tax credits from low income housing investments.

Net income in the quarter was $5.6 million compared to 4.4 million in the same quarter last year.

And so on a dilutive per-share basis earnings were 34 cents compared to 26 cents in Q1 last year.

Diluted shares outstanding have decreased to 16.7 million shares compared to 17.1 million for the prior year quarter, largely as a result of our share repurchase program completed during the third and fourth quarters of fiscal 2004.

Regarding the dividend on December 14, the Board of Directors of WD-40 Company declared a regular quarterly dividend of 20 cents per share payable on January 30, 2005 to shareholders of record on January 8, 2005.

About our balance sheet at November 30, 2004, cash and equivalents were $38.7 million, up from 29.4 million at the end of the fiscal year.

And accounts receivable declined due to a lower level of first quarter 2005 sales compared to the fourth quarter of 2004.

The current portion of long-term debt rose from $10 million to $20.7 million, while long-term debt declined by the same amount.

We have two principal payments due in the next 12 months, 10 million which is due this coming May, and 10.7 million due in October, both of which follow our regular debt repayment schedule.

Based upon the closing price today of our stock that annualized dividend yield will be 2.8 percent.

We will be filing our 10-Q on Monday.

And that is the financial update.

Thanks very much.

And I will turn it back over to Garry Ridge.

Thanks, Mike.

As we announced at our annual meeting of shareholders in December, we are currently developing two new delivery systems for the WD-40 brand, and will be testing consumer and market appeal in the next few months.

One of the concepts is designed around consumers not losing the straw that is provided on each of the WD-40 products.

For a long time we have been looking for ways to keep the straw from getting lost.

We believe the new concept may be the solution for the WD-40 consumers.

The other concept, the WD-40 no mess pen, is believed to be a revolutionary new delivery systems for the WD-40 product.

The delivery systems is intended to appeal not only to man, but also to target to sale to women.

The new delivery system will be convenient, easy-to-use and make using WD-40 less messy.

These new concepts are in the final -- they are in the first stages of commercialization.

And the primary focus is to gauge end market and consumer appeal, which will help us determine the long-term value of these products to the Company.

If we have positive results from our market research test, we hope to launch these products in the U.S. and other parts of the world later in the year.

We will at that time be able to better predict the impact of these developments on earnings.

You can view some pictures of the concepts on our website at WD-40.com in the Investor Relations section under Archived Presentations referencing the annual shareholder meeting.

Again I would like to stress that we're pleased with Q1 results, and that we have confidence in achieving our full year guidance.

However, we do have a concern about the impact of rising costs of steel and other raw materials, and will need to attack these influences on our business with much rigor over the next few months.

We would now be happy to take any questions.

(OPERATOR INSTRUCTIONS).

Mimi Sokolowski Sidoti & Co.

I have a couple of questions.

I'll start -- I apologize for jumping around, but let's first start with the strength in lubricants.

Is that something that we can expect for the full year or is that growth going to slow?

And if it is going to slow, what is in place -- what was in place during the November quarter that won't be in place for the remainder of the year?

We have given a guidance on our lubricants growth for the year, as you know.

And I recall, and I don't have the graph in front of me, but it is on our website.

The lubricant growth has come from the continued development of the WD-40 brand outside of the U.S. and the continued strengthening of our performance inside the U.S., particularly due to the facts -- and we have discussed these many times before.

One of the strengths we got when we went from one brand to many was we took away our dependence on WD-40, which allowed us to do things like take out of the market the bonus can many years ago, which have shortened the repurchase cycle.

And we may well be seeing a continued benefit on that.

You note that last year was also a strong year on our lubricants business as well.

And that also is influenced by as we continue to get a bigger base business in Europe, we are growing off a bigger base, so that is adding more to the business.

So we did have a very nice first quarter in our lubricant business.

We did forecast a good year I think in lubricants.

And we're on track and will end up I think where we thought we would.

I'm still -- I'm still not kind of clear. 18 percent, there isn't one thing you can identify?

It is across all markets.

We didn't -- they were no special things that happened anywhere.

We had strong growth in Europe.

We had good growth in Latin America -- in the Americas.

And we grew in just about every market of the world.

Okay.

Okay.

I will move along then.

Let me see.

Could you -- do you have any definitive revenue expectations for FY 05?

I know you have got the long-term plan in place but do you --?

No.

We give you one year and then a four-year goal.

Okay.

But for the one year on the revenue line has anything been issued?

Oh yes, for this year?

Yes.

Yes.

It is actually on our website.

And Mike is going to pull it up, so we will be able to give you that in a minute.

I'm sorry.

I should've had that slide.

No problem.

No problem.

And I wanted to ask -- these are probably some questions for Mike.

Let me see.

The SG&A, it declined as a percentage of revenue, and I missed if you had said why?

I think you talked about increased costs associated with freight and employee benefits, but as a percentage of revenue why would it have declined?

It's really being leveraged off the cost base.

Mike can talk more about that.

One of the things that happens in our business, Mimi, is that the higher our sales go period to period the lower generally speaking are fixed overheads of SG&A would likely be.

Keeping in mind of course that one of the things that within SG&A that isn't fixed is freight, which is where we classify that.

But generally speaking if we have higher revenue we would expect that SG&A would fall as a percent of sales.

It is not something that has happened on a consistent basis in the recent past largely due to the fact that we have been incurring higher costs as a result of being a public company.

And those are things (technical difficulty) legal, accounting and other system related things that public companies face.

The what is the dollar amount of SG&A that is fixed?

We haven't split that out.

I guess what I can say is that if we think about the structure of our SG&A there is selling, there is general and admin expenses.

Selling expenses to some extent would fluctuate with the sales because a portion of our sales go through brokers who earn a commission on the sale.

Right.

That makes sense.

The rest of it generally speaking is fairly stable.

But again, it depends upon what the circumstances are with respect to costs for things like legal and insurance and things like that.

Mimi, getting back to your question on revenue, I have the answer for you.

Our forecast for the year on our plan on 1 page is 276 million.

That is broken into 171 million in lubricants, 98 million in household products, and 70 million in hand cleaners.

Since you mentioned the head cleaners, historically at least for F 04, F 03 pretty tough go at it.

And then you've got 9 percent growth this year.

Was there anything in place that was different from the prior quarters?

Well, you may have caught on that we launched the Lava Pro range of hand cleaners at the end of last year, which is a mimic really of the 3-IN-ONE Pro.

Now not that that has had any material impact, but certainly that has broadened our range of product.

So we think we've been a wider offering now.

And as we go forward we are going to be executing Lava Pro similar to the execution of 3-IN-ONE Pro.

Okay.

And I'll just give one last question and make room for other people to ask questions.

Spot Shot, I know you've invested a lot of time and effort into that.

If you can't disclose any numbers, would you at least characterize that product's performance and how you feel about it?

Well, whereas Spot Shot is a great product, and whereas we are as bubbly (ph) about it as we ever were, we're very happy with the way we have been able to take the Spot Shot technology and launch it into the UK.

We have continued to gain distribution in the U.S.

There has been some competitive activity that we have talked about before in the U.S. market.

But Spot Shot is a fine product, and we're still working hard to get it into more households and have it used by more consumers.

Frank Magdlen with the Robins Group.

Two questions.

One, could you explain the other income of 324,000?

Foreign exchange impact?

All right versus last year you had a negative number there.

Right.

And then is it fair to say that you -- if you're not raising your revenue number that you're really overachieved a little bit in the first quarter?

And might that have been from filling the pipeline a little bit with new distribution?

No, I don't think there is any -- I don't think there was any unnatural pipeline fill.

Okay.

The other thing, Frank, is we don't give -- again, we don't give quarterly guidance.

So with respect to overachieve I'm not sure we have any reference point for that.

Okay.

That's -- we expect some seasonality -- seasonal pattern in what you have done going forward.

Are you willing to expand a little bit more in what's going to happen to gross margins, or when do you need to make your move there?

Yes, Mike can I can both talk on that.

Let's put it in prospective first.

Our gross margin over time, if you look at the full year of '03 it was 51 percent thereabouts.

In '04 it was 52 percent.

And our historical gross margin has been in the 50 percent range.

And we need to keep in that range to meet our goals within our current business model.

And given the varying impact of increases in cost of components that flow into our supply chain, and particularly at this time there is still some unknowns in some of the increases, which are really not quantified for each item individually, we are not -- we don't discuss them in detail.

However, having said that, we're very conscious of the fact that we need to maintain our gross margin in the 50 percent historical range.

We have been successful at doing that over time.

And that is really what we're working on going forward.

We have a number of scenarios in place depending on where things eventually fall completely.

But really their focus needs to be to make moves to ensure that we keep our gross margin in that, what I call happy zone, which allows us to operate our business model.

(OPERATOR INSTRUCTIONS).

Howard Choe with Standard & Poor's.

I know you're not providing quarterly guidance but I was wondering if you could just give us some indication as to when do you think you can take some price increases?

No, we can't give any indication of that at this point.

Okay.

My second question is, I believe the last quarter you gave guidance of 25 percent sales increase in household products for fiscal '05.

Are you still comfortable with that range?

With respect to the specific product categories, the product category growth is a dynamic situation like all aspects of our business are.

So are we still comfortable with that, yes.

And we have reconfirmed our guidance for the full fiscal year.

(OPERATOR INSTRUCTIONS).

There are no further questions in our queue at this time.

I will turn the call back over to you, Mr. Ridge, for any closing remarks.

Thank you very much.

This must be a record for time for our conference calls.

But thank you for joining us.

We look forward to seeing you again in 90 days or so.

Steady as she goes.

Good afternoon.

And that does conclude our conference call.

We do thank you for your participation.