WD-40 Co (WDFC) 2005 Q2 法說會逐字稿

Good day, everyone and welcome to this WD-40 Company second 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, Miss Maria Mitchell.

Please go ahead.

Good afternoon and thank you for joining us for our second 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 a variety of factors, contingencies, and uncertainties considered relevant by WD-40 Company.

Forward looking statements involve risk and uncertainties which may cause actual results to differ materially from forward looking statements, including impacts of new product introductions and innovations; increases in raw material costs; increases in the cost of compliance; and the uncertainty of market conditions, both in the 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 to stay up-to-date with our most recent Company developments provided in the investor relation section of our website at wd40.com.

Please also note, our third quarter fiscal 2005 quarterly earnings conference call is scheduled to take place on Wednesday, June 29th, 2005 at 2 p.m.

Pacific time.

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

Thank you, Maria.

Good day and good afternoon.

Thank you for joining us.

Today we reported net sales for the second quarter ended February 28, 2005 of $61.1 million, an increase of 4.4% over the second quarter last year.

Year to date net sales were 121.8 million, up 9.7% over the same period last year.

Net income for the second quarter was 5.3 million, down 15.5% compared to the prior year's quarter.

Earnings per share were $0.31 in the second quarter compared with $0.36 per share for the quarter last year.

Year to date net income was 10.9 million, an increase of 2.6%.

First six months, earnings per share were $0.65 compared to $0.62 in the same period last year.

We are on track with our performance for the first six months to meet our goals for the year.

Although we've had challenges that we did not anticipate this year, our fortress of brand strategy, which gives us more ways to win, is serving us well.

We continue to be focused and committed to innovation.

As expected and shared in the second quarter, we were hit hard by higher costs in manufacturing and freight and our results reflect those costs.

We are implementing price increases to offset a portion of these costs and at the same time we are pleased to have our innovation program in place and delivering to support us through the year.

Today our fiscal year guidance remains the same.

In fiscal year 2005 we expect to have net income increase 5.5% to 27 million, achieving earnings per share of $1.62 based on an estimated 16.7 million shares outstanding.

While we expect to end the year right where we had anticipated, there are several offsetting factors that have changed how we expect to get there.

We are seeing increases in raw materials such as steel and oil beyond what we'd expected and our cost for compliance related to Sarbanes Oxley has gone up significantly.

On the other side, as mentioned, we have also implemented a price increase that will begin to impact us in this 3rd quarter and now expect to begin shipping the two new WD-40 product innovations in the 4th quarter, both of which will offset those increased costs.

Total sales in the quarter were 63% from the Americas, 29% from Europe, and 8% from the Asia-Pacific region.

In the Americas sales for the second quarter were down 3% from a year ago.

We did have a solid quarter in both Latin America and Canada, with both seeing double-digit sales growth over last year.

In the U.S. the lubricant business was strong, but was offset by some declines in our household products.

In Europe, sales were up 23.6% for the second quarter.

We continue to do well with the 1001 brand and are gaining distribution of new 1001 items in the UK.

We also achieved strong results in Italy, Spain, Germany, and the Middle East.

In the Asia Pacific region, sales for the quarter were up 8.4% from last year.

Asia Pacific has done well with new product innovations and we are gaining distribution with these new products in Australia.

Global sales of our lubricant brands, WD-40 and 3-IN-ONE, were up 6.7% for the quarter and in fact we had increased sales of WD-40 in all trading blocks and are continuing to gain distribution of our new 3-IN-ONE professional line in a number of markets.

Sales of heavy duty hand cleaners, which are Lava and Solvol, were up 6.7% for the quarter.

Sales for household products, X-14, Carpet Fresh, 2000 Flushes, Spot Shot, 1001, were down 1.2% to the previous year's quarter.

We are building the distribution of our new X-14 products and we're pleased with the performance as well as the success we've had with the 1001 brand.

However we had some specific declines in Spot Shot, Carpet Fresh, and 2000 Flushes that offset those successes.

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

Thank you, Garry.

We'll start off with a little more expansion on sales and then on to the rest of the financials.

Total second quarter sales were $61.1 million, up 4.4 over the second quarter last year, and half year sales were $121.8 million, up 9.7%.

Lubricant sales, WD-40 and 3-IN-ONE, for the quarter were $43.1 million, up 6.7% from Q2 last year.

And lubricant sales for the first 6 months were 80.2 million, up 11.8% over the first half last year.

Hand cleaner sales, Lave and Solvol, were $1.4 million in the quarter, up 6.7% from Q2 a year ago.

And for the half year, hand cleaner sales were $3.3 million, up 8.1% versus a year ago.

Household products, which include 2000 Flushes, Carpet Fresh No-Vac, X-14, Spot Shot, and 1001, second quarter sales were $16.6 million, down 1.2% compared to the same quarter last year. 1001 brand sales were $2.2 million in the quarter.

You may remember that we acquired that in April of 2004.

Through six months, household product sales were $38.3 million, up 5.6%, and household product sales without 1001 for the half-year were $34.1 million.

America's Q2 sales were $38.3 million, down 3% against last year.

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

Through six months, America's sales were $81.1 million, up 2.4% compared to last year, while Canada's sales were up by 12.4% and Latin America sales were up by 21%, while the U.S. sales were flat through six months.

Asia Pacific Q2 sales were $5 million, up 8.4%.

Australia achieved strong growth overall, led by growth in household products and lubricants.

Asia sales were up by 1.8%, and through six months, Asia Pacific sales were $8.2 million, up 12.2%.

Australia has continued its robust growth with half year sales up 33.2% versus six months last year.

Europe second quarter sales were $17.8 million, up 23.6% versus a year ago.

Germany, Italy, Spain and our distributor business in the Middle East and Europe all contributed strong sales growth versus Q2 last year in U.S. dollars. 1001, which was acquired in April 2004, contributed sales of $2.2 million in the quarter.

In Europe, sales -- Q2 sales without 1001 were up 8.4%.

Half year Europe sales were $32.5 million, up 32.4% compared to the first half last year. 1001 sales were $4.3 million in the first half.

Through six months, we've had growing sales in the UK, Russia, France, Germany, Spain, and the Middle East.

Gross profit margin in the quarter was 48.5% versus 51.9% a year ago, and as a result, gross margin was $2.1 million less in the quarter compared to Q2 last year on the same percentage basis.

Through six months, gross margin declined by 3 percentage points to 49.5%, a reduction of $3.7 million.

And these swings were driven primarily by rising of costs of products sold.

We continue to be concerned about rising cost -- raw material costs, particularly steel and petroleum-based products.

We began to incur increased costs during the 4th quarter of fiscal 2004 and have continued to see further increases in the current second quarter and year-to-date periods.

We also expect to see further increases during the remainder of fiscal 2005.

To combat these cost increases, the Company will be increasing prices on certain products during the current fiscal year, and the majority of these price increases will begin in the third quarter.

Selling, general, and administrative expenses in the second quarter increased to $16.7 million from $14 million for the second quarter of last year.

The increase in SG&A is attributable to a number of items, including $200,000 related to exchange rates; $400,000 related to increased freight, due to both fuel surcharges and a change in customer purchase patterns which increased the frequency of shipments, but in smaller quantities; $800,000 related to increased bonus accrual, as no bonus was accrued for the Americas portion of our business in the prior year; and $500,000 of increased people costs, which include salaries, medical insurance, and relocation expenses; $300,000 of accrued expense related to a preference claim associated with the bankruptcy of a customer; $200,000 of increased research and development costs related to the WD-40 Pen and Smart Straw; 200,00 of increase miscellaneous expenses; and $200,000 of increased commissions and professional services.

These increases were partially offset by a $100,000 decrease in insurance and investor relations costs.

As a percentage of sales, SG&A increased to 27.4% in the second quarter, from 24% in the same period last year, primarily attributable to the items listed above.

Looking ahead, we see continued higher costs for Sarbanes Oxley.

One example is in audit fees.

Price Waterhouse Coopers recently notified us of their estimated total audit fees for fiscal year 2005.

Due to higher rates and additional work for SarbOx, they estimate their total allotted fees at $976,000.

Audit fees in fiscal year 2002, by comparison, were $135,000.

Financial Executive International conducted a survey on the impact of Sarbanes Oxley, section 404 implementation.

The results were in line with our experience, that the cost of implementation places a disproportionate burden on smaller public companies.

We continue to believe that there will be benefits of SarbOx, thought they come at a heavy price.

Advertising and sales promotion expenses decreased to $3.4 million for the second quarter, down from $5.1 million in Q2 last year.

As a percentage of sales, decreased to 5.6% in Q-2 from 8.7% last year.

The decrease is mainly related to the timing of investments and print media as well as reduced spending in television media and product downloads versus the same period last year.

Advertising spending in the U.S. was reduced in the current second quarter due to declines to consumer response to certain advertising programs.

The Company is currently reevaluating the market dynamics and its strategies to determine which programs will be the most effective.

As a percentage of sales, advertising and sales promotion expenses may fluctuate, period to period, based upon the type of marketing activities employed by the Company, as the costs of certain promotional activities are required to be recorded as a reduction in sales while others remain in advertising and sales promotion expenses.

Investment in global advertising and sales promotion expense for fiscal year 2005 is now expected to be in the range of 6.5% to 8.5% of net sales, revised from the Company's previous estimate of 8.5% to 10.5% of sales.

As a result of the previous items, operating income for the quarter was $9.3 million compared to 11.2 million in the second quarter last year.

And for the half year, operating income was $19.1 million compared to $19.6 million last year.

Net interest expense for the quarter was $1.2 million versus 1.7 million in Q2 last year.

And for the year to date period, net interest expense was $2.7 million versus 3.3 million.

Net income on the quarter was $5.3 million compared to $6.2 million in the same quarter last year and on a diluted per share basis, earnings were $0.31 compared to $0.36 last year.

For the half year, net income is $10.9 million versus $10.6 million last year, which equates to earnings per diluted share of $0.65 after six months compared to $0.62 for the half year last year.

Diluted shares outstanding were 16.8 million dollars -- 16.8 million shares for the year to date period compared to 17.2 million for the prior year to date.

And regarding the dividend, on March 31st, the Board of Directors declared a quarterly dividend of $0.22 per share payable on April 29th, 2005 to shareholders of record on April 18th, 2005.

You may recall that the prior dividend rate was $0.20 per share per quarter.

The Board of Directors evaluates the dividend on a quarterly basis and the Company's ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities, and loan covenants.

A few words about our balance sheet at February 28th, cash and cash equivalents were $36 million at the end of the quarter, up from $29.4 million at the beginning of the fiscal year.

Accounts receivable declined due to a lower level of second quarter sales compared to 4th quarter.

Inventory increased to $8.2 million, up 1.8 million from August 31st, 2004, due to the purchase of inventory from packagers late in the 2nd quarter, inventory in transit, and the build-up of inventory in preparation for promotions.

Other [inaudible] rose primarily due to taxes receivable that reflect tax returns amended to accelerate our net operating loss carried forwards, which were acquired through the Global Household brands acquisition in 2001.

Current portion of long-term debt [inaudible] to $27.1 million from 10 million at August 31st, reflecting a principal payment due in October on our term loan.

Income taxes payable declined due to the timing of estimated tax payments versus expense and long-term deferred tax liability continues to grow as a result of the different treatment of goodwill for book and tax combined with the NOL utilization described before.

As Garry mentioned, we're on track to achieve our fiscal 2005 goals with sales of $275 million, net income of $27 million, and earnings per share of $1.62 based on an estimated 16.7 million shares outstanding.

The path to get there has changed as a result of the evolution of our business, new product developments, and additional costs.

On the sales front, we now expect our lubricant business to grow by 14.6% to $181 million, household products to grow by 11.7% to $87 million, and hand cleaners to remain flat, around $7 million.

These sales now take into consideration revenues in the 4th quarter of the new WD-40 Smart Straw and WD-40 Pen.

And as I said before, we now expect global advertising and promotion expense to be in the range of 6.5% to 8.5% of net sales for the full year.

We had been expecting, again, annual A&P expense to be in the 8.5% to 10.5% of sales.

That's the financial update.

Thank you very much and I'll turn it back over to Garry Ridge.

Thanks, Mike.

As we've been sharing with you, we're currently developing two new delivery systems for the WD-40 brand.

The first one, called Smart Straw, is -- one of the concepts is designed around consumers not losing the straw that is provided with each can of WD-40 product.

This new innovation solves the one piece of negative feedback that consumers have shared with us. "I always lose the blank blank blank blank straw."

For a long time we have been working on ways to keep that straw from getting lost, and we believe the new concept may be the solution for consumers.

The other concept, the WD-40 No Mess Pen, is believed to be a revolutionary new delivery system for the WD-40 product.

The delivery system is intended to appeal not only to men, but will also be targeted and sold to women.

The new delivery system will be convenient, easy to use, low odor, and not messy.

These new concepts will add to revenues in the 4th quarter of this fiscal year.

You can view pictures of the concepts on our website at www.wd40.com in the investor relations section, archived under the Archived Presentations.

As we said, we're on track to meet our goals for the year.

With the significant impact of rising raw materials and the added impact of the cost of 404, this year, like all others, is not one where you'd need to follow us quarter by quarter.

We would now welcome any questions.

Thank you very much.

The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] And our first question will come from Liam Burke with Ferris, Baker, Watts.

Garry and Mike, how are you today?

Good.

Ad and promotion: you had a higher budget for the year in anticipation of trying to get certain lagging products, raise their profile.

Why the lower expenditure and what precipitated that decision?

A couple of things.

If you look at our guidance for the year, our goals for the year, you will see that the lubricant side of our business is having a higher growth rate than in the household products area.

And traditionally, always our marketing investment has been less in -- lesser in the lubricant side than the household product side.

That's number one.

Number two, just in the last seven or eight months we brought some new marketing learning to our organization with new team members that come from parts of the industry that did a complete audit, basically. on our marketing investment and there are certain things that we believed that -- although the investment was there, were not bringing us the results required, so we've changed some of that.

And we will continue to do that.

And overall, we've continued to maintain our support through the period in the brands that have continued to grow, like X-14 and the household products, where half year to date, our household products are still 5.6% ahead of last year's.

Okay.

On household products, you laid out the products that had a year over year decline, Spot Shot in particular, which had been a pretty popular product.

Why are they -- I mean, we've talked about X-Fresh, 14 and 2000 -- I'm sorry, 2000 Flushes and Carpet Fresh, but why are they -- why are you having such a tough time with those particular brands?

Well, the Spot Shot, Liam, is particularly generated -- and I won't name it to one customer or one promotional activity.

Generally in the marketplace, Spot Shot remains and continues to be the number one product in its category.

It is not being eroded by competitive share.

But when we bought the Spot Shot brand, there was a -- a large portion of the sales were in the hands of three or four customers.

And one of those customers this year changed their activity and that's particularly offset us.

So, that's really what's happening with Spot Shot.

The other brands are -- 2000 Flushes.

We just -- you would see that we just got distribution of 2000 Flushes, the new clip-on product, in Wal-Mart.

We also just got distribution of the new X-14 orange aerosol in Wal-Mart which is -- which was a big win for us.

So we're starting to see the climb there.

So, you know, running -- again, this is like a portfolio of stock.

Not every brand is going to perform the way you want it all the time.

We're comfortable we understand the brands.

We're comfortable in the space we're in.

We're comfortable about the innovation we're doing.

We'd like every brand to be hitting on every mark, as it were.

Some are performing better than others.

But our strategy remains the same and we're confident that we're going to deliver every year.

Okay, great.

Thank you.

And we'll now hear from Mimi Sokolowski with Sidoti.

Hi Garry.

Hi, Mike.

Hi, Mimi.

I think most of my questions have been answered, but I guess I have some follow-ups.

Garry, if you could restate what you said about lubricant.

Typically you're not -- you're not devoting as much advertising spend to that segment.

The cost of marketing in the lubricant segment -- if you go back in time to when we were just a lubricant company, we spent -- or invested between 9 and 10% of our sales in the total marketing effort of our lubricant brand.

When we took on the household products, that percentage went up from 10% to about 17%.

That wasn't because we increased our spend in WD-40.

It was because the household brands have a higher marketing investment need than the WD-40 brand.

If you look at our guidance going forward now or our projection of sales, you will see that we're saying that our lubricants are going to grow like about 40%, I think, in the year.

That's primarily due to the continued robust growth of the WD-40 brand outside of the U.S., where we now for two years in a row, we've been growing at double-digit rates in Europe and Asia and Latin America.

And by including in the sales in the 4th quarter of this year, the revenues we expect to generate from the WD-40 No Mess Pen and from WD-40 Smart Straw, which were never included in that before.

Okay.

Now, am I misunderstanding?

It sounds like you are saying the reason why your spending is coming down is because lubricants is performing better than you had expected?

Is that accurate?

It is really a combination of things, Mimi.

One, you know, Garry was looking ahead, he had indicated that the investment behind the lubricant business is lower than it is in household products.

And that's a fact for us as well.

The other thing that's gone on is we've -- with the addition of new people into our marketing, and we've continually re-evaluated how we're investing marketing resources, and some of the things that we had expected we would invest in this year are things that we have now determined don't deliver the kinds of returns we would have expected.

And so we're managing the business according to what we see today.

So, does that mean you just pull the plug on the marketing spend for those brands?

Or do you say, we've got to come up with a different marketing scheme for those brands?

Well, you may pull some of it.

You may -- you know, there was one particular program that we were investing in that in -- that once we analyzed it, we determined that the investment wasn't a wise one.

That the impact of the program was not delivering what we'd anticipated.

So, you know, let's not get this wrong.

We don't pull the plug.

We still invest in line with most other consumer products companies as a percentage of sales.

You still see us out there doing what we want.

We are just adapting our marketing execution to what the current landscape is.

And then that landscape changes very quickly as people like Wal-Mart grab huge market shares in the grocery trade channel.

You can see how the distribution of our household products, Mimi, is now stronger outside of grocery than it's ever been.

If you go to Wal-Mart now -- sorry, if you go into Home Depot now you'll find 2,000 Flushes, you'll find Carpet Fresh, you'll find Spot Shot.

If you go into Wal-Mart you will see X-14 orange aerosol.

So, you know, these markets are changing and the grocery trade channel is a different one.

So we need to manage our business in light of what the conditions are in the market at the time.

And that's exactly what we're doing.

Okay.

And then just for one more point of clarification, you said Spot Shot originally had three or four large customers and most recently one of those customers changed their activity.

I think that's how you put it.

Correct.

Could you elaborate on that?

When we purchased Spot Shot, probably 60 to 70% of the sales were in the hands of four customers, I guess.

That, over time, changed, but the customers remained large.

One of those customers, over a period of time, has been trialing other brands against Spot Shot to see if they can improve their position.

The good news is, Spot Shot still performed above all the other brands.

The bad news is, while they did that, we lost some of our promotional opportunities, but the good news is Spot Shot won out.

Okay.

All right.

I'm set.

Thank you very much.

Thank you.

And our next question will come from Frank Magdlen with the Robins Group.

Good afternoon.

Good afternoon.

Could you give a little -- expand a little bit more on where your targeted gross margins are going to be for the balance of the year, given you have some price increases coming through, and I think the margins are a little bit lower than what maybe you had hoped for.

Granted, you're struggling, like so many other people, and trying to manage the commodity costs and the freight costs that are -- and packaging costs that are hitting everybody.

Yes.

You may recall, Frank, that we shared at the last conference call that we felt margins would get worse before they got better.

And we really teed up this quarter and -- up the second quarter as a quarter where we were going to get margin squeeze.

We were getting increases in raw materials flowing into our system in December and in fact the majority of our price rises didn't take affect until just this week in April.

Our goal, as we've always shared, is to get out gross margin in the sweet spot that we like of around the 50% mark, and that's our long-term goal.

And so far we are reasonably comfortable that the measures we have taken, the price rises we have executed, will start to see us trending that way again.

Even in this quarter, we have only got about six weeks of the quarter where we are actually going to get the full impact of some of the price rises that we have been able to run through the system.

So we should see it trending in the right way, given that we don't get any more unexpected increases from raw materials.

We hope that we have been able to identify them, quantify them, and have them feed into our system to give us some reliability.

But it has certainly been a rough time as far as commodity prices in the last three months.

All right.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] We will now hear from Peter Udo with Presidio Management.

Hey, guys, I had a question going back to the advertising again.

I'm sorry.

I know you have the two products, WD-40 products, coming to market in the 4th quarter.

Don't you need to provide advertising -- additional advertising support for those new products?

And do you -- it's kind of a loaded question, but do you think you're doing long-term harm by not -- by cutting the advertising?

I guess if you were a private company, would you be doing this?

It seems like to some extent you might be managing to earnings, and I'm just hopeful that's not the case.

Thank you for the question.

Number one is, we are -- we are not cutting and ditching advertising.

We're making different advertising investment decisions.

We don't spend money, we invest it.

And over the long haul that's been our track record.

As far as the -- the two new WD-40 products, there's two things in marketing that you need to do: sell to the consumer and make it easy to buy.

And our goal in the first is to make these two products easy to buy.

First -- your first one being Smart Straw.

Through distribution and promotion, consumers who already have -- you know, WD-40, the brand, has a 95% brand awareness.

Advertising builds brand awareness.

We don't need to build WD-40 brand awareness any more.

But certainly, through our research, both of these concepts at point of sale communicate very effectively and we believe that the point of sale activity that will come with the product and the in store promotion that we see, backed by probably the most well-known brand in the world, WD-40, will carry it through.

Okay.

One follow-up question.

I think I heard correctly, the 1001 brands contributed 2.2 million to revenue, so that means that the core -- I guess on an apples to apples basis, that segment, household product segment, was down around 14, 15%.

Is there something there that you are going to be able to do to, I guess, right the ship there and start increasing the sales?

Thank you.

Well, on a year to date basis, the household products dropped 5.3%.

I didn't back out the 1001 brand.

Our household products business has gone from declines in the prior years of 19s and 20% to being flat or if not growing a little.

So I would submit to you, the ship has turned and if you look at the distribution of the new products that we've been gaining, it's really about innovation, new product to market, and we've had innovation in our X-14 brand, we've had innovation in our 2,000 Flushes brand, there's innovation continued to be worked on for all of our brands.

So I don't know that this -- it's kind of the disaster that you may paint it to be.

Okay.

I guess I was looking at it on an apples to apples basis, before the acquisition.

So, if you you look at the sales x the acquisition, it is improving a little bit, but I guess the declines aren't as severe, but still mid-teens.

Yes.

The most of it, though, is in one brand, which is -- which, as we talked about, was in Spot Shot, that's been affected by this promotional swing.

So, you know, managing brands is like managing a portfolio of stocks.

They go up and down, they perform differently and we need to execute the programs that we need to keep them going.

Okay.

And is this -- situation with the large customer involving Spot Shot behind us and we should probably start to see some growth there?

Well, you know, I would like to say yes and at this time I would say yes, but, you know, we don't control the decisions that customers make and they say yes one day and no tomorrow.

But I would say that we're on our way.

Mike, did you have a comment on that?

Yes, I would just say that, historically, our markets have been dynamic.

You know, much like stocks go up and down, so too does distribution of products.

And so our long-term goal is to grow these things and we're confident that we will.

Okay.

Thanks, guys.

And we have no further questions.

I would like to turn the call back over to our speakers for any concluding comments.

Thank you very much.

We'll see you in about another 90 days.

In the meantime, keep spraying and stop squeaking.

Bye for now.

And that will conclude our conference.

Thank you all for your participation.