WD-40 Co (WDFC) 2005 Q3 法說會逐字稿

Welcome to the WD-40 Company third quarter 2005 earnings release conference call.

Today's call is being recorded.

At this time I'd like to turn the call over to the VP of Corporate and Investor Relations of WD-40 Company, Miss Maria Mitchell.

Please go ahead, Ma'am.

Thank you.

Good afternoon and thank you for joining us for our third 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 risks and uncertainties which may cause actual results to differ materially from forward-looking statements, including impacts of new product introductions and innovations, increases in cost of goods 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 in 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 Relations section of our website at WD-40.com.

Please also note our fourth quarter fiscal year 2005 quarterly earnings conference call is scheduled to take place on Wednesday, October 19, 2005 at 2 PM Pacific time.

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

Thank you Maria.

Good day and good afternoon to you all.

Today we reported net sales for the third quarter ended May 31st, 2005, of 65.1 million -- an increase of 9.1% over the third quarter last year.

Year-to-date net sales were 186.9 million, up 9.5% over the same period last year.

Net income for the third quarter was 6.4 million, up 4.8% compared to the prior year's quarter.

Earnings per share in the third quarter grew by 8.6% to $0.38 per share.

Year-to-date net income was 17.3 million, an increase of 3.4% from last year and through nine months, earnings per share were $1.03, up 6.2% compared to the same period last year.

We are pleased that our lubricants, hand cleaners and household products all achieved sales growth in the third quarter.

While we performed well across the globe in the sales arena, the continuing increases in cost of goods has had a clear impact on our bottom line.

We implemented a price increase in the third quarter that we thought would offset the rise in some of the cost of goods.

However the increases in the cost of goods have been impacting us since the beginning of the year and hence has continued to go up even more than expected.

Cost of goods increases are mainly attributed to rises in steel for the cans we use as well as petroleum products, which impact the ingredients of some of the WD-40 products as well as freight and shipping costs and as well as the plastics costs that are used in many of our Company's products.

We had hoped to see a positive trend in our gross margin bringing it closer to our historical 50% mark, but that did not happen.

Because of the higher cost of goods we're not confident that we will see a material increase in our margins through the rest of this fiscal year.

As a result of the higher cost of goods in current sales trends, we have revised our guidance for the full year.

In fiscal 2005, WD-40 Company now expects sales growth of approximately 8% to a range of between 260 and 265 million and net income of approximately 25 to 26 million in achieving earnings per share in a range of $1.50 to $1.55, based on an estimated 16.8 million shares outstanding.

Total sales for the quarter were 67% from the Americas trading bloc, 26% from Europe and 7% from Asia-Pacific.

In the Americas, sales for the third quarter were up 7.2% from a year ago.

We had a strong time with our lubricant sales in the Americas during the quarter as well as increases in heavy-duty hand cleaners and household products.

Our investment in innovation has been a major driver within our business and we have more coming that will have a positive impact across all of our regions.

In Europe, sales were up 12.5% for the third quarter.

We also had growth in lubricants and household products sales in Europe; and we are especially proud of the successes we have created with the 1001 brand.

In the Asia-Pacific region, sales for the quarter were up 14.4% from last year.

Sales were up across all products segments in the Asia-Pacific region, as well; and they were led by strong growth of lubricants in Asia and Carpet Fresh No-Vac product in Australia.

Global sales of the lubricants WD-40 and 3-IN-ONE were up 8.7% in the quarter.

We had a strong quarter across the globe in lubricant sales; and we are moving the WD-40 Smart Straw and the WD-40 No-Mess Pen from commercialization phases to the launch phase.

We have begun shipping both these products into selected global markets during the fourth quarter and you'll see some of the results of these shipments by the end of the year.

Sales of heavy-duty hand cleaners, Lava and Solvol, were up 4.9% for the quarter.

Sales of household products X-14, Carpet Fresh, 2000 Flushes, Spot Shot and 1001 were up 10.2% compared to the previous year's quarter.

We had growth in our household products brands in all regions, driven by the success of our innovations with 1001 and 2000 Flushes and the two new exporting products we launched.

We are very pleased with the off shelf performance numbers that we have been seeing with the X-14 Orange aerosol product.

I would like to now pass over to Mike Irwin who will discuss the financial results in more detail.

Thank you, Garry.

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

Starting off with sales, as Garry mentioned, total third quarter sales were 65.1 million up 9.1% over the third quarter last year and sales through nine months were $186.9 million, up 9.5% over last year.

Lubricant sales which include WD-40 and 3-IN-ONE for the third quarter were 43.1 million, up 8.7% from Q3 last year and through nine months, lubricant sales were 123.3 million, up 10.7% over the first nine months of last year.

Hand cleaners sales Lava and Solvol were $1.8 million in the quarter, up 4.9% from Q3 a year ago.

And for nine months, hand cleaner sales were $5 million, up 7%.

Household products -- which include 2000 Flushes, Carpet Fresh, No-Vac, X-14, Spot Shot and 1001 -- third quarter sales were $20.3 million, up 10.2% compared to the same quarter last year. 1001 brand sales were $2.3 million in the quarter and through nine months, household products sales were $58.6 million, up 7.1%.

Household products sales without 1001 through nine months were 52 million.

America's Q3 sales were $43.7 million, up 7.2%.

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

Through nine months, Americas' sales were $124.8 million, up to (ph) 4% compared to last year.

Canada's sales are up by 7.8%, Latin Americas sales are up 18.3% and the U.S. sales are up 2.9% through nine months.

Asia-Pacific Q3 sales were $4.7 million up 14.4%.

Australia achieved overall growth of 8.4% led by growth in household products and hand cleaners.

Asia sales were up by 19.2%; through nine months Asia-Pacific sales were $12.9 million, up 13%.

Australia's sales through nine months were up 23.3% versus last year.

Europe third quarter sales were $16.8 million, up 12.5% versus a year ago.

The UK, Germany, Spain and our distributor business in Africa all contributed strong sales growth versus Q3 last year in U.S. dollars. 1001 -- which was acquired in April 2004 -- contributed sales, again, of 2.3 million in the quarter and Europe Q3 sales without 1001 were up 3.5%.

Nine-month Europe sales were $49.2 million, up 24.9% to last year; and 1001 sales for the first nine months were $6.7 million.

Through nine months we also had growing sales in the UK, Russia, France, Germany, Spain, Italy and our distributor business in Europe and in the Middle East.

Moving on to gross profit margin in the quarter was 48% versus 51.7% a year ago.

Through nine months, gross margin declined by 3.3 percentage points to 48.9%.

The decrease in gross margin percentage in the third quarter is largely attributable to the increase in cost of products sold.

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

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

As a result of the general upward trend of costs in the market we are concerned about the possibility of continued rising costs and components, raw materials and finished goods during the year.

The remaining decrease in gross margin percentage was due to product mix.

The Company has implemented a plan to increase prices for some of its products.

The majority of those price increases were implemented during the third quarter of this fiscal year and the increase in pricing of certain products worldwide added approximately 1 percentage point to gross margin percentage compared to the prior year.

The price increases are intended to help mitigate the effect of rising costs in gross margin percentage; however further rises in cost of products could offset the benefits of the price increases.

The Company is also examining supply chain cost savings initiatives in an effort to further reduce the impact of increased costs on gross margin percentage.

Through nine months our gross margin percentage dropped by 3.3 percentage points from 52.2% to 48.9%.

To put that in perspective, had we been able to maintain 2004 gross margins, our 2005 year-to-date gross margin would be $6.1 million higher, our net income would have been $4 million higher, and our earnings per share would have been $0.24 higher through nine months.

Selling, general, and administrative expenses in the third quarter increased to 15.4 million from 14.3 million in Q3 last year.

The higher SG&A is due to a number of items including 300,000 related to exchange rates, 200,000 increased freight due to fuel surcharges and sales growth, 500,000 of higher people costs including salaries, medical insurance, and relocation expenses.

And 400,000 related to miscellaneous expenses such as travel, office, amortization, depreciation, professional services, and R&D.

These increases were partially offset by $300,000 of decreased insurance, investor relations cost and commissions.

As a percent of sales SG&A decreased to 23.7% in the third quarter from 24% in the same period last year.

Year-to-date SG&A costs were $47.5 million up 11.8% from last year.

Advertising and sales promotion expenses decreased to 4.7 million for the third quarter, down from 5.8 million in Q3 last year and as a percentage of sales decreased to 7.1% in the third quarter from 9.8% last year.

The decrease is mainly related to lower advertising and product demos in the U.S., partially offset by increased television advertising in Europe.

The Company's currently evaluating its marketing programs to enhance their effectiveness.

We believe the traditional advertising programs have declined in effectiveness across the industry.

On the other hand, we also expect that our advertising promotional expense will return to historical levels.

Through nine months A&P expense was $13.4 million, down 18.4% versus last year.

As a result of the previous guidance operating income for the quarter was $11 million compared to 10.6 million in the third quarter last year.

Through nine months operating income was 30.2 million flat compared to last year.

Net interest expense for the quarter was $1.4 million versus 1.6 million in Q3 last year and for the year.

Net interest expense is $4 million versus 4.9 million last year.

Net income in the quarter was 6.4 million compared to 6.1 million in the same quarter last year and on a diluted per share basis, earnings were $0.38 compared to $0.35.

Through nine months, net income was $17.3 million versus 16.7 million last year.

That equates to earnings per diluted share of $1.03 after nine months compared to $0.97.

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

Regarding the dividend on June 28 the Board of Directors at WD-40 Company declared a regular quarterly dividend of $0.22 per share, payable on July 29th, 2005, to shareholders of record on July 18, 2005.

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 (technical difficulty).

A few words about our balance sheet at May 31st.

Cash and cash equivalents were $32.1 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 low level of third quarter sales compared to fourth quarter sales.

Inventory increased to $7.9 million up $1.6 million from August 31st, due to the purchase of inventory from packagers during the third quarter, inventory in transit, and to support new product introductions and promotions.

Other current assets were up versus August 31st due to taxes receivable resulting from tax refunds primarily in the U.S.

Current portion of long-term debt is $10.7 million reflecting a principal payment due on October on a term loan.

Following the principal payment of $10 million that we made during May, our total debt outstanding declined to $75 million.

Income tax was payable, declined due to the timing of estimated tax payments versus expense.

And the long-term deferred tax liability continues to grow as a result of the different treatment of goodwill so book and tax combined with the accelerated utilization of net operating loss carryforward that was acquired as part of the global household brand acquisition in 2001.

A word about foreign exchange rate impacts, foreign exchange rates affected sales positively by $1.1 million in Q3 and on a year-to-date basis have affected sales by $3.3 million for the year.

Net income was affected positively by foreign exchange rates in the third quarter by $100,000 and on a year-to-date basis by about $400,000.

We will be filing our 10-Q on July 11th.

That is the financial update.

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

Thanks Mike.

Following our board meeting yesterday I'm pleased to announce that Peter Drewry (ph) was elected to our Board of Directors.

Peter brings many years of consumer products good business learning to WD-40 Company.

Peter retired from Clorox earlier in 2005 where he was Senior Vice President, General Counsel and Secretary.

Peter also spent 17 years with Johnson & Johnson.

We are pleased to see that the efforts from our innovation program under the leadership of our Team Tomorrow group are now starting to generate meaningful internal revenue growth; and we are looking forward to seeing these results from our new WD-40 brand innovations -- the WD-40 known as Pen and the WD-40 Smart Straw.

These two new innovations join the other 13 we delivered last year which included WD-40 Big Blast, two products under the X-14 brand and the geographic expansion of Carpet Fresh and Spot Shot on the 1001 brand in the UK market and also Carpet Fresh into the summer Asian markets.

We are innovating across all our brands under our Sweat the Assets program and you will continue to see the rollout of new products under all our brands in the months and years to come.

We are also active in our acquisition search, looking particularly for brands that we can roll up into our operations to leverage our wide distribution outside the grocery trade channel.

The impact of rising costs is very disturbing.

However we seem to be caught in the same cycle as others.

No way does that mean that we are in any way complacent or accepting of the impact on our cost of goods.

We are redoubling our efforts to ensure our supply chain is gaining the maximum benefit from all the manufacturing options we have globally.

Our outsourced manufacturing business model -- which has been our model for over 50 years -- gives us a very unique level of flexibility.

We intend to explore all our options and we will make the necessary changes to our supply chain to drive our gross margins back over the 50% mark.

We would now be happy to answer any questions.

(OPERATOR INSTRUCTIONS) Liam Burke with Ferris, Baker, Watts.

Were there any sliding fees in the cost of goods line that were significant enough to move that gross margin number at all?

No.

The other question I had in regard to steel.

Now this is entirely what we were reading in the paper but it looks like the demand is moderating.

You are not seeing any price decreases there?

Not at this time.

We have had serious and continue to have serious ongoing discussions, challenging our steel suppliers to have actions that are equal to what we are hearing.

We have about a 22.5% increase in steel cost and we have been wearing those as you know.

I think we shared it in our last call.

But we have turned up the volume significantly on our efforts to make sure that whatever is being passed through we are getting our share of it.

But we haven't seen it yet.

Then just quickly on household, it looks like both the markets and product lines are all working in your favor.

Is this a forecast of things to come in household now?

I don't know everything is working all in our favor.

But certainly the innovation that we delivered to the market, particularly the two new X-14 products, the new 2000 Flushes, the work we to take Carpet Fresh to the UK are all starting to give us solid reaction.

We also saw some improvement in our Spot Shot business.

I think, as I commented in my remarks, we are starting to gain the traction that we wanted to get from the innovation program.

It's taken us 2 1/2 years to go from a standing start; and we are also particularly encouraged with the WD-40 innovation, the Pen and the Smart Straw.

Justin Yarr (ph) with Lord Abbett.

Garry, could you talk a little bit about -- you alluded to the advertising promotional line, maybe some of the programs you are thinking about doing differently, what hasn't worked, maybe what has worked in the last year or so maybe where some of those efforts are going to be focused going forward or is it too early to tell?

Mike actually commented on that so I will get him to -- he's got that.

Yes, Justin, I think that as we look at our entire promotional mix which includes advertising, includes coupons, includes (MULTIPLE SPEAKERS) and other methods.

There, what we're really trying to do is find the right mix again; and we believe that traditional advertising programs have been hampered in effectiveness, largely due to the fragmentation of media.

People have so many choices these days.

In addition, coupons are an area where we feel like they are somewhat of a mixed bag.

Sometimes they work.

Sometimes they don't.

Some product categories they work better than others.

Some timing they work, depends on the value.

So what we are really doing is reevaluating our whole program and trying to rediscover what we think is going to have the maximum impact.

And you may recall, too, we have been talking about this all year and it was interesting -- just a month or so ago there was an article in the Wall Street Journal that P&G are doing exactly the same thing.

I'm not comparing ourselves.

To us, of course, they've got larger budgets but we have been talking all year about the way we have been reengineering and testing other modes and ways of making the end user aware and making it easy for them to buy our product.

Just relative to the guidance discussion if my math's right, just picking the midpoint of your updated earnings guidance would imply earnings would be down about 8% year-over-year in the fourth quarter.

Yet, it seems like through nine months, the sales performance has been reasonably strong.

You allude to, I think, a little bit in the press release that that may not be the case in the fourth quarter or is it more just simply the cost issue catching up to you?

It's cost of goods.

If you were to look in this quarter the impact of the change in the cost of goods just in the quarter year-over-year was about $2.4 million.

As Mike shared, for the whole year, the impact of cost of goods if we had just been able to maintain our gross margin of last year our earnings per share at this time would be about $0.24 a share higher.

So I think we are caught in this cycle with everybody else right now.

That doesn't mean we are no worse than anyone else means anything to us.

It doesn't.

So we need to get on top of this even further; and our biggest challenge has been trying to get our arms around where it starts and where it finishes.

We have become a lot more vocal and a lot more inquisitive for the past month as far as why these things are coming down the line to make sure they are not just flowing through to us because it seems to be a timely thing.

Justin, just to put that in perspective a little bit, some time ago as we had talked about the relative cost of an average can of WD-40 and we said back then that about 25% of the total cost of a can of WD-40 was related to petroleum and about 75% of it was related to other things, which included packaging.

The cost of goods and effects that we seen in recent times hit on both of those pieces because steel is one of those other big costs in the can of WD-40.

But we have also obviously -- we're seeing $60 barrels of oil today.

So but the thing, if you look back historically over commodities they don't always go up forever.

We've found ourselves in a difficult situation now but we don't necessarily think that we will forever see higher costs.

But we don't know when they're going to come back down or moderate yet, either.

Just to follow up on the topline again just doing the math, it looks like sales would be -- picking the midpoint -- would be up marginally in the fourth quarter yet, Garry, to your point with the two new WD launches and a full quarter of some of the other stuff, I would think that the momentum would be better than that.

The problem -- not the problem -- the issue we have with the WD-40 launches is ramping up our supply.

And we -- the WD-40 Pen is actually being made in Taiwan and China.

We have got them flying over the ocean as we speak; and they have already started shipping to stores in the U.S.

So we are selling as many as we can make but it is a ramp up that really will decide how many get into this year and how many flop more in the next year.

Lastly on that cost issue so I understand.

Since you guys are contract manufacturing most of that stuff out do you -- how much of it do you buy as a finished product versus -- like in the case of a can of WD.

Do you go out and contract with the steel procurement and petroleum procurement or do you leave it up to the guy and then you pay the end producer that full amount?

So how does that -- how can you guys back the cost?

I can explain that.

We actually buy finished goods; however we have a meaningful and significant input into the componentry that goes into that finished goods.

For example, our can supplier -- we actually are able to identify can suppliers so our volume of cans even total is very meaningful and if you look at cans, caps, and valves -- which are the three major items -- we have intimate negotiations with the original manufacturer before they flow through to the contractor who puts them all together for us.

So you agree with the hand guy on the price separately.

Correct.

Separately, right, okay.

So you guys feel you have more direct effect than, obviously, if you were just buying a can of finished product from (MULTIPLE SPEAKERS).

And in fact we have a very very visible view -- no, that's wrong for me to say.

We have a very good view of the (indiscernible) of materials that go into the can because their volumes are so large.

Yes okay.

And just the last point on the steel coming down, is it more a LIFO FIFO issue as to why that hasn't been seen yet?

Or are you guys -- from the guys who have been buying from just haven't been passing that through to you yet?

I can't find a plausible excuse from them yet but it's really about tinplate.

Tinplate is way at the end of the steel line and they're saying it isn't flowing through there completely get.

There's still a lot of demand for tinplate where they maybe a more of an oversupply coming up for more of the heavy steels.

The price increases that we have were made up of an increase in the surcharge and we are pushing very hard to understand where those two separate.

Frank Raglan (ph) with the Robbins Group.

You mentioned a little -- can you mention a little bit of how you think you are doing on a market share basis?

In the past you've been good about it and maybe in the last conference call or two not as much.

But where do you think you are?

Are you gaining market share or holding your own in other than lubricants?

Certainly in our household products area, we have always said that we were No. 1 or No. 2 with the brands that we have in those categories.

And we have continued to hold strong positions in the aerosol rug and room deodorizer category, in the spot stain aerosol category.

So my answer to you is, I believe that our market share if not equal to yet up on where we were.

Equal to or greater.

Equal to or greater.

Particularly to -- keep in mind market share is reasonably difficult to measure these days in certain ways because Nielsen doesn't capture all of the other trade channels.

If you go into Home Depot now, you will find our Carpet Fresh product in there.

It wasn't there eight months ago.

If you go into Lowe's you'll find it there.

It wasn't there. 2000 Flushes is in Home Depot; it wasn't there before.

So we have got to collate all those numbers together.

Do you find any new product introductions in Q4?

The main new product introductions are the shipping of the Smart Straw and the WD-40 Pen.

We may have some flowthrough from those toward the later part of the quarter but those are the two majors.

One last question -- is there any additional estimate expenses for Q4 that wouldn't have been accrued during the year?

The additional expenses in Q4 for SG&A would probably be driven primarily by regulatory which we talked about in the past about Sarbanes-Oxley and the audit works that PWC had told us about.

So -- and those are expenses I think that, last time on the call we had described the magnitude of expense.

And those are the things we haven't fully seen the effect of those costs yet, Frank, because they haven't completed their work because we are not done yet with the year.

So the haven't had a chance to bill you.

Right.

(OPERATOR INSTRUCTIONS) Peter Udo with Posidium (ph) Investment Management.

Can you talk a little bit about and I had to step off the call for a second so you may have mentioned this.

But in household products, if I heard correctly excluding 1001 Flushes, it looks like revenue growth was slightly down.

Can you talk about where the weakness is and I guess what're the positives and the negatives within that segment?

In the case of -- with household products on the third quarter sales were actually up excluding 1001.

For nine months, sales were down a bit excluding 1001 and those weaknesses are areas we have described before and we've had concerns about category impacts on Carpet Fresh and that sort of thing.

So it's primarily been U.S. household products and Carpet Fresh is one that has been hit by category impacts.

You mentioned the price increases.

How large were the price increases you put in place to try to mitigate the cost increases?

The only price increases that we carried forward of significance was on the WD-40 brand.

And it was a 7% increase.

Did you realize -- how did it work?

Did you realize most of it?

All of it?

A major percentage of it.

Mr. Ridge, there are no further questions at this time.

I will turn the conference back over to you for any additional or closing remarks.

Thank you very much.

Thanks for joining us.

Have a happy Fourth of July week in which is somewhat significant for me because on the 4th of July it is my 18th anniversary being at WD-40 Company.

So take a day off for that.

What I'd also like to mention to you -- if you would like to go to our website@WD-40.com there is a great contest where you can earn yourself an early edition of the WD-40 Pen by joining our fan club and referring five of your friends to the fan club site which is part of our guerrilla marketing campaign, starting to create the tipping point for the Pen.

And thank you very much and we will see you in October.

That does conclude today's conference.

We thank you for your participation.

You may now disconnect.