WD-40 Co (WDFC) 2006 Q1 法說會逐字稿

Good day, and welcome to this WD-40 Company first Quarter 2006 earning 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.

Good afternoon, and thank you for joining us for our first quarter earnings call for fiscal 2006.

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 impact of new product introductions and innovations; impact of cost of goods; the uncertainty of market conditions, both in the United States and internationally; the impact of foreign exchange rates; and the timing of advertising and sales promotion activities.

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 relations section of our website at wd40.com.

Our second quarter fiscal 2006 earnings conference call is scheduled to take place on April 5th, 2006, at 2 p.m.

Pacific time.

At this time, I'd 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, 2005, of $67.2 million, an increase of 10.8% over the first quarter of last fiscal year.

Net income for the quarter was 7.5 million, up 33.3% compared to the prior year's quarter.

Earnings per share were $0.45 in the first quarter, compared to $0.34 per share in the same quarter last year, an increase of 32.9%.

We had sales growth in lubricants, household products, and hand cleaners during the quarter, which contributed to a good start to the year.

We are continuing to make progress in our product innovation program, and in growing our fortress of brands.

Cost of goods during the first quarter was 51.9% of sales, compared to 49.6% in the first quarter last year.

We remain concerned about rising costs, while we look for ways to improve our gross margin.

In fiscal year 2006, we expect net sales to grow between 9 and 14% to 288 to $299 million.

We expect net income for the year to be between 4 -- 24.7 million and 28 million, achieving earnings per share of between 145 to 165, based on an estimated 17 million shares outstanding.

Please note that the fiscal year 2006 results include the expensing of stock options.

Total sales for the first quarter were 69% from the Americas, 25% from Europe, and 6% from Asia Pacific.

In the Americas, sales for the first quarter were up 8% from a year ago.

We had growth in all our brands in the Americas during the quarter, and are starting to see the positive results from our innovative -- innovation strategies.

In Europe, sales were up 15.4% for the first quarter.

We had growing sales in the Middle East, in Eastern Europe, Germany, Italy, and the UK during the quarter.

Our European business continues to be a significant and growing area of emphasis.

In the Asia Pacific region, sales were up 26.8% from last year.

We had a positive turn in Asia, and this region continues to represent important long-term growth opportunities for us.

Global sales of our lubricants, which include WD-40 and 3-IN-ONE were up 14.4% in the quarter.

During the quarter, we had a positive impact from the new WD-40 delivery systems across the globe.

We are on target with the rollout of these 2 products, the WD-40 No-Mess Pen and WD-40 Smart Straw.

Sales of heavy duty hand cleaners, Lava and Solvol, were up 1.1% for the quarter.

And sales of household products, X-14, Carpet Fresh, 2000 Flushes, Spot Shot, and 1001, were up 5.3% compared to the previous quarter last year.

I'd now like to pass over to our CFO, Mike Irwin, who will review the quarter in more detail.

Thank you, Garry.

In addition to the information presented on this call, we suggest that you review our 10-Q that was filed this afternoon.

We'll begin with a review of sales, and then on to the rest of the financials.

Total first quarter sales, again, were $67.2 million, up 10.8% from Q1 last year.

Lubricant sales, WD-40 and 3-IN-ONE, for the first quarter were $42.4 million, up 14.4% from last year.

We had strong growth in our lubricant business in the U.S., Latin America, Asia, Eastern Europe, Germany, Italy, Spain, and the Middle East.

Hand cleaner sales, which are the Lava and Solvol brand, were $1.9 million in the quarter, up 1.1% from Q1 a year ago.

And household products, again, which is 2000 Flushes, Carpet Fresh, X-14, Spot Shot, and the 1001 brand, first quarter sales were $22.9 million, up 5.3% compared to the same quarter last year.

America's Q1 sales of $46.3 million, up 8% against last year.

U.S. sales were up 7.9%.

Latin America was up 23.1%.

And the Canada sales declined by 2.3%.

Asia Pacific Q1 sales were $4 million, up by 26.8%.

Australia declined by 3.8%, while sales into Asia directly -- Q1 sales were up 60.5% due to WD-40 sales to customers in China, Hong Kong, Indonesia, and Malaysia.

Europe first quarter sales were $16.9 million, up 15.4% versus a year ago.

And we had sales growth in the UK, France, Germany, Italy, Eastern Europe, and the Middle East.

Gross profit was 48.1% of sales in the first quarter, compared to 50.4% in Q1 last year.

The 2.3 percentage point decrease in the gross margin percentage was mainly due to the increase in cost of products sold.

This increase was primarily due to the significant rise in costs from components and raw materials, including aerosol cans and petroleum based products.

We remain concerned about the possibility of continued rising costs of components, raw materials, and finished goods.

Gross margin percentage was also negatively impacted during the past quarter, as the Company incurred costs associated with slow moving and impaired inventory.

As a result, the Company focused on reducing excess inventory of certain products and offered significant discounts which reduced gross margins.

The discounts and costs associated with the slow moving and reworking the impaired inventory negatively impacted gross margin percentage by 0.9%.

Selling, General and Administrative expenses for the first quarter increased by 6.4% to $16.4 million.

The increase in SG&A stems in part from stock options expense of $0.4 million as the Company began to expense options for the first time in Q1, a higher R&D investment of $0.2 million reflected in the Company's commitment to innovation, and higher employee-related expenses of $0.5 million for salary increases, benefits, and additional staffing.

Despite the higher costs, we did gain operating leverage in the quarter, as SG&A decreased to 24.3% of sales in the first quarter, compared to 25.3% in the same period last year.

Advertising and sales promotion expenses were $3.3 million in the quarter versus $5.3 million in Q1 last year, and as a percent of sales, decreased to 5% from 8.7% in the first quarter last year.

The decrease is mainly related to the timing of investments in television media, print media, and market research, versus the prior year first quarter.

Advertising and promotion expense is expected to increase this year as we align brand support activities with the distribution of new products.

Our investment in global A&P 2006 is expected to be in the range of 7.5% to 9.5% of net sales.

Operating income for the quarter was $12.5 million, compared to $9.8 million in Q1 last year.

Amortization expense in the quarter, as 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 in the first quarter was $1 million, down $450,000 versus Q1 last year, reflecting the continued reduction in our debt, which we have reduced by $21 million since Q1 last year.

The provision for income taxes was 35.3% for the current year quarter, up from 35% in Q1 last year.

The increase in rate is due to the impact of reduced low income housing tax credits, growth in worldwide income, nondeductible stock options expense related to non-U.S. taxpayers, and the phaseout of extra territorial, or ETI benefits.

Net income in the quarter was $7.5 million, up 33% from Q1 last year.

And on a diluted per-share basis, earnings were $0.45 compared to $0.34 in Q1 last year.

Diluted shares outstanding have increased to 16.8 million shares compared to 16.7 million for the prior year quarter.

Regarding the dividend on December 13th, the Board of Directors declared a regular quarterly dividend of $0.22 per share payable on January 31st, 2006, to shareholders of record on January 6, 2006.

Based on today's closing price of $27.27, the annualized dividend yield would be 3.2%.

About our balance sheet on November 30th, cash and equivalents were $34.3 million, down from 37.1 million at the end of the fiscal year.

Accounts receivable declined due to a lower level of first quarter 2006 sales compared to the fourth quarter.

And inventories rose to $10.2 million, and it reflects the inventory acquired to support new product introductions and promotions, including the WD-40 No-Mess Pen, as well as inventory in transit.

Long-term debt declined at $53.6 million following a $10.7 million principal payment we made in Q1.

The next principal payment is due in October.

That's it for the financial update.

Again, more information is available on the 10-Q filed this afternoon.

Thank you very much.

And I'd like to turn it back over to Garry Ridge.

Thank you, Mike.

I need to just find my page.

Here it is.

You stole it from me.

At our annual shareholders meeting in December, I shared our strategic goals for 2006.

You can view the full presentation, as well as our fiscal goals on 1 page out to 2009 in the Investor Relations section on our web site at www.wd40.com.

Some of the highlights of the strategic focus this year are, an increase in the investment in Team Tomorrow.

This is the team responsible for the innovation efforts for the Company.

In 2006, our investment in new product innovation will be about $4 million, an increase of over $1.5 million over 2005.

It's worth remembering, 4 years ago we had no new product development program at WD-40 Company at all.

The efforts of Team Tomorrow will deliver about $30 million of new revenues in 2006 from products that we have developed under their innovation program.

Our global rollout of our 2 new delivery systems in WD-40, which are Smart Straw and No-Mess Pen, is underway, and we're pleased so far with the acceptance.

We continue to focus on the extending -- the distribution of all our brands across the many trade channels we service in the USA.

This will continue to lower the impact of the grocery trade channel in our business, while making our products easier for consumers to buy.

Our global expansion continues to gain momentum.

Last year, our European trading block had sales of about $68 million.

That's a growth of over 51% in the past 2 years.

We continue to expect our growth in Europe to be robust in 2006, and with both geographic and product expansion.

In Asia, we are formulating our plans to accelerate our growth in China.

We have been in the China market for many years, but it's time now to turn up the volume.

We are actively searching for new products to acquire, that meet both our financial and our strategic goals.

Roll-ups that can take advantage of our solid infrastructure that we have built over the past few years will be the most attractive, and will give us the best returns.

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

However, we continue to be concerned about the impact of rising cost of steel and other raw materials, and will need to continue to attack these influences on our business with much rigor over the next few months.

We would now welcome any questions.

Thank you. [OPERATOR INSTRUCTIONS] Jeff Zekauskas, JPMorgan.

Hi.

This is Will Hunter for Jeff Zekauskas.

Can you guys speak to the relationship that you see between promotional spend and sales growth going forward?

Specifically, seeing sales growth in the quarter up 10.8% with some of your lowest A&P spend in a couple of years?

Well, we have a goal in the year to raising sales, I think of between 9 and 14.

The quarters do flux from quarter to quarter.

We don't really look at our business on a quarter to quarter basis.

Some of the advertising spend that didn't happen in this quarter, will happen in the next quarters.

So really we're here for the long-term in making sure that we manage our brands and manage our investment.

Thank you very much.

Frank Magdlen, The Robins Group.

Good afternoon, gentlemen.

It was a nice quarter.

Could you elaborate a little bit on the slowing and impaired inventory?

And did I hear you right, that it cost you 90 basis points in gross margin?

Yes, it was a combination of things.

With respect to impaired inventory, we had a cosmetic issue that came up with one of our items, that just required rework, and so that cost us some.

And then from time to time, as we look at our inventory situation, we would have inventory built for us to a particular forecast.

And if we don't hit our plans with that, we would move it out.

And part of our normal practice in making sure that we're managing our business well, is what we call an SK, or stock keeping unit rationalization and review.

And we do that on a periodic basis, and we determine whether they're SKUs that aren't ongoing.

Mainly, they would be a particular promotional pack that we maybe have a remnant of.

So, we would then rework those, or clear them out at a lower cost.

But it's not -- it's usually on a periodic basis that that happens.

All right.

And then as we talk about A&P, you'll catch that up later in the year.

Yes.

And then, what about the geographic expansion in Europe?

Where are you going to be going with that?

Well, as we have been, we are now directing, I think, probably a dozen or more markets in Europe.

Geographic expansion in Europe is not a new thing for us.

We've been growing our European business over the past years consistently.

The growth is coming from places like the direct markets of Germany, France, Spain, Italy, Portugal, Denmark, Holland, from indirect markets of Poland and Russia.

So there's a lot to do still in Europe, and we really work on that on a continuing basis as far as building our brands.

We're nowhere near as mature in Europe with our core brand, WD-40 and 3-IN-ONE, in the markets that we want to be in.

So it's just a matter of time.

All right.

And 1 last question.

What are your financial targets for an acquisition?

What's your basic guideline?

Well, we basically have a number of financial guidelines.

But certainly one of the key roles that we have, is return on invested capital.

We've stated that that's something that we want to continue to grow.

So we'd want to make sure that anything that we had, had a positive return on invested capital.

We want brands that live under the sink, in the garages, or in the toolboxes of the world, that could take advantage of our multiple trade channel distribution, that had gross margins equal to or better than the brands that we have now.

They may have growth opportunities in sales, or they may not.

A sensible acquisition that was particularly a roll-up, where we took the sales and cut the cost out, and then planted it in our infrastructure, may be one that we'd also consider.

So, we're really staying on focus.

We're a global consumer product innovation, distribution, and marketing company, in the space of dirt, and squeaks, and smells.

And that's where we look.

Jeff Zekauskas, JPMorgan.

Yes, hi.

This is Silke Kueck, also working with Jeff.

Can you quantify how large the advertising spend was?

What was the timing effect?

Was it like 2 million, or was it 3 million?

Where should we see it?

Should it come back in the second quarter, or the third quarter?

Well, Silke, thanks for the question.

As you know, we don't give quarterly guidance, so we're unable to comment on the particular timing of it, except to say that by year end, we would expect the advertising promotion investment to fall somewhere between 7.5 to 9.5% of annual sales.

So it would be -- I know the advertising expense, it represents 7.5 to 9.5% of your sales?

Correct.

Which is the guidance that we gave.

Okay.

But that means that it would step up significantly in the next few quarters.

Well, we've only got 3 quarters left.

So I guess if you look at it, then the balance has to be invested over the next 3 quarters.

Can you talk about the components of your sales growth, in terms of volume, price, and currency?

Sure.

As far as the sales in the first quarter, the currency side, Mike -- .

The currency on a worldwide basis -- the currency impact was minimal.

And then, there was very little pricing in it, because we've just about circled our price increase from last year.

So I would say the majority of it was in volume.

If you look at the business, it was globally about 14% up in lubricants, 5% up in household, 1% in heavy duty hand cleaners.

In the Americas, our lubricant business was up about 9%, which is all volume.

Our household products, which is nice to see, were up 7% in the quarter.

And that's got to be all volume, because there's been no pricing in household at all.

And it's nice to see even our household product, Spot Shot, grew 16% in the USA -- sorry, 7% in the USA.

Carpet Fresh grew 16% in the USA.

Our 2000 Flushes business grew 2%.

And our heavy duty -- sorry, hard surface cleaners business in X-14 grew 26%.

And again, that's all volume, because there is no pricing.

Was pricing negative because of the discounts that you had to give to move some of the impaired inventory?

Well, it impacted the gross margin as we shared, by about 9/10th of 1%.

Liam Burke, Ferris, Baker Watts.

You talked about the dividend.

Is there any thought to -- I know you bought back shares in the past.

Is there any thought to buying back stock?

We've exercised our authority at this time.

We look at usages of cash, or the board does, on a quarterly basis, and we consider dividend.

We consider share buy back.

We really want a little bit of dry powder as we've got right now, because certainly an acquisition with sales at a good margin would do a lot more to drive the value of the business than a buy back at this time.

But we consider all of those, and we do it on a quarterly basis.

Okay.

Great.

And Mike, I'm sure this is disclosed in the filing, but do you have a per share estimate on the stocks -- the option issuance expense?

For the year, when we had issued our annual guidance, I think that our estimate at that point was $0.06 to $0.08 for the entire year.

Okay.

And that still holds true?

For the first quarter, we had $400,000 in stock options expense.

Before tax.

Before tax.

Okay.

All right.

And, Garry, you mentioned earlier some household products, Spot Shot, Carpet Fresh, 2000 Flushes, and the X-14.

Yes.

And you had some revenue increases.

That was all North America.

Is that right?

Well, that's primarily USA, Liam, because that's -- .

Oh that's right.

Most of these are USA products.

Right?

Our Spot Shot was up 7%.

Carpet Fresh was up 16%.

The Flushes business was up 2%.

And the X-14 hard surface cleaners was up 26% all in the USA.

Okay.

And then I guess 1 last question.

Mike, do you have a blended North American sales growth number for the first quarter?

I know you mentioned Canada and -- ?

8%.

Great.

The Americas in total.

So that would include Latin America as well.

[OPERATOR INSTRUCTIONS] Shaun Nicholson, Kennedy Capital.

I was just curious on the China -- I know you guys have been talking about that in the call.

Is it more of a -- like how would you go and make the acquisition?

I know you're paying down debt now.

Would it be using cash, or how would you go ahead and fund that?

We didn't talk about an acquisition in China.

Or if you were to do a roll-up type, get into some products out there, or in any situation?

Well, let's talk about -- our acquisition search is primarily in the U.S.

If we were to make an acquisition in the U.S., we would use a combination, depending on the value of the acquisition of cash and probably debt.

Is there a level of debt to cap you're comfortable with?

We've always said that we would be comfortable with about a triple B credit rating, and I believe that's about 2 times EBITDA on a max level.

Okay.

And as far as the discounting, do you guys -- do you see that as a one-time thing, or do you expect that would happen again in this year -- towards the end of this year?

Well, the discounting that we discussed was in respect of moving out some extra inventory that we had.

We don't see that as an ongoing thing.

But at the same time, in any business, when you're building promotional stock and building other stock, it's not uncommon for inventory to be cleared out.

Okay.

Great.

Thanks, guys.

Quinn Martin, Arrow Investments.

I think you briefly touched on this, but I was just hoping you could discuss your acquisition strategy a little bit further, and what kind of opportunities you're seeing right now.

Well, basically we're in the squeak, smell, and dirt business, so we're looking for products that stop squeaks, get rid of smells, and get rid of dirt.

We want things -- products that are appealing to the distribution channels that we service, and the distribution channels we service takes product to toolboxes and workshops and under sinks of houses around the world.

So that's kind of the landscape of what it is.

We want brands.

We would want brands that have margins that are -- gross margins that are equal to, or better than our product, which would then give us the leverage of our infrastructure.

A roll-up is probably more attractive, where we could buy the brand without the infrastructure, because we have a very nice infrastructure that we've built over the past 5 years that has the capacity to do more.

We basically would look for products that would in turn increase our return on Invested Capital.

Which is pretty high as it is.

It's about 18.4%.

And then the other couple factors we consider -- it really for us, really does need to be a brand.

We want something that's meaningful in the eyes of consumers, because that simplifies the marketing investment that we would need to place behind it.

And then we also look for things that work as advertised, products that are demonstrable.

Because it's easy for people to see them work, when it's obvious that they achieve whatever it is that they're supposed to do.

Yes, and we've been used to that.

Squeaky hinge, spray, no squeak.

Smelly carpet, spray, no smell.

Dirty toilet, flush, it's clean.

We like those types of products.

[OPERATOR INSTRUCTIONS] Frank Magdlen, The Robins Group.

Garry, do you have any, or are you in possession of any reasonable market share data?

I know it's been questionable as to how good it might be with certain retailers not reporting.

But do you have a feel for what's going on?

We do have market share data that we reflect on, particularly in the grocery trade channel.

I think we do comment in the Q that despite some of the activities in Carpet Fresh, the data that we have tells us that we're doing well as far as market share is concerned.

But it's a very muddy field out there now.

Now that the numbers that are out there, they don't always include all of the available distribution.

And we being in so many different trade channels, our best measure is really factory sales.

And then we balance that with what does Nielsen say?

We look at ACV numbers in grocery, which is all commodities volume distribution numbers, but we don't share them individually.

But our marketing people do pay attention to what data points there are there, and they pay attention to it in helping us to measure and learn and react to what we're doing.

All right.

And 1 other question.

On freight surcharges, are you still up significantly over last year?

Do we just track the price of diesel to figure that one out?

Yes.

That's really where it is.

There hasn't -- although we have seen a drop in gasoline prices, we haven't seen a lot of movement in diesel.

So we're still seeing -- what we are doing and what has been good for us, is we've been doing a bit of work on better managing the way we ship freight.

So we may be getting a little offset from it.

In other words, doing a better job of combining orders.

But there is no visible sign of any retraction that we can see in diesel prices.

Most of your shipments truckload?

No.

Not necessarily.

No.

We service many, many accounts around the world, from the biggest retailer to the smallest corner store.

So there's a plethora of different ways that we send things.

[OPERATOR INSTRUCTIONS] Jeff Zekauskas, JPMorgan.

Hi.

This is Silke Kueck again.

Hi, Silke.

Can you talk about what your R&D initiatives would be in '06?

That is, I know you've rolled out the No-Mess Pen and the Smart Straw.

What are sort of like the increase in R&D?

What is it going into?

Well, we're not -- we obviously aren't going to be specific and tell the world what we're working on, but what we are doing -- .

Which categories maybe?

Across all categories.

Okay.

If you look at -- in the last year, we had 11 new products, I think it was, across all new categories.

If you look at this year, particularly look at Spot Shot.

One of the reasons of our Spot Shot growth, is we introduced the Spot Shot Trigger Spray product.

We've introduced 2 new products in X-14, which has helped that grow 26%.

So we're looking at all our brands, and looking where they can travel with what new innovation.

It appears we have no further questions in the queue at this time.

Mr. Ridge, I would like to turn the conference back over to you, for any additional or closing remarks.

Well, thank you to everyone for their interest, and we'll talk to you again in April.

In the meantime, stop some squeaks, and help us with our No-Mess Pen sales.

Cheers.

That does conclude today's conference call.

We thank you all for joining.

At this time, you may now disconnect.