WD-40 Co (WDFC) 2006 Q2 法說會逐字稿

Good day and welcome to the WD-40 Company's second quarter 2006 earnings release conference call. Today's program is being recorded. At this time I would like to turn the conference over to the Vice President of Corporate and Investor Relations for WD-40 Co., Miss Maria Mitchell. Please go ahead, Ma'am.

Good afternoon and thank you for joining us for our second quarter earnings call for fiscal 2006. Today we are pleased to have Garry Ridge, President and CEO via conference call from China; Michael Irwin, Executive Vice President and CFO; and Jay Rembolt, Vice President of Finance and Controller here in San Diego. 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 impact of new product innovations, impact of cost of goods, the impact of foreign exchange rate, the timing of the advertising and sales promotion activity, 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 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 WD-40.com.Our third quarter fiscal 2006 earnings conference call is scheduled to take place on July 10th, 2006, at 2 PM. At this time I would like to turn the call over to Garry Ridge.

Seeing how it is 5 AM here Thursday morning in Shanghai, 2 PM in San Diego and 5 PM in New York City. Today the world truly is flat and WD-40 truly is a global company. The results we reported today again show how the strength of the global WD-40 business continues to build the WD-40 fortress across more than 160 countries globally. Strong results continue in Europe and we are encouraged with the growth we've seen of last few quarters in Asia and the Americas due in most part to product innovation in all segments. We are pleased to see the continuing progression of styles and net income both of which were up double-digit rates in the second quarter. And this is the second quarter in a row.This also comes on the heels of last fiscal year in which we achieved sales and profit growth above 8%. Today we reported net sales for the second quarter ended February 28, 2006, of $71.5 million, an increase of 17% over the second quarter last year. Year-to-date net sales were 138.7 million, up 13.0% from the same period last year. Net income for the second quarter was 7.2 million, up 37% compared to the prior quarter last year. Earnings per share were $0.43 in the second quarter compared to $0.31 per share for the quarter last year. Year-to-date net income was 14.7 million, an increase of 35.1%, 3 to 6 months earnings per share were $0.88 compared to $0.65 last year. We are pleased with the sales and profit growth we have generated across all of our trading blocks. We've also started to see success from our commitment to innovation and to the recent introduction of new products that have resulted from that strategy.Cost of goods during the second quarter was 52%, compared to 51.5% in the second quarter last year. We are still challenged by continuing increases in cost of goods; and as a result we plan to execute price increases on certain products during this third quarter. I will now pass over to Mike and Jay, who are in San Diego, who will cover the results in more detail.

Thank you, Garry. We will begin with a review of sales and then Jay Rembolt will cover the rest of the financials.WD-40 Company's second quarter sales growth of 17% and year-to-date sales growth of 13 for NUM% reflect the impact of our innovation program, as well as continued expansion and distribution in developing markets. We sell products in three product segments. Lubricants, which is the WD-40 and 3-in-One business. Second quarter sales were $49.1 million, up 13.8%; and year-to-date sales of our lubricants were $91.5 million, up 14.1%. The hand cleaner segment which is the Lava and Solvol brands second quarter sales were $1.4 million, down 3.5%; and year-to-date sales were $3.2 million, down 0.9%. Household product groups, second quarter sales were $21 million up 27.1%; and year-to-date household product sales were $44 million, up 14.7%. The lubricants sales were affected by the addition of the WD-40 Smart Straw and WD-40 No-Mess Pen, which were introduced in the third and fourth fiscal quarters last year. Household product sales growth also reflects the impact of innovations such as the Spot Shot liquid in a spray bottle, with the Spot Shot trigger, the Spot Shot professional line. 2000 Flushes clip-on, X-14 Orange aerosol and the X-14 Oxy Citrus cleaner. We run our business in geographic segments, the Americas region -- which is our largest segment -- covering 63% of our sales. Second quarter sales were $45.5 million, up 18.9% and year-to-date Americas sales were $91.7 million, up 13.1%. Within the Americas, the U.S. business had second quarter sales up 19.6% and year-to-date U.S. sales were up 13.4%. The sales growth in the U.S. in the second quarter was driven by strong WD-40 performance across all trade channels and the addition of the WD-40 Smart Straw and the WD-40 No-Mess Pen. Again, introduced in the second half of last year. WD-40 sales grew by 10% on the quarter. U.S. household product sales were up by 35% in the quarter due to higher promotional activity, increased distribution and the addition of new products such as the Spot Shot liquid, Spot Shot professional line, X-14 Orange aerosol, and 2000 Flushes clip-on. Spot Shot, Carpet Fresh, X-14 to 2000 Flushes have all recorded double-digit sales growth in the second quarter and through the first six months of year. U.S. sales growth through six months, again, was driven by the same reason. WD-40 Smart Straw and No-Mess Pen. And WD-40 sales were up 9% in the U.S. for the first half of the year. U.S. household product sales were up 20% through six months due to the promotional activity, distribution, and impact of new products I already mentioned. We continue to face stiff competition in our household product segment and from related categories in the battle for shelf space.Latin America sales were up 23.9% in the second quarter and 23.5% on a year-to-date basis. Our Latin America business is primarily based on the lubricants WD-40 and 3-IN-ONE; and WD-40 sales were up 25% in the quarter and 24% year-to-date as a result of increased promotional activity as well as growth in distribution. Our Canadian business had second quarter sales up 7.6% and year-to-date up 2.6%. We sell the lubricants, hand cleaners and household products in Canada and Canadian sales growth was driven by WD-40 Smart Straw and WD-40 Pen as well as growth in 2000 Flushes. European region sales for the second quarter were $20.4 million, up 15.1% and on a year-to-date basis up 30 -- they were -- sales were $37.4 million, up 15.2%. Our European business includes lubricants and household products; and we sell into Europe year through a combination of direct operations in certain countries as well as through distributors into other countries. Changes in foreign currency rates compared to the same prior year fiscal period partially offset the growth of sales in Q2 by reducing our sales by $1.8 million; and the foreign exchange impact through six months reduced sales by $2.2 million.European direct markets which are the UK, Spain, Italy, France, Germany, Portugal, Austria, Denmark and The Netherlands had sales up 19% for the quarter and 14% on the half year, with sales growth in countries such as the UK of 14% in the quarter and Germany 43%, Spain 20%.Again we have had the impact of sales growth due to the WD-40 Smart Straw and No-Mess Pen, which reflects the innovations in those brands. Sales growth in the Germanics markets -- which include Germany, The Netherlands, Denmark, Austria and Switzerland -- was a result of increased awareness and penetration of the WD-40 brand. The introduction of the WD-40 Smart Straw and the further development of direct sales into The Netherlands. While sales in Spain were up as a result of the WD-40 Smart Straw launch and the No-Mess Pen which we sell into Spain under the 3-IN-ONE brand, we achieved sales growth over the six-month period in those same markets, largely due to the same items I've just described.We sell through independent local distributors in Eastern Europe and Northern Europe, as well as the Middle East and Africa, and our European distributor business was up 5% in the second quarter and 18% on a year-to-date basis. Sales growth in the distributor markets was the result of continued growth in Eastern Europe. These markets continue to experience growth in distribution and usage resulting from our increased market penetration and brand awareness. Russia continues on a strong growth track as our half year sales matched our full fiscal year sales from three years ago.Moving onto the Asia-Pacific region, second quarter sales were $5.6 million, up 10.2%; and year-to-date sales were $9.6 million, up 16.6%. Within Australia, sales were up 9% on the second quarter and 3% year-to-date period. Primarily it was a result of the promotions and the launch of the WD-40 No-Mess Pen, as well as the contributions of 3-IN-ONE and No-Vac which also contributed to sales growth.No-Vac sales continued to increase as it continues to gain market share in Australia and half year sales, as I said before, the 3% increase was driven by all three brands of WD-40, 3-IN-ONE and No-Vac. The Asian region, sales were up 10.5% in the second quarter and 26% year-to-date and Q2 sales were influenced by strong growth in Korea, Hong Kong, Taiwan, Thailand, Indonesia, and China as the Company continues to expand into new markets. Sales of 3-IN-ONE also contributed to the increase in Asia as a result of the launch of a new product in some markets. We saw a bit of a drop-off of No-Vac sales in Japan though it was off of a small base. The 26% growth in Asian half year sales was driven by WD-40 growth in China, Hong Kong, Indonesia, Malaysia, Korea, Taiwan and Thailand. And we also had the contribution of 3-IN-ONE to that increase in sales, as a result of that launch of new products.That's it for the sales update. I'll turn it back over to Jay Rembolt, who will continue with a review of the rest of the financials.

Thanks Mike. As I address the remainder of the income statement and other financial items, I'll go through the second quarter results completely and then discuss the year-to-date results.In the second quarter our gross margin was 48% of sales and this compares to 48.5% of sales in Q2 last year. The decrease in gross margin percentage was attributable to increases in the cost of goods sold. However the full impact of these cost increases was dampened by a decrease in certain advertising and promotional discounts, which are recorded as reductions to revenue. Without the impact of these reductions, gross margin would have been 46.6% in the quarter.The increase in our cost of product sold was due to the significant rise in costs for components in raw materials, including aerosol cans and petroleum-based products. As a result of the general upward trend of costs in the market we remain concerned about the possibility of continued rising costs for components, raw materials in our finished goods.Selling, general , and administrative expenses for the second quarter increased by 3.1% to 17.3 million. The increase in the SG&A stems in part from stock option expense of .6 million for Q2 as the Company began to expense options for the first time in Q1 of this fiscal year. Freight costs increased by .4 million, primarily driven by sales growth. We saw higher employee-related costs of about .3 million for salary increases and benefits and additional staffing. These increases were partially offset by foreign currency exchange impact and bad debt recoveries, including a favorable preference claim settlement. Despite the higher costs, we were able to gain operating leverage as SG&A decreased to 24.2% of sales in the second quarter compared to 27.4% in the same period last year.Advertising and sales promotion expenses were 4.8 million in the quarter, up from 3.4 million in Q2 last year; and as a percent of sales increased to 6.8% from 5.6% in Q2 last year. The increase is related to the timing of our investment in advertising activities year-over-year. In the prior fiscal year, media investment was concentrated in the first quarter. For the current year, media investment has been concentrated in the second quarter and will continue during the second half of the fiscal year as the Company aligns its advertising and sales promotion activities with the distribution of its new products. Investment in global A&P for 2006 is expected to be in the range of 7 to 9% of net sales.Operating income for the quarter was 12.1 million compared to 9.3 million Q2 last year. Our net interest expense for the quarter was .9 million and it was reduced down by .4 million from Q2 last year. This reflects the continued reduction in our debt, which we have been able to reduce by 21 million since Q2 of last year. The provision for income tax was 35.9% for the current quarter, up from 34.8% in Q2 last year. The increase in rate is due to the impact of reduced low income housing tax credits, growth in worldwide income, non-deductible stock option expense related to non U.S. taxpayers and the current year impact of the phaseout of the extra territorial income or ETI benefits. Net income in the quarter, as Garry said earlier, was 7.2 million, up 37% from Q2 last year. And on a diluted per share basis, earnings were $0.43 compared to $0.31 in Q2 last year.Diluted shares outstanding have remained constant at 16.8 million shares. And regarding our dividend, on March 29, the Board of Directors declared a regular quarterly dividend of $0.22 per share, payable on April 28, 2006, to shareholders of record on April 17, 2006.Based on today's closing price of 31.16, the annual dividend yield would be 2.8%.Looking to the first half of the year, our gross margin was 48% compared to 49.5% last year. The decrease is again attributable to the component and raw material increases. In addition first quarter costs associated with reworking inventory negatively impacted growth gross margin by 4 percentage points for the first six months of the year. These cost increases were partially offset by the reduced advertising and promotional discounts in the second quarter and without the impact of these reductions, gross margin would have been 47.4%.Selling and general and administrative expenses for the first six months increased by 4.7% to $33.6 million. The increase in SG&A stems in part from, again, stock option expense which was $1 million year-to-date and freight costs, again driven by sales growth of .5 million. Higher related, employee-related of about .8 million for salary increases, benefits and additional staffing. We also had some higher cost associated with professional services and increased R&D investment activity. For the first six months, the increases again were partially offset by foreign currency exchange in that bad debt recovery. We were able to again achieve operating leverage for the first six months as SG&A decreased to 24.2% of sales compared to 26.4% for the same period last year. Advertising in sales promotion expenses were 8.2 million in the first half year, down from 8.7 million in the same period last year. As a percent of sales they decreased to 5.9% from 7.2% in the first six months last year. And as we said earlier the decrease is primarily related to timing of the investment activities year-over-year. We continue to see our investment in advertising ramped up through the second half of the year. Investment in global A&P for the fiscal 2006 is expected to be in the range of 7 to 9%.Operating income for the first six months was 24.5 million compared to 19.1 million in the same period last year. Interest expense for the first half was 1.9 million, down .8 million versus last year, reflecting the debt reduction we spoke of earlier. Provision for income taxes was 35.6% for the first six months, up from 34.9% in the comparable period last year. The increase in rate is due to the same factors affecting Q2 results. Net income for the first six months was 14.7 million, up 35.1% from the same period last year. On a diluted per share basis our aims of $0.88 were compared to $0.65 of last year.About our balance sheet, at February 28, cash and cash equivalents were 33.6 million, down slightly from 37.1 million at the end of the fiscal year. Our accounts receivable increased slightly to 44.8 million as a result of timing. And inventory increased to 12.5 million, up by 4.5 million from the 8 million at August 31st. And this was primarily due to inventory acquired to support new product introductions and promotion, including the WD-40 No-Mess Pen. As the Company expands its manufacturing sourcing outside of its historical package or model, there is a potential need for the Company to carry higher levels of inventory. Our long-term debt declined to 53.6 million following a 10.7 million principal -- principal payment made in Q1.Our next fiscal payment is due in October. Thanks for -- that's about all the information that we have for now. If you want more information it will be available in our 10-Q, which we filed on Monday, April 10.Thank you and back to Mike Irwin.

Thanks, Jay. As a result of the year-to-date performance as well as things we see up ahead, we are updating our guidance on net income. We had originally expected net income to range between $24.7 million to $28 million, generating earnings per share of between $1.45 and $1.65 based upon 17 million shares outstanding. We now expect net income to range between $25.5 million and $28 million which would produce earnings per share of $1.50 to $1.65, based on 17 million shares outstanding. Looking ahead towards the second half we expect to ramp up our marketing investment. Marketing investment in the first half, again, we talked about was affected by timing of brand support activities. We also remained concerned about higher cost from manufacture as our recent experience indicates that the trend in cost of goods is still going up. We will be implementing a price increase on certain items in certain markets to help alleviate the higher cost of goods. Nonetheless we can never be certain as to how customers might react to price increases, despite the widespread awareness of the circumstances that drive higher costs for many manufacturers.So that is all on the financial update. We will turn it back over to Garry Ridge.

Thanks Mike, Jay and Maria. We would certainly be happy now to take any calls and questions.

(OPERATOR INSTRUCTIONS) Jeff Zekauskas of J.P. Morgan.

Yes, this is Will Hunter for Jeff Zekauskas. Looks like you guys earned $0.88 in the first half of the year. What's different in the second half of the year that you expect EPS to be lower, based on your full year guidance?

There's a number of things that we talked about, Will. First off, thanks for the question. As we said before we continue to be concerned about higher cost in manufacture. And it's something that we still see the trend going up and we're not sure that it's done yet. We will attempt to address that as we mentioned through implementing a price increase on certain items in certain markets. But that also brings a risk of how customers will respond despite the fact that many manufacturers across many industries are in a position to where they have to raise prices. And then the other issue that -- it is not really an issue but a consideration for us -- is that we see the opportunity to ramp up our marketing investment in the second half. And so that of course will bring a higher expense that comes with it.

Thank you very much and just, secondly, on your tax rate you noted several items that raised their provision for taxes in the second quarter. Would you characterize these items as one time in nature or are these ongoing items?

Jay, you want to comment on that?

Yes; they are primarily ongoing items. We see our rate slightly higher. It is gone up a ways. It'll be tax credits that we've historically had are playing out and so we see a little bit of a lift in our tax rate as we go forward.

Liam Burke with Ferris, Baker Watts.

Garry, could you talk a bit about you've had some pretty strong product introductions, both on households and on lubricants. Looking past '06 do you have anything on the pipeline for '07 or are you just going to continue to promote the ones that you have out there?

Back in I think it was 2002, in fact, on December 5th we formed a group within the Company called Team Tomorrow. And Team Tomorrow's mission was very simple. They were going to focus on revenues of the future. We've actually doubled these -- nearly doubled the investment in Team Tomorrow this year. Our investment in what would commonly called by others is research and development is up around 4 million this year. I think it was about 2.6 million last year. So the background of that is this Company is now a marketing distribution and innovations company. And, yes, we certainly have a stream of product innovation that is going through varying processes of review right now. And, yes, we will be bringing appropriate product to the market under the brands we have as we go forward. Innovation is now and will continue to be a vital part of our growth strategy. Growth strategy is basically sell more WD-40 wherever you can. As you probably know I'm in Shanghai right now looking for that last squeak and we are going to find that last squeak in China. So innovation is a part of our business and will continue to be. And, yes, there will be new products rolled out as they are completed and verified and when the timing is appropriate.

Specifically on promotions for the second half obviously your guidance would indicate that it would be higher as a percent of revenue. But are there any particular products or channels that you have in mind or is it just general across the board increases?

Basically our strategy these days is to focus promotion on innovation. So already, we -- you would have or you may not have seen but we have started a media program on our new Spot Shot trigger. That media started to run last quarter. We've got activity behind our Pen and our Smart Straw. So as we focus on the innovation the whole brand gets the halo effect with that. Looking at the second half of the year, the thing that we are comfortable the thing that we're happy with is, we're seeing the top line growth. Our uncertainties really are in cost of goods. We will know better at the end of the third quarter. We've got price right we're implementing now and we are getting the traditional death threats from some of our retailers -- they are not going to promote us. We have got some choppy waters to get through in the next 90 days as we roll out some of those things.

Frank Magdlen with the Robins Group.

Good afternoon and congratulations on a nice quarter. Garry, you mentioned new distribution. Was there any significant new distribution in North America?

Nothing significant. We are happy that we've been able to take things like our new No-Mess Pen in places that we weren't before such as hobby and home areas, such as the office supply area, and we're also ramping up our business in the [Gansan] area with our professional range of product. So distribution is a creep game. We just continue to develop it. I'm saying outside of the U.S. We continue to use the new products to get us new distribution and different trade channels and multiple trade general distribution is an absolute focus of ours. It is one of our core strengths. Make the end-user aware and make it easy for him to buy.

Then was the professional line responsible for a significant part of the household product in sales increases?

No.

So it's still in its infancy?

Yes.

Considerable way to go. All right. Thank you very much.

(OPERATOR INSTRUCTIONS) A follow up from Jeff Zekauskas. ))Jeff Zekauskas:This is (indiscernible) on Jeff's team. Very strong on sales results this quarter. Is the number of sales -- as the rate of sales grows, you see the square represented for the second half and can you sort of talk about what the contribution was from new products? What's core volume growth and pricing?

I will touch quickly on the sales rate if you like, Mike. It's within the range of our guidance. We said that sales this year would grow 9 to 14%; and it's within a little bit above the range. If you look year-to-date it's right within the range. So we have had two solid sales growth quarters off the back of a reasonable sales growth last year. And that is coming from, firstly, the increased revenue from our innovation which was a strategy that we had been talking about for some time. It's about sweating the assets of the brands that we have. And secondly the other area of growth which is our global expansion, we've had a very solid three years in Europe and that continues. We're looking at our opportunities in places like China and Russia. So that's really where the sales come from.Michael, I will let you or Jay cover the other.

The second part of your question had to do with -- could you repeat that again?

Yes just like the contribution to sales growth maybe what was core volume growth? What was the contribution from new product and what's the contribution from the price increases?

When respect to new products we haven't split out the revenue growth by what the impact of new products were. What we would say about new products though is that we see two components of new product contribution to sales. One of them is that, in particular in household products, but really across our business, innovation doesn't necessarily imply a 100% incremental. So new products sales are important, not only to grow our sales, but in some cases to maintain them as well.We have not split out the price increase that we took last year as its -- on its impact on sales. So we don't have that number.

And if I recall, Mike, there was no price impact in the second quarter.

No. The price increase that we've alluded to on this call is one that's become -- that will begin to affect us during the third quarter as it begins during the quarter.

Was there any benefit from price this quarter at all that contributed to sales growth?

Yes there was. And we will be providing more information and background on that when we issue our 10-Q on Monday.

The last question I have, in terms of the advertising expense or the promotional expenses that is netted out of sales. I think last quarter that number was down 1 million and it fell another million this quarter. Should that number also be increased? Should that number go up in the second half of the year or do you have an expectation?

I think what we've talked about on the A&P investment, here is the part that is not a reduction to sales but the actual A&P investment that appears on the income statement. Just to backtrack for everyone's benefit. There's two big pieces of marketing investment that we make in our business. One of which shows up on the income statement as an expense and that is for things like media advertising, public relations, printed materials and that sort of thing. Traditional advertising. The other portion is recorded as a reduction in our sales and that portions is for things like coupons that we might draw up in a particular market, slotting. Any sort of incentive that we might give to customers to promote, to display or to sell our products. And we, as we've said before we had foreseen changes in the way that marketing takes place whether it shifts from -- into advertising and away from coupons or toward coupons or slotting and away from advertising, just depending upon what the need of the business is at the time. So we have been going through a process over the past year or so in the U.S. market in particular where we've weighed which options that we're investing in and what the best returns are. And as Jay alluded to in his commentary that part of the reasons why we had a bit of a drop-off last year was that we stepped back and re-evaluated the investments that we were making. So as we look ahead to the second half of this year, we see our traditional marketing investment beginning to ramp up.

And, everyone, I will turn the conference back to you for closing remarks.

That's it for me here in Shanghai.

This is it from San Diego. Thanks very much for your interest in the call today and we will look forward to speaking to you again in three months.

That will conclude today's conference. You may now disconnect and have a pleasant day.