WD-40 Co (WDFC) 2007 Q2 法說會逐字稿

Thank you very much for holding, everyone, and welcome to this WD-40 Company second-quarter 2007 earnings release conference call.

Just a reminder that today's call is being recorded.

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

Maria Mitchell.

Please go ahead.

Good afternoon and thank you for joining us for our second-quarter earnings call for fiscal 2007.

Today we're pleased to have Garry Ridge, President and CEO, and Mike 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 the impact of new product innovations and renovation; foreign currency exchange rate; impact of cost of goods; the timing of advertising and sales promotions activities; 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 Relations section of our website at WD40.com.

Our third-quarter fiscal 2007 earnings conference call is scheduled to take place on Monday, July 9, 2007, at 2PM.

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

Thank you, Maria.

Good day and thanks for joining us.

Our shareholders' letter last year opened with, "We only see one market, and it is global." We continue to see the benefits from our growing global operations.

Today, we reported net sales of $79.3 million for the second quarter of fiscal 2007, an increase of 11% over last year.

Year-to-date net sales are $151.3 million, an increase of 9.1% over the same period last year.

Net income for the second quarter was $8.9 million, up 23.6% compared to the second quarter of last year, and year-to-date net income is $14.6 million, down 0.8% from the same period last year.

Earnings per share for the quarter were $0.52 compared to $0.43 last year, and year-to-date earnings per share are $0.85 compared to $0.88 last year.

A look by product segment -- our lubricants segment had sales in the second quarter of $56.7 million, a 15.7% increase, and year to date, our lubricants segment had sales of $105.6 million, a 15.5% increase.

Hand cleaners were $1.2 million, down 12.1%, and for the year so far, $2.9 million, down 9.7%.

Household products had sales of $21.4 million, an increase of 1.6%, and year to date are at $42.7 million, down 2.8%.

Lubricant sales were up in all of our trading blocks, assisted by the continued geographic expansion, along with the addition of WD-40 Smart Straw and WD-40 No-Mess Pen, which were introduced in the third and fourth fiscal quarters of 2005.

Our core lubricant business continues to be a growth opportunity.

From 2003 to 2006, our lubricant sales grew at a compounded annual growth rate of 9.5%.

Household product sales' increase for the quarter were due to sales growth in Australia and Europe compared to Q2 last year, as well as sales growth in the Spot Shot and Carpet Fresh brands in the U.S.

The sales decline for the year-to-date period were due to the U.S.

and were a result of several factors, including lost or decreased distribution, timing of promotions and customer purchasing patterns.

We're pleased to see the year-to-date sales growth of our household products in Europe and the Asia-Pacific business segments.

We continue to focus on innovation and renovation through product packaging and promotional strategies and to address the challenges and opportunities that exist within the competitive environments of the household products categories.

A look at our regions -- the Americas trading block had Q2 sales of $48.9 million, an increase of 7.6%, and year to date are at $94.1 million, an increase of 2.6%.

The Americas region is our largest segment, covering 62% of our total sales in the current fiscal year.

It is made up of the U.S., which had a 9.6% increase in sales for the quarter and is up 1.7% for the year.

The sales increase in Q2 was mainly due to the WD-40 brand.

In Latin America, sales in the quarter were down 2% but are up 8.3% for the year.

Our Latin American business is primarily based on lubricants, WD-40 and 3-IN-ONE brand.

Brand sales were down 2.7% in the quarter, primarily due to decreased promotional activities.

Year to date, WD-40 sales in Latin America were up 9.1% over the last year.

In Canada, we were down 4.3% for the quarter, but were up 7.3% for the year.

We sell lubricants, hand cleaners and household products in Canada.

Second-quarter sales decline were a result of decreased promotional activities.

Year-to-date Canadian sales growth was driven by the impact of Smart Straw and some promotional activities around the 2000 Flushes brand with key customers.

Across the pond to Europe, the European trading block had sales of $24.4 million in the quarter, up 19.1%, and year-to-date sales of $46.2 million.

That is up 23.6%.

Our European business includes lubricants and household products.

We sell into the European market through a combination of direct operations in certain countries as well as through distributors in others.

Changes in foreign currency exchange rates compared to the same period last fiscal year positively impacted current year-to-date sales by approximately $3.9 million or 9%.

In our European direct markets, our sales were up 15.3% for the quarter and are up 19.5% for the year.

We have direct sales forces in the United Kingdom, Spain, Italy, France, Germany, Portugal, Austria, Denmark and the Netherlands.

Sales in U.S.

dollars for the second quarter grew as follows -- the UK was up 40%; France was up 23%; Germany, Switzerland, Austria, Denmark and the Netherlands were all up 8%; Spain and Portugal were up 13%; and Italy was up 52%.

Sales from these countries accounted for 69% of the region's sales in the first six months of the current fiscal year, down from 71% in the previous fiscal year.

In our distributor markets in Europe, sales in the quarter were up 30% and are up 33.9% year to date.

We sell through independent local distributors in Europe and Northern Europe, the Middle East and Africa.

We had double-digit sales going in all of our distributor markets.

The distributor market accounted for approximately 31% of our total European segment sales in the first six months of the current fiscal year, up from 29% in the same period last year.

Slipping down to Asia, the Asia-Pacific block's sales were $6 million -- they were up 8.7% -- and are $11 million year to date, up 14.6%.

In Asia, sales were up 3.9% for the quarter and up 13.3% so far for the year.

Sales in Asia were up 3.9% in the quarter, primarily due to the increase of WD-40 sales to customers in China.

Sales across other regions in Asia were also up, including Korea, Malaysia and the Philippines.

Year-to-date sales have increased by over 13% over the previous year-to-date period.

The region represents a long-term growth potential for the Company.

While the Company has historically sold to Asia through third-party marketing distributors to help accelerate the growth in the region, the Company has begun direct operations in China in the current fiscal year.

We're pleased that our China subsidiary has already opened for business and is now actively selling in this important market.

In Australia, sales for the quarter were up 19.4% and are up 17% for the year.

Sales in Australia were up in the quarter due to the growth primarily in the NoVac brand, which is a new product introduction, and an increased distribution of lubricant sales also included to the growth in Australia as a result of increased promotional activity and the continued launch of the WD-40 Smart Straw.

That is it for the sales update.

Now I will turn over to Mike Irwin, who will continue the review of the financials.

Thank you, Garry.

In addition to the information presented on this call, we suggest that you review our 10-Q that will be filed on Monday, April 9.

As Garry has already covered the sales in detail, we will continue with the rest of the financials.

Gross profit was 49.2% of sales in the second quarter compared to 48% of sales in Q2 last year.

This 1.2 percentage point increase in the gross margin percentage was primarily attributable to price increases on some of the Company's products that were implemented during the third quarter of the prior fiscal year to reduce the impact of rising cost of products sold.

The increase in pricing added approximately 2 percentage points to gross margin in the current fiscal year's second quarter compared to the prior fiscal year's second quarter.

Another factor in the rising gross margin percentage was a decrease in advertising and promotional and other discounts, which positively impacted gross margin by 0.3 percentage points.

Certain A&P costs such as coupons and slotting are treated as a reduction in sales.

The timing of these promotional activities, as well as shifts in product mix, may cause fluctuations in gross margin percentage from period to period.

Offsetting the above benefits to gross margin was the continuing rise in the cost of raw materials and components, including aerosol cans and petroleum-based products.

Higher costs continue to negatively affect gross margins in all of our Company's regions.

Selling, general and administrative expenses for the second quarter increased 14.3% to $19.7 million.

The increase in SG&A stems in part from higher employee-related expenses of $0.9 million for salary increases, benefits and additional staffing to support the Chinese operations; freight costs were up $0.2 million due to sales growth; and miscellaneous expenses, which include increased commissions, travel costs and legal expenses, which contributed an increase of $0.7 million.

$0.6 million of the SG&A expense increase was due to changes in foreign exchange rates through the quarter.

The higher costs lowered our operating leverage in the quarter as SG&A expense increased to 24.9% of sales in the second quarter compared to 24.2% in the same period last year.

Advertising and sales promotion expenses increased to $5.1 million in the second quarter from $4.8 million in Q2 last year and as a percent of sales decreased to 6.4% from 6.8% in the second quarter last year.

The increase in the current-year period is related to an increase in advertising activities in the Asia-Pacific region compared to the same period last year.

Operating income for the quarter then followed was $14.1 million compared to $12.1 million in Q2 last year.

The amortization expense that we see in our income statement 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 for the quarter was $0.6 million, down from $0.9 million in Q2 last year, reflecting the continued reduction in our debt.

We made our annual $10.7 million principal payment in October 2006.

The provision for income taxes was 33.2% for the current-year quarter, a decrease from 35.9% in Q2 last year.

The decrease in rate is primarily due to one-time favorable rulings on foreign tax matters, the renewed federal research and experimentation credit and the tax benefit of municipal bond interest.

The decrease in tax rate was partially offset by the impact of reduced low-income housing tax credits and the phase-out of extraterritorial income deduction.

Net income in the quarter was $8.9 million, up 23.6% from Q2 last year, and on a diluted per share basis, earnings were $0.52 compared to $0.43 in Q2 last year.

Diluted shares outstanding have increased to 17.2 million shares compared to 16.8 million for the prior-year quarter.

Moving on to the financial results for the six-month period, gross profit was 48.6% of sales in the first six months compared to 48.0% of sales in the same period last year.

The 0.6 percentage point increase in the gross margin percentage was primarily attributable to price increases on some of the Company's products that were implemented during the third quarter of the prior fiscal year to reduce the impact of rising cost of products sold.

The increase in pricing added about 2 percentage points to gross margin percentage in the current fiscal year compared to the first six months of the prior fiscal year.

Another factor in the rising gross margin percentage was a decrease in advertising and promotional discounts, which positively impacted gross margin by 0.4%.

Again, the timing of these promotional activities, as well as shifts in product mix, may cause fluctuations in gross margin percentage from period to period.

As we said before, the same holds true that partially offsetting the benefits in gross margin was a continuing increase in cost of raw material and components, including aerosol cans and petroleum products.

The higher costs again continue to negatively affect gross margins in all the Company's regions.

Selling, general and administrative expenses for the first six months increased 15.4% to $38.8 million, and the increase stems in part from higher employee-related expenses of $1.9 million for salary increases, benefits, relocation expenses and additional staffing to manage our China business and inventory control.

Freight costs were up $0.5 million due to sales growth and fuel surcharges.

Bad debt increased $0.3 million versus last year as the same period last year reflected the recovery of bad debt.

Miscellaneous expenses, including increased commissions, travel costs and legal expenses, were up $1.5 million.

And $1 million of the SG&A expense increase was due to changes in foreign exchange rates.

As a result of the higher costs, they lowered our operating leverage for the first half, with the SG&A cost as a percent of sales rising to 25.6% in the first six months compared to 24.2% last year.

That continues to be a concern for us, as it has been for some time.

Advertising and sales promotion expenses increased to $10.7 million in the first six months from $8.2 million in the same period last year and as a percent of sales increased to 7.1% from 5.9% in the prior year.

The increase in the current-year period is related to the timing of our advertising investment in the first six months of this fiscal year compared to the first six months of the prior fiscal year.

This fiscal year, the Company increased its consumer broadcast and print media advertising to support new products compared to the same period last year.

Our investment in global advertising and promotion expense for 2007 is expected to be in the range of 6.5% to 8.5% of sales.

Operating income for the first six months was $23.7 million compared to $24.5 million in the same period last year.

Net interest expense for the year-to-date period was $1.3 million compared to $1.9 million during the first six months of fiscal 2006.

Again, we made our annual $10.7 million principal payment in Q1.

The provision for income taxes was 34.2% for the first six months of fiscal 2007, a decrease from 35.6% in the prior year.

The reasons for the difference in tax rate are the same as previously described for the quarter.

To put things in perspective, our tax rate for the entire fiscal year 2006 was 34.41%.

Net income in the first six months was $14.6 million, down 0.8% from the first half of the prior year.

And on a diluted per share basis, earnings were $0.85 compared to $0.88 in the prior year.

Diluted shares outstanding have increased to 17.2 million shares compared to 16.8 million in the prior-year period.

Regarding the dividend, on March 27, the Board of Directors declared a regular quarterly dividend of $0.25 per share, an increase of 13.6% from the previous year's dividend of $0.22 per share, payable on April 30, 2007, to shareholders of record on April 16, 2007.

Based on today's closing price of $31.89, the annualized dividend yield would be 3.1%.

Moving on to our balance sheet, at February 28, 2007, cash and equivalents were $46.6 million, up from $45.2 million at the end of the fiscal year.

Accounts receivable increased to $49.7 million, up $5.2 million from the end of last year as a result of the timing of sales.

Inventories decreased slightly to $15.2 million, down by $0.3 million versus the end of the fiscal year.

Our inventory level has grown in recent years due to innovations as well as a broader sourcing of products outside of our traditional build-and-ship supply chain.

Although we don't currently envision dramatic increases in inventory, we are willing to invest in inventory to the extent that those levels can help us grow sales and/or achieve lower costs.

Current liabilities were $48 million, up from $43.7 million at August 31.

Accounts payable and accrued liabilities increased by $8.1 million due to timing of payments and higher sales levels in January and February of this fiscal year compared to July and August of fiscal 2006.

On March 27, 2007, the Company's Board of Directors approved a share buyback plan.

Under the plan, which is in effect for up to 12 months, the Company is authorized to acquire up to $35 million of the Company's outstanding shares.

That is all for the financial update.

More information, again, is available in our 10-Q, which will be filed on April 9.

Thanks very much, and back to Garry Ridge.

Thanks, Mike.

Just to sum up, despite the significant headwinds in our cost of goods, we believe we are on track with our earnings guidance.

We will continue to focus on improving our gross margins from both cost reductions and innovative activities.

Here is a recap of our guidance for fiscal 2007.

We expect sales to grow between 7% to 13% to $307 or $324 million, driven by continued geographic expansion, market penetration and new products.

We expect our advertising and promotion investment to range between 6.5% and 8.5% of sales.

We expect net income to grow between 3.4% and 12.5% to $29.1 million to $31.6 million, which would achieve an EPS in the range of $1.70 to $1.85, assuming 17.1 million shares outstanding.

This includes the impact of the first-year results in China, which are expected to reduce net income in 2007 by approximately $1 million or $0.06 a share.

We are continuing to look for the right acquisition that meets our guidelines.

Specifically, we're looking for niche brands with demonstrable performance that can be completely integrated into our business.

In the past year, however, we have found that prices were simply too high.

We feel that the investment we're making in China is now similar to an acquisition, but it impacts the P&L more than the balance sheet.

We would be pleased now to answer any of your questions.

(OPERATOR INSTRUCTIONS).

Jeff Zekauskas, JPMorgan.

Can you talk a little bit more about some of your successful pricing initiatives that assisted your gross margin in the quarter?

Were they mainly in lubricants or in some other area?

Were they in the United States?

Were they offshore?

Can you talk about that?

I think that you have probably summarized it, actually, yourself pretty well.

We had price increases on selected products in selected markets really around the world.

Taking pricing increases is always a challenge.

However, we found last year, as we did in the year before when we implemented a price increase, that the driving forces behind our price increases over the past two years were so well know in the marketplace that our customers couldn't really object to their existence, though they weren't happy with taking it.

And price to us remains a tactic that we are hesitant to deploy, as we continue to have an obligation to have products that deliver above-expectation performance at extremely good value to end-users.

So we don't always see that as an easy option.

But it has helped to soften some of the impact of higher costs that have plagued us in recent years.

So was the mix of assistance to you this quarter, because you did have such strong results in WD-40 -- that is, is a lubricant-biased mix positive for you?

A lubricant-biased mix -- as you've seen from our 10-Q filings, the overall impact of our European operation is more significant today than it was before just because of the momentum and size.

So certainly, as Europe grows and becomes more of a dominant influence on our business, then profitability in that area, as you see in our filings, is a little higher than in the Americas trading block.

And in essence, the other things, Jeff, to build on that is that the investment -- the marketing investment that we make in our lubricant business is consistently lower than it is in household products because of the difference in purchase cycle.

And so that part of it is a favorable thing, if we are selling more of things that we don't have to support as aggressively as we do household products.

I guess just a last question for now -- in the first half, you have had these tremendous results in lubricants, where you are up, order of magnitude, 15%.

And in household products, for the first half, you're down a little bit.

Is it the case that these are the overriding trends or the general trends of your business, that lubricants is likely to be strong through the remainder of the year and household products is likely to be weak?

Or in some sense, is the first half a little unrepresentative, and you expect lubricants to weaken and household to strengthen?

Can you just talk about that in general?

Yes, Jeff -- if you were to look at our goal, FY '06 to FY '10, which is a page that is prominent on our website, it does say that we, over a four-year period, expect the growth in lubricants to be higher than the growth in household products.

And that's primarily driven by the continued development of our offshore markets of Europe and Asia and the innovation and the introduction of things like Smart Straw and Pen, which are products that have come out of our Team Tomorrow product development plan.

So yes, again, Europe is a bigger part of our business these days.

As we said in the call, our lubricant business has grown at a compounded annual growth rate of 9.5% since 2003.

Right, so for the second half, how fast do you think lubricants will grow in rough terms and how fast do you think household products will grow?

We don't split them out specifically, but we do give the overall guidance that we have given as far as the total sales.

Liam Burke, Ferris, Baker Watts.

You talked about households in the U.S., you had Spot Shot and Carpet Fresh were up.

Presuming that 2000 Flushes and X-14 were down, was there any particular challenge or anything in those two categories?

No, again, it is timing.

We still have the number, we think, for the year.

So I think that these things ebb and flow a little bit.

We are still in the early stages of the relaunch of X-14 as the bathroom expert product.

That product is starting in its new packaging and trade dress to appear on shelves right now.

There is -- marketing initiatives behind that will come into play in the third quarter.

So no, I don't think there is anything we're losing a lot of sleep over.

And how was 1001 this quarter?

How did that meet expectations?

Well, if you look at it, mostly all of our household products business in Europe is 1001.

And I think if (indiscernible) or Mike, have you got it there?

I don't have it split out, but --

There will be more commentary in the Q when it comes out.

And it looks like ad and promotion, to sort of follow on from the previous question, was at the lower end, but sales were stronger.

And I guess I'm answering my own question -- it was primarily a mix of product growth with less investment required on the WD-40 brand and more on households.

So would we anticipate a lift in the second half on households?

We would anticipate coming in within the range that we have guided.

And in fact, if you look in real dollar terms, our marketing, advertising and promotional expenditure for the year is a couple of million dollars ahead.

So we expect to be tracking as we have guided.

Frank Magdlen, The Robins Group.

Just to talk about household products a little bit longer, I think in the last quarter, you mentioned that you missed out a little bit -- you had some reduced distribution.

And I know we are coming up on the July period of time, in which some of the retailers might restock.

Can we look for any accretion to that distribution that you may have lost?

Well, in fact, the particular things that we were talking about were seasonal around the Christmas period and have rotated back in now.

So we would get some of the impact of that already.

So again, it was a very seasonal thing.

And then I guess the second question is are you prepared to talk about any other relaunch or product reformulation besides the X-14 being the bathroom expert?

No, there is nothing else that we have on the horizon to talk about at this time.

And Frank, you may note that as in the past, we talk about product introductions and innovations once we do them as opposed to signaling advanced warning to competitors.

Right, but I will be honest -- my job -- I try not to be the buyer of the product when I am at home.

I let my wife do that.

No, I'm just saying that if I walk into a Kroger or Wal-Mart or something, will I find something there that you would not have talked about yet?

No, I don't think so.

Robert Felice, Gabelli & Company.

Just a couple of quick questions.

I guess just first, I was hoping you could shed some color on the Board's recent decision to authorize the buyback.

Perhaps I am reading into it a little too much, but on the acquisition front, it sounds like you haven't really found anything that falls into what you're looking for at least on the price side.

And perhaps at this point, you have resorted to buying back stock as a better use of cash.

Correct.

I think that you're looking at -- what we are looking at is there are not a number of -- there are no real viable options at prices that we want to pay.

And we want to have the opportunity, then, when the time is right, to, if we feel an investment in our Company is more appropriate, then to have that opportunity.

And Robert, just to clarify that, I don't think that by having a share repurchase authorization, is an implied thing that we see that as a better option to acquisition.

As Garry mentioned, it gives us another option and the timing to do it.

Fair enough.

And then I guess I was also wondering -- you mentioned the $1 million impact from China during the year.

And I was wondering what magnitude or portion of that has already flowed through the P&L -- in other words, what has hit so far and what should we expect in the back half?

What we have had so far is about a $500,000 expense impact on China as we have scaled up our operation.

And that operation is now open for business in Shanghai and is selling and taking orders.

As we were in the mode of building up and preparing for its opening during the first half of the year, that is where the $500,000 expense side comes from.

So the second half would represent a full half of a year of operation of that.

And so the$500,000 is what we have recorded so far.

And with sales ramping up there in the back half, you wouldn't expect that expense to mitigate a little bit?

I think it is too early to tell.

We've only been open a couple of weeks.

It may be different from that, but we'll know more at the end of the next quarter.

And I guess lastly, in response to an earlier question, you had said that you are I guess seeing a positive benefit as sales increase in the European region and you have slightly higher gross margins.

Are we seeing a longer-term structural shift, then, in gross margin percentage -- I guess, in other words, a gross margin level we saw this quarter, would you view that as sustainable longer term in light of this shift?

Our goal is to get our gross margin back above 50%.

We will get it from diversification through geography, diversification through trade channel, diversification through product innovation and renovation.

So certainly, it is not one singular thing, but our European business, which is -- it has and continues to grow at a healthy rate, is helping us in that area.

But it is one part of the grand plan.

And the other thing about it, as we mentioned earlier on the call today, we continue to be concerned about rising costs.

And as much as we would like to see our underlying costs decline, we are still worried about the implications were are receiving in our supply chain for things like aerosol cans and anything pretty much based on petroleum.

Jeff Zekauskas, JPMorgan.

Can you talk about the impact of your new products on lubricant sales?

In other words, how much did the No-Mess Pen and your other new product influence sales growth?

Jeff, we don't break that out by product line, and that is an intent that we have.

But we can tell you that we continue to see good opportunity from our Smart Straw product.

And the No-Mess Pen is a product that has a long life cycle for us.

And as we convert new customers to it, it's just another delivery system.

We see that the new delivery systems for the core brand of WD-40 as a favorable way for us to go.

And certainly the market seems to have liked that.

So we don't break it out, and we're not going to break it out for obvious competitive reasons.

But certainly, it is contributing.

Our growth in WD-40 is coming from two areas -- the new products and geographic expansion.

Did your average prices in lubricants go up in the quarter?

We don't talk about average price.

But we did say that there have been some benefits from the pricing that we have received.

And if we talk about the quarter in particular, we said that the increase in pricing added 2 percentage points to gross margin.

Right.

I guess if I can just make a suggestion, you will publish your 10-Q, I guess, on Monday?

Right.

Maybe you might think about publishing your Q in advance of your conference call, because the level of detail in the Q is much greater than you can deliver orally.

And it just helps in trying to understand the results.

Thank you.

With that, ladies and gentlemen, we will conclude the question-and-answer session.

I will turn things back over to Garry Ridge for any additional or closing comments.

Thank you very much.

Thanks for joining us.

Enjoy the Easter break, if you are having one, and we will see you in 90 days or so.

Thanks again, ladies and gentlemen.

That concludes today's conference call.

Have a good day.