WD-40 Co (WDFC) 2011 Q3 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good day, everyone, and welcome to this WD-40 Company third-quarter 2011 earnings release conference call.

  • Today's call is being recorded.

  • At this time, it is my pleasure to turn the call over to the Vice President of Corporate and Investor Relations for WD-40 Company, Ms.

  • Maria Mitchell.

  • Please go ahead, ma'am.

  • Maria Mitchell - VP of Corporate and IR

  • Good afternoon, and thank you for joining us for our third-quarter earnings call for fiscal 2011.

  • Today, we are pleased to have Garry Ridge, President and CEO, and Jay Rembolt, Vice President and Chief Financial Officer.

  • 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 commodity prices, impact of changes in foreign currency exchange rates, impact of promotional timing, the impact of introducing new products, and fluctuating global conditions, both in the United States and internationally.

  • The Company's expectations, beliefs, and projections are expressed in good faith and are 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, and 10-K.

  • 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 wd40company.com

  • Our fourth-quarter and fiscal year 2011 results will be released on Monday, October 17, 2011.

  • Our earnings call will be held on that same day.

  • I'd like to turn it over to Garry at this time.

  • Garry Ridge - President and CEO

  • Thank you, Maria.

  • Good day, everyone, and thanks for joining us for today's conference call.

  • Today, we reported net sales of $85.5 million for the third quarter of fiscal 2011, an increase of 4% over Q3 last fiscal year.

  • Year-to-date net sales were $245.7 million, an increase of 2% versus the same period last fiscal year.

  • Net income for the third quarter was $8.1 million compared to $9.1 million in Q3 last fiscal year, and diluted earnings per share for the third quarter were $0.47, down from $0.54 from the same period last year.

  • Year-to-date net income was $26.2 million compared to $29.2 million in the same period last fiscal year, and year-to-date diluted earnings per share were $1.53, down from $1.74 for the same period last fiscal year.

  • This fiscal year, we've experienced rising commodity prices, which have unfavorably impacted our gross margin.

  • We've also experienced sales challenges in the US, due to reduced product offering and lost promotional activities with certain key customers.

  • These events are putting pressure on our net income and, hence, have caused us to revise our guidance for the current fiscal year.

  • At WD-40 Company, we don't panic; rather, we adjust and keep our focus on our long-term objectives.

  • To address higher input costs, we are implementing price increases late this fiscal year.

  • To address our sales challenges in the US, we are working to bring innovation to the market sooner, and focusing our marketing efforts on increasing product usage amongst our heavy users.

  • More than ever before, our business is poised for growth, as we continue to invest in our four core strategic initiatives that we call the Fantastic Four.

  • These include expanding into global growth markets, bringing innovation into existing markets, developing our business through acquisitions and strategic partnerships, and using our new marketing strategies to leverage our loyal end users' affinity for our brands.

  • During the third quarter we made significant strides in our core strategic initiatives.

  • Global expansion, our first initiative, continues to be a major driver of sales growth.

  • Period over period, total sales outside the US grew by 10% in the third quarter, and 13% year-to-date as compared to the prior fiscal year periods.

  • As a percent of total revenue, sales outside the US were 57% of global sales in the third quarter compared to 53% in the prior year, and are 60% of our sales year-to-date.

  • During the quarter, we also made significant progress on the development of our new WD-40 Specialist line of products, which was born out of our brand exploration and extension project under our fourth core strategic initiative.

  • WD-40 Specialist is a portfolio of specialty problem-solving products that will wear the famous WD-40 brand trademark and yellow shield.

  • It is aimed at the trade and doer enthusiasts who currently use the WD-40 brand.

  • We believe that the WD-40 Specialist line of products will also be a platform for our second strategic initiative to leverage innovation into existing markets.

  • Over time, WD-40 Specialist will provide us with the opportunity to develop products that will build our overall category offering.

  • During the fourth quarter of this fiscal year, we plan to ship the first three products in the Specialist line in the US market.

  • We plan to introduce additional items with a national launch of WD-40 Specialist brand during early fiscal 2012.

  • We are concurrently working on a launch of the WD-40 Specialist in the UK for fiscal year 2012, with additional markets under consideration.

  • Two products for the line are being developed via a strategic partnership, our third strategic initiative.

  • Our work to identify an acquisition that meets both strategic and financial goals continues.

  • We are yet to find an acquisition with a valuation that is attractive or meets our strategic goals.

  • That completes the update on our strategic initiatives, so let's move on to more of the details of our third quarter and year-to-date results, starting with sales.

  • Multi-purpose maintenance products made up 85% of our global sales in the third quarter, with the category sales up 7% in Q3 and 5% year-to-date compared to the prior fiscal year periods.

  • All three trading blocks experienced growth in multi-purpose maintenance products in Q3 period versus period, with the Americas up 5%, Europe up 4%, and Asia-Pacific up 26%.

  • The sales growth in the Americas was driven primarily by a major promotional program in the US, while sales growth in Europe was primarily driven by the growth of WD-40 Smart Straw and 3-IN-ONE products, and our increased focus on the industrial channels and our ongoing growth of our base business.

  • Growth in Asia-Pacific region was attributed to improved economic conditions throughout the Asian region, and the development of markets within the multi-purpose maintenance products category.

  • Our work in China continues at a good pace and we are pleased with our progress.

  • Global sales of multi-purpose maintenance products by brand were as follows.

  • WD-40 brand sales were up 7% in Q3 and up 5% year-to-date.

  • Sales of the 3-IN-ONE brand were up 14% in Q3 and are up 6% year-to-date; and the Blue Works brand represented less than 1% of global sales, both in Q3 and year-to-date.

  • Homecare and cleaning products made up 15% of our global sales in the third quarter, with the category sales down 12% both in Q3 and year-to-date.

  • Products under this category include Spot Shot, 2000 Flushes, Carpet Fresh, and No Vac, 1001, X-14, Lava and the Solvol brands.

  • This category continues to represent a smaller portion of our business per our strategic roadmap, particularly in the Americas.

  • By trading block, sales of homecare and cleaning products in the third quarter were down 18% in the Americas.

  • They were up 8% in Europe, and up 7% in Asia-Pacific.

  • Homecare and cleaning product sales in the Americas have been negatively impacted by competition, category declines, lost distribution, reduced product offerings, and the volatility of orders with certain customers, particularly those in the warehouse, club and mass retail channels.

  • All brands under the homecare and cleaning products category in the US experienced sales decline in both Q3 and year-to-date, with the exception of our Lava soap brand, which has sales maintained year-to-date compared to the prior-year period.

  • While we made a strategic decision to focus our investments on innovation on our multi-purpose products, we are continuing to work to stabilize sales of our homecare and cleaning products, particularly in the US market.

  • We are conducting market research this fiscal year on our Spot Shot and 2000 Flushes brands, and are planning to introduce product improvements next fiscal year on the Spot Shot brand.

  • We are also considering leveraging innovation from our international markets.

  • Sales growth of homecare and cleaning products in the Asia-Pacific region was driven by sales in Australia.

  • Sales of the Solvol brand of soap increased 25% in Q3 and 13% year-to-date.

  • Sales of No Vac brand increased 4% in Q3 and 20% year-to-date.

  • In Europe, sales of the 1001 brand increased 8% in Q3 and 3% year-to-date.

  • Now on to our results by segment.

  • Global sales were up 4% in the third quarter and 2% year-to-date.

  • We continue to experience volatility in our Americas region and healthy growth in Asia-Pacific and Europe.

  • The growth in sales has been driven primarily by increased distribution and ongoing growth of our base business, as price increases have been minimal year-to-date.

  • Impact from changes in foreign currency exchange rates was favorable.

  • Our Q3 fiscal year 2011 results, translated at last fiscal year's third quarter exchange rates, or what we term as constant currency basis, would have produced net sales of $82.9 million versus $85.5 million.

  • Year-to-date net sales in constant currency would have been $243.9 million versus the actual of $245.7 million.

  • A little more detail on the Americas.

  • Sales in the Americas segment decreased 1% in the third quarter and were down 8% year-to-date.

  • The segment accounted for 54% of global sales in the third quarter versus 56% in the prior-year period.

  • In the US, sales were down 4% in the third quarter and down 11% year-to-date.

  • While we did experience sales growth of the WD-40 brand in the third quarter, mainly due to the major Military Can Series promotion, this growth was more than offset by declines in the household and cleaning products category.

  • The Spot Shot and 2000 Flushes brands had the greatest negative impact in the US results in Q3.

  • As for the year-to-date, sales of all brands are lower than the prior-year period, with the exception of Blue Works brand, which was launched last fiscal year.

  • While it is common for sales to vary period versus period due to timing of promotional activities, we project fiscal year 2011 sales in the US market will be below last fiscal year.

  • Promotional activities in the third and fourth quarters are not projected to offset the negative impact of reduced product offering, and lost promotional activities and opportunities with certain key customers earlier in the year.

  • We see the promotional challenge we've had with certain key customers, particularly the WD-40 brand, as bad weather, not climate change.

  • We're working to find ways to restore the historic promotional programs.

  • Sales in Latin America increased by 8% in both the third quarter and year-to-date, with most of the growth in the WD-40 and 3-IN-ONE brands.

  • Sales in Canada increased by 28% in the third quarter and 5% year-to-date, driven by higher sales of both multi-purpose products, and homecare and cleaning products.

  • Now on to our Europe segment.

  • Sales in our Europe segment were up 4% in the third quarter and are up 9% year-to-date, as compared to the prior fiscal year period.

  • The segment accounted for 33% of global sales in Q3 of both the current and prior fiscal year.

  • Europe sales in the third quarter benefited from changes in foreign currency exchange rates; and sales on a constant currency basis would have produced net sales of $26.3 million versus an actual of $28.1 million.

  • Year-to-date changes in the foreign currency exchange rates did not have a material impact on our Europe net sales.

  • We sell into Europe through a combination of direct markets in certain countries as well as through exclusive marketing distributors in other countries.

  • We have direct sales forces in the UK, Italy, France and Iberia -- which includes Spain and Portugal -- and in the market we term the Germanics Region, which includes Germany, Austria, Denmark, Holland, and Switzerland.

  • Overall, we are seeing unit growth in our European direct markets due to the continued growth of the WD-40 Smart Straw product, our increased focus on the industrial trade channel, and the ongoing growth of our base business.

  • Sales throughout our European direct markets increased 8% in Q3 and were up 7% year-to-date.

  • We sell through exclusive independent marketing distributors in eastern and northern Europe, in the Middle East and Africa, and virtually all sales consist of the WD-40 brand.

  • Sales in our Europe distributor markets declined 4% in the third quarter, primarily due to the decreased sales in the Middle East as a result of unstable economic conditions.

  • Due to strong sales growth in the first half of the current fiscal year, Europe distributor markets had sales growth of 15% year-to-date compared to the prior year period.

  • Now let's have a look at Asia-Pacific.

  • Sales in Asia-Pacific segment were up 23% in the third quarter and up 33% year-to-date.

  • The segment accounted for 13% of global sales in Q3, up from 11% in the prior fiscal year period.

  • Asia-Pacific sales in the third quarter benefited from changes in foreign currency exchange rates on sales, as we call constant currency basis would have produced net sales of $10.6 million versus the actual of $11.2 million.

  • Year-to-date, on a constant currency basis, we would have been at $30.2 million versus an actual of $31.5 million.

  • Sales in Australia increased 24% in both Q3 and year-to-date compared to the prior-year fiscal periods.

  • There was a favorable impact from changes in foreign currency exchange rates.

  • On a constant currency basis, sales increased 8% in Q3 and were up 12% year-to-date.

  • The sales growth was attributed to improved economic conditions, category development in the multi-purpose maintenance category, and the ongoing growth of our core base business.

  • China and many of the markets throughout the Asian region continue to yield significant sales growth.

  • Sales in China increased 41% in the third quarter and 58% year-to-date, due to the ongoing growth of our base business and the timing of promotional activities.

  • We continue to focus on building end-user awareness and distribution in China, and supporting these activities through increased advertising and promotional investment, as well as added sales and marketing Tribe members.

  • Sales throughout the rest of Asia increased 12% in Q3 and 32% year-to-date, due to continued growth of the WD-40 products throughout the distributor markets, including those in Indonesia, Taiwan and Korea.

  • That's it for the sales update.

  • I'll take a break and let Jay cover off on our financials and our progress towards our 50/30/20 measures.

  • Jay Rembolt - CFO, Treasurer, and VP of Finance

  • Garry, thanks so much.

  • In addition to the information that we're presenting on this call, we suggest that you review our Form 10-Q, which we'll be filing tomorrow.

  • As Garry covered the sales in detail, I'll continue with the rest of the financials.

  • But first, let's take a look at the 50/30/20 rule.

  • The 50/30/20 rule is a set of financial measures that we use to run our business.

  • The 50 represents gross margin, which we target to be at or above 50% of net sales.

  • The 30 represents our cost of doing business, which is our total operating expenses, excluding depreciation and amortization.

  • Our target for this metric is 30% or less.

  • Finally, the 20 represents EBITDA.

  • If our gross margin is at or above the 50%, and our cost of business is 30% or less, our EBITDA will be at or above 20% of net sales.

  • EBITDA is earnings before interest, taxes, depreciation and amortization.

  • The descriptions and reconciliations of these non-GAAP measures are available in both our 10-Q and in our investor presentation.

  • First, we'll look at our gross margin or the 50 of our 50/30/20 rule.

  • Gross margin in the third quarter was 49.3% compared to 51.2% in Q3 of last fiscal year.

  • The decrease of 190 basis points in gross margin was primarily attributed to the higher cost of raw materials, which was partially offset by the positive impacts from lower promotional trade discounts and some price increases.

  • Looking at the input costs, we experienced a net unfavorable impact of 250 basis points from our major input costs.

  • This was primarily due to the combined effects of changes in the cost of petroleum-based materials and aerosol cans during Q3 compared to the prior-year period.

  • We experienced significant increases in the cost of petroleum-based materials during our third fiscal quarter, primarily due to the spike in oil prices that began during our second fiscal quarter.

  • A quick reminder about the timing of the -- on the impact of input cost changes.

  • There is often a delay of a quarter or more before raw material and other input cost changes flow into our cost of goods sold.

  • We mentioned the favorable impact from promotional and trade discounts.

  • This quarter's lower level of those discounts compared to the prior-year period increased our gross margin by 80 basis points.

  • Promotional trade discounts, which are treated as a reduction to sales include coupon redemptions, allowances to retailers for shelf space, cooperative advertising and promotional activity, volume discounts, and other one-time and ongoing promotional incentives that we offer to our customers.

  • Price increases favorably impacted our gross margin by 60 basis points period versus period.

  • The impact stems from price increases implemented during the first -- during the current fiscal year on certain products in certain markets.

  • Additional price increases will be implemented during the fourth quarter in an attempt to reduce the impact from higher costs of petroleum-based materials and aerosol cans.

  • All other impacts combined negatively impacted our gross margin by an additional 80 basis points.

  • These include some of the following.

  • Changes in sales mix, which negatively impacted our gross margin by 20 basis points.

  • This is attributable to the higher percentage of global sales in the Asia distributor market period versus period.

  • The distributor markets have lower margins compared to our direct markets.

  • The lower margins in these markets are a function of the lower pricing given to distributors in exchange for managing sales and distribution in their respective territories.

  • We also continue to experience unfavorable impact from changes in foreign currency exchange rates within our Europe segment, which negatively impacted our gross margin by 20 basis points.

  • Cost of goods sold in our European segment are sourced in pound sterling, while revenues are generated in euros, sterling, and the US dollar.

  • Period versus period, the value of the euro to the pound sterling deteriorated, causing revenues from the euro-based countries to be worth less in pound sterling, thus eroding gross margin in parts of our European segment.

  • All other miscellaneous impacts combined negatively impacted the gross margin by about 40 basis points.

  • The themes that we've just discussed for the gross margin in the quarter also apply year-to-date.

  • Gross margin year-to-date held above our threshold at 50.6% compared to the 51.7% in the prior fiscal year period.

  • The decrease of 110 basis points in gross margin was attributable to the higher cost of raw materials, again, partly offset by the positive impact from lower promotional trade discounts and price increases.

  • Now on to the 30 -- the cost of doing business.

  • In the current quarter, the cost of doing business was 34% of net sales compared to 35% in Q3 of the prior fiscal year.

  • Our goal is to have cost of doing business to be at or below 30%.

  • The decrease in the cost of doing business percentage in Q3 reflects lower expense growth relative to sales growth.

  • Our net sales increased 4% versus the prior-year quarter, whereas our cost of doing business expenses increased by 2% period versus period.

  • Our sales, general, and administrative expense in the Q3 was $22.6 million versus $23.3 million for the prior fiscal year quarter.

  • As a percentage of net sales, it was 26.4% in Q3 versus 28.3% in the prior-year quarter.

  • The decrease in SG&A expenditure was primarily due to lower employee-related costs stemming from lower bonus expense compared to the prior-year period.

  • Based on our most recent forecast, certain business segments are not expected to achieve the sales and other profit performance metrics required to trigger a payout of bonuses.

  • And as a result, the bonus expense for the third quarter reflects these lower levels of achievement.

  • Lower bonus expense was partially offset by higher compensation costs associated with annual merit increases, as well as increased staffing levels.

  • Significantly offsetting the decreases were higher costs for professional services and legal fees, increased freight expenses, and the impact of foreign currency exchange rates.

  • SG&A expense for the year-to-date period was $65.9 million versus $63.2 million in the prior-year fiscal period.

  • As a percentage of net sales, SG&A expense was 26.8% year-to-date versus 26.3% in the prior-year period.

  • The increase in SG&A expense is primarily due to the higher legal and consulting fees, increased freight costs, and a higher level of expenses associated with travel.

  • We also incurred higher office overhead costs associated with some ongoing repairs and maintenance.

  • Changes in foreign currency exchange rates increased our SG&A expenses by about $0.4 million in that year-to-date period.

  • The aforementioned expense increases were partially offset by the lower estimated bonus expense for the current year.

  • On to advertising and sales promotion expense.

  • In Q3, that increased to $7.1 million compared to the $5.7 million in the prior-year period.

  • As a percent of sales, our advertising and promotional expense increased to 8.3% from the 6.9% in Q3 last year.

  • The increase in advertising and sales promotion expense was primarily due to a higher level of activities in our Americas and our European segments period versus period.

  • A change in foreign currency also had an impact on the increase.

  • Year-to-date advertising and sales promotion expense increased $2.4 million compared to the prior-year period.

  • As a percentage of sales, it increased to 7.6% year-to-date from 6.7% in the prior-year period.

  • The increase is primarily due again to the higher level of advertising and promotional activities in our European segment, as well as additional impacts in our Asia-Pacific segment.

  • Amortization of intangible assets was $0.6 million in Q3 compared to $0.2 million in the prior-year period.

  • The increase in amortization is related to our decision to change our 2000 Flushes, Spot Shot, and 1001 trade names from indefinite-lived intangible assets to definite-lived intangible assets.

  • This change was effective February 28, 2011, and amortization of these three trade names began on March 1.

  • The prior-year quarter only included amortization of the Carpet Fresh and X-14 trade names, as well as the customer list acquired in the 1001 acquisition.

  • The annual amortization impact from the change related to the 2000 Flushes, Spot Shot and 1001 trade names is expected to be about $1.6 million on an annual basis.

  • Year-to-date amortization was $1 million compared to $0.5 million in the prior fiscal year period.

  • The increase again is attributable to the reclassification of the 2000 Flushes, Spot Shot and 1001 trade names from indefinite-lived to definite-lived intangibles.

  • Total operating expenses in the current quarter were $30.3 million versus $29.2 million in Q3 of last fiscal year.

  • Operating income in Q3 was $11.8 million compared to the $13 million in the prior-year quarter.

  • Year-to-date, total operating expenses were $85.4 million versus $80 million in the prior-year period.

  • Operating income year-to-date was $39 million compared to $44.4 million in the prior-year period.

  • EBITDA, the last of our 50/30/20 measures, was 15% of net sales in Q3 compared to 17% in the prior-year quarter.

  • Year-to-date, EBITDA was 17% compared to the 20% in the prior-year period.

  • We target EBITDA of 20% of net sales, but expect variations from time to time as sales, A&P investment fluctuates with the timing of promotional activities.

  • Our EBITDA percentage is also affected by investments we make for our future growth.

  • Interest income for both quarters was under $100,000.

  • Interest expense in Q3 was $0.3 million, down $0.1 million versus the same period last year, due to the lower principal balance on our long-term debt.

  • Other income in Q3 was $0.1 million and slightly higher than the prior-year quarter, driven by higher foreign currency exchange gains period to period.

  • Year-to-date, interest income was $0.2 million and slightly higher than the prior-year period.

  • Interest expense was $0.8 million compared to $1.3 million in the prior-year period, again, due to the lower principal balances on our long-term debt.

  • Other income year-to-date was $0.2 million compared to $0.1 million in the prior-year period.

  • The provision for income taxes in Q3 is 31.4% versus the 28.4% in the prior fiscal quarter.

  • The increase in the effective tax rate was primarily due to an addition of an uncertain tax liability of $0.3 million during the quarter associated with foreign operations.

  • Year-to-date, the effective rate has gone down slightly at 32% compared to the 32.6% in the prior fiscal year period.

  • The decrease in the tax rate is primarily due to the domestic production deduction, a favorable mix of foreign earnings taxed at lower rates, and the release of liabilities associated with the expiration of certain tax statutes.

  • These benefits were offset by the $0.3 million uncertain tax liability that we just talked about for the third quarter.

  • Net income in Q3 was $8.1 million versus $9.1 million in the prior-year quarter.

  • Changes in foreign currency exchange rates had a favorable impact on net income of $0.3 million.

  • Our current fiscal year third-quarter results on a constant currency basis would have produced net income of $7.8 million.

  • Diluted earnings per common share were $0.47 in Q3 compared to the $0.54 in the prior-year quarter.

  • Diluted shares outstanding increased from 16.8 million shares to 17 million shares.

  • Year-to-date, net income was $26.2 million versus $29.2 million in the prior-year period.

  • Changes in foreign currency exchange rates had a $0.2 million favorable impact on net income.

  • Year-to-date fiscal year 2011 results on a constant currency basis would have produced net income of $26 million.

  • Diluted earnings per common share were $1.53 year-to-date compared to $1.74 in the prior-year period.

  • Diluted shares outstanding increased from 16.7 million shares last year to 17.1 million shares in the current year.

  • Regarding the dividend on June 21, the Board of Directors declared a quarterly cash dividend of $0.27 per share, payable on July 29, 2011, to shareholders of record on July 15, 2011.

  • Based on today's closing price of $41.68, the annualized dividend yield would be 2.6%.

  • About our balance sheet at May 31, cash and cash equivalents were $70.3 million, down from the $75.9 million at the end of the fiscal 2010.

  • Net cash provided by operating activities was $21.6 million, while the issuance of common stock upon exercise of stock options provided cash of $16.5 million.

  • These cash inflows were offset by, one, our annual principal payment of $10.7 million, regular dividends of $13.7 million, share repurchases of $21.3 million, and $0.2 million used for capital expenditures.

  • Cash was also positively impacted by $0.3 million due to changes in foreign currency exchange rates, and other miscellaneous items positively impacted cash by about $1 million.

  • Under the Company's $60 million share repurchase plan, the Company repurchased 531,000 shares at a total cost of $21.3 million during the period from December 14 of 2010 through May 31 of 2011.

  • Our balance sheet, cash flow and liquidity remain strong.

  • Our long-term debt is scheduled to be repaid in full this calendar year, with our final principal payment of $10.7 million due in October.

  • On June 17, we replaced our unused $10 million line of credit with a new $75 million three-year revolving unsecured credit agreement.

  • We believe that our current cash position, strong cash flow from operations, and our available credit will provide us with the liquidity needed to fund operations, invest for the future, and provide long-term returns to our shareholders.

  • This completes the financial overview.

  • More information, again, will be on our 10-Q, which will be filed tomorrow.

  • Thanks, and now back to Garry.

  • Garry Ridge - President and CEO

  • Great.

  • Thanks, Jay.

  • Now on to our revised fiscal year 2011 guidance, which we announced on June 22.

  • Our latest guidance reflects the lower expected sales in the US market, the higher cost of raw materials and its negative impact to gross margin, as well as an increased number of shares outstanding.

  • This guidance does not include any acquisition activities and assumes that foreign currency exchange rates will remain close to the recent levels.

  • We now expect our fiscal year net sales results to be in the range of $330 million to $340 million or sales growth of between 2.6% and 5.7% versus fiscal year 2010.

  • We do expect our gross margin for the year to come in close to 50%.

  • We expect our annual global advertising and promotion investment to be close to 7.5% of net sales.

  • With all that, we expect our net income of between $34.9 million and $36.6 million, which would achieve a diluted earnings per share of between $2.05 and $2.15, assuming 17 million weighted average shares outstanding.

  • So, in summary, what did you hear from us on this call today?

  • You heard we expect fiscal year 2011 to be a record year for sales.

  • You heard we were working to restore historic promotional levels in the US with certain customers.

  • You heard we have initiatives to stabilize our household products brands in the US.

  • You heard that our gross margin got squeezed as the impact of raw material prices hit our cost of goods.

  • You heard that we are managing through the cost of goods challenges and expect to see an improved margin position into 2012.

  • You heard we continue to execute with positive results against our strategic driver to build our global business, and that our China development is going well.

  • You heard we are on track with the launch of the WD-40 Specialist brand, and that we expect to ship three products late this fourth quarter; additional products as well as a launch in the UK market are planned in 2012.

  • You heard that we made progress against our share buyback.

  • So, as is customary, in closing, I'd like to share a quote with you, one that I'm the author of -- "Why get older if you can't get wiser?"

  • Thank you for joining us today.

  • We would be pleased now to open the conference call to your questions.

  • Operator

  • (Operator Instructions).

  • Liam Burke, Janney Montgomery Scott.

  • Liam Burke - Analyst

  • Garry, Jay touched on -- on his prepared comments, touched on the step-up in advertising and promotional expenses.

  • And you tied it to the nice growth that you had in Europe and in Asia-Pacific.

  • What -- can you give us some detail on what promotional activities you did?

  • And how much follow-through you're going to get from that investment?

  • Garry Ridge - President and CEO

  • In Europe, we ran two major promotions this year.

  • One in the UK, which was a targeted campaign aimed at our enthusiast end-users and driving their increased consumption.

  • It was basically around cleaning and removing.

  • The second large one in Europe was in Germany.

  • We linked with a well-known DIY expert in Germany.

  • That promotion was about, again, a campaign linking to our heavy end-users in the DIY and enthusiast categories of our usage base.

  • The objective there was to raise brand awareness.

  • We still have brand awareness opportunities in Germany.

  • And we know that, over time, as we raise awareness, purchase and consumption comes afterward.

  • So there were the two major programs in Germany.

  • We have started off a development activity in China.

  • In China, we, in particular, we developed a -- sorry, we employed a new Marketing Director about six months ago as a new addition to the team.

  • We've engaged in a serious amount of market research that comes into the advertising and sales promotion category.

  • That market research is to help us better focus on our execution in China going forward.

  • So those were probably the three major activities that happened in places outside the US.

  • We also did a little in the US.

  • Some of you may have seen the full page ad that we had in USA Today just the day before Memorial Day, which featured our Military Can promotion, which was in stores.

  • Liam Burke - Analyst

  • Okay.

  • Jay, the inventory was up significantly from year-end.

  • Is there a reason for that or --?

  • Jay Rembolt - CFO, Treasurer, and VP of Finance

  • You know, I think we were, I would say, abnormally low as we ended the year.

  • There were a number of segments that had a kind of abnormally low year-end inventories.

  • So I think, one, there is occasional inventory build in advance of promotional activities, et cetera, that takes place and varies from time to time.

  • We are seeing, and will in some of our supply chain initiatives, we are seeing a little bit of a build in inventory as we choose to, I think, better position product to, I guess, emphasize the efficiencies in our supply chain network.

  • So that's another contributor.

  • We might see that continue.

  • Liam Burke - Analyst

  • Okay, great.

  • Thank you, Jay.

  • Operator

  • (Operator Instructions).

  • Eric Hollowaty, Stephens Inc.

  • Eric Hollowaty - Analyst

  • Thanks for taking my questions.

  • Could you, to the extent that you can, talk a little bit more about the sales challenges in the US?

  • Maybe give us a bit more detailed flavor for what you mean when you talk about reduced product offerings and lost promotional opportunities.

  • Any more specifics there would be appreciated.

  • Garry Ridge - President and CEO

  • Sure, I will do what I can.

  • Sometimes our customers' wants and needs are not exactly aligned with what we're able to provide.

  • Sometimes they assign their margin objectives to us and we've had some situations surrounding that this year.

  • During that time, we know that we get a 30% to 50% lift in sales from our normal turn business, when we have off-shelf promotional activity in stores where people who use a lot of WD-40 shop.

  • And during this angst time that we've had with a certain customer over this year, we've not been given that same sort of exposure in that trade channel in that customer.

  • That has caused our sales to be less in that customer than they normally would be -- or customers than they normally would be.

  • We see it more as bad weather than climate change.

  • We are committed to working through this.

  • It's always a testing time when you've got commodity prices rising.

  • You're taking pricing to the market and retailers are doing their job.

  • They're making sure that we're being honest.

  • We are being honest.

  • We did bring honesty to the table.

  • But we've been put in the sin bin for a little while, and this -- that's the way it goes.

  • That's business.

  • So, it's bad weather, not climate change.

  • We're working on getting through it.

  • And, fortunately, 60% of our business is outside of the US, and we've got -- we're diversified in many trade channels.

  • So, although it's unfortunate, it's not fatal nor is it anything that we won't get through eventually.

  • Eric Hollowaty - Analyst

  • Right.

  • And those -- just to be clear -- those difficulties you're seeing are affecting both of your revenue segments?

  • Or is it overly affecting one versus the other?

  • Garry Ridge - President and CEO

  • It's just the US.

  • Eric Hollowaty - Analyst

  • Okay.

  • What about category-wise?

  • Garry Ridge - President and CEO

  • The majority of it is with our multi-purpose maintenance products category.

  • The other -- because that's where we've had the pricing with oil.

  • Eric Hollowaty - Analyst

  • Yes, got it.

  • And on the issue of bringing innovation to market sooner, from where I sit, it seems like the new product and innovation pipeline has been relatively robust.

  • So maybe you could help us understand a little bit more what exactly you'd like to accomplish there going forward, and how you see that linked to your financial goals.

  • Garry Ridge - President and CEO

  • Sure.

  • With the development of the WD-40 Specialist Brand, which is the first brand that will ever carry the yellow shield of the WD-40 brand, we've now got a platform brand that allows us to move into categories at a faster rate than we did before.

  • So we will have three products -- and our whole goal was to bring new product to our business that we could take to the world quicker.

  • What we had to do first up is to develop the world.

  • So now we have a number of developed markets around the world, the US being the lead market where it's most needed, where we will launch three SKUs in Specialist this year; another two will come out in January.

  • That will be the start of this category development.

  • We're very fast on the track of that into the UK.

  • The other thing that is good about this is that this product goes into our mainstream heavy user categories of the trades and doers.

  • And it wears the shield.

  • So we feel that we're very happy to have got to this stage and we think this will give us an unprecedented platform to be able to develop the category.

  • What we want to do with this whole thing is develop the category.

  • We believe that there are solutions in the categories that haven't been met, and there is white space that we've identified through our research, where end users are not being satisfied and not -- so we'll be bringing not only traditional, but also new product offerings and new solutions under the Specialist platform.

  • Eric Hollowaty - Analyst

  • Got it.

  • That makes sense.

  • Thanks very much, Garry.

  • I'll jump back in the queue.

  • Operator

  • Jeff Zekauskas, JPMorgan.

  • Ben Richardson - Analyst

  • This is Ben Richardson filling in for Jeff.

  • So I had a question on mix effects in the third quarter.

  • And any -- if you can describe the drag on gross margin that might have had.

  • Typically, you see a seasonal decline in the fourth quarter, but I'm wondering if that might be a little different this year?

  • Jay Rembolt - CFO, Treasurer, and VP of Finance

  • Yes, as you saw that we had a significant increase in our Asian business, in our Asian -- and the predominant business model in Asia is our marketing distributor model.

  • We sell at a lower margin to those partners that help facilitate the sale and distribution efforts.

  • So that is really the chunk that when we talk about mix in the period, it was really related to the increase in distributor business, primarily as a result of the robust activities in Asia.

  • Ben Richardson - Analyst

  • Okay.

  • As I draw a line in the fourth quarter to the midpoint of your sales guidance, something like $335 million, it's about a 10% year-over-year increase in the fourth-quarter sales.

  • Where -- if you might describe by segment, where that bounce might come?

  • Is this a shift of third-quarter sales to the fourth quarter in either segment or a --?

  • Garry Ridge - President and CEO

  • It's not unusual for us to have had quarters before where we've had 10% sales increases, but we're looking at -- we're having a strong back half to the year.

  • I think you will notice that the quarter that we just had was probably the -- I think it was a record quarter for the Company.

  • I think it was the highest sales quarter we've ever had in the Company.

  • So -- and we're looking for strong sales in the fourth quarter, both in Europe and in Asia-Pacific.

  • We expect that we will have a reasonable quarter in the Americas.

  • So I don't think it's going to come from anywhere in particular, but we do have some solid stuff going on.

  • And we feel that the guidance we've given is realistic.

  • Ben Richardson - Analyst

  • Okay, thank you very much.

  • I'll hop back in the queue.

  • Operator

  • Eric Hollowaty.

  • Eric Hollowaty - Analyst

  • Wanted to ask you guys for your latest thoughts on the plan for the homecare and cleaning products business.

  • You've obviously been very forthright in the past about your plan to essentially run that as a cash cow business and use the proceeds to invest in the HCP segment, which you view as the growth business.

  • But with the declines in sales that we continue to see there, has that affected how you continue to view this business over the long-term -- or for that matter, the short-term?

  • And whether it makes sense to continue to run that as a cash cow or to look at other options?

  • Garry Ridge - President and CEO

  • If we were -- thank you, Eric -- if we were diverting long-term investment dollars into the category -- into that product area, I think that then we would have an issue.

  • But right now, we are harvesting.

  • The brand -- those brands contribute far more than their fixed costs absorb and we continue to watch that, but we are not diverting growth dollars into those brands.

  • So, eventually, we will probably be out of them.

  • But until we can replace that in a comfortable way, we will continue to do that.

  • There may come a time where we do go and we've looked at different options of getting out of those brands and making changes.

  • We still have healthy growing businesses in those brands in Australia and in the UK.

  • It's really just the piece in the US.

  • What's happening in the US is cyclical.

  • So it's -- and our main diversion has been getting out of the grocery business in the US, which is a very costly business to be in.

  • So they're really more beneficial to us when we're not playing in there.

  • So we may be losing more revenue dollars than we're actually -- than you're actually able to see about contribution dollars.

  • Because we're not paying huge slotting fees.

  • We're not investing in huge promotions in the grocery trade channel.

  • Eric Hollowaty - Analyst

  • Thanks for that, Garry.

  • So just not to put words in your mouth, but it sounds like those businesses are -- or what you're saying is they're still profitable?

  • Garry Ridge - President and CEO

  • They are very profitable.

  • Eric Hollowaty - Analyst

  • Okay, great.

  • Thanks very much.

  • Appreciate that clarity.

  • Operator

  • Joe Altobello, Oppenheimer.

  • Joe Altobello - Analyst

  • Just two quick questions for you.

  • First, in terms of the advertising and promotion spending, obviously, 7.5%.

  • This is toward the high end of where you guys have been historically.

  • Is this a new normal in terms of the investment spend we should expect going forward, as a percentage of sales?

  • And sort of a related follow-up to that, going back to your 50/30/20 rule.

  • You have to go back a few years to the last time you guys actually put up a full year 20% EBITDA margin number.

  • How quickly do you expect to get back to that?

  • And how do you expect to get back to that?

  • Thanks.

  • Garry Ridge - President and CEO

  • Okay, let's go to the 50/30/20 first.

  • Last year, I think we were at 18.9% or something.

  • And really, one of the main drivers -- there's two drivers of that -- being able to restore our gross contribution to 50% or above, and that's been under pressure this year.

  • And then on the 30% side, is as you know, as a business, we pay -- we invest off our P&L.

  • We don't invest capital to grow our business.

  • So every time we step out on an expansion program, we pay for that from the P&L.

  • And we've done in China.

  • We've done it with our development of our Specialist product.

  • We've done it in our -- we're investing $5 million to $6 million a year in R&D.

  • So we can fix it by turning the tap off in those areas.

  • Very short-term, very weak-kneed, not what we will do.

  • So we are hoping that as we roll out Specialist, grow revenues with the Specialist brand, and continue to have robust growth in our international markets, and year-to-date, our global businesses -- our business outside the US is now 60% of our total and growing, as you've seen, at 10%, 15%, 20% a year.

  • So that's what we're looking -- that's what it will be.

  • We have a clear goal to get there, but it won't -- it takes work.

  • And this year, we got a little bit of extra pressure from the oil pricing.

  • On the advertising and sales promotion, it is at the higher end this year.

  • We'll still be looking at guiding in about the same range next year.

  • You never know.

  • It's not out of step.

  • It's not unusual for us to have spikes from time to time.

  • But we could have again not done our market research in China and that would have been the wrong thing to do.

  • Shortsighted, weak-kneed people would have done that, but that's not who we are.

  • So we've got that as a clear goal, as you know, Joe.

  • And we hit the margin, gross margin where we want it, and we get the sales growth, we'll end up getting there.

  • It's a thing -- it's over time.

  • Joe Altobello - Analyst

  • That's very helpful, Garry.

  • Thanks.

  • Just one follow-up for Jay, in terms of the tax rate for the fourth quarter, and what we should expect for next year?

  • Jay Rembolt - CFO, Treasurer, and VP of Finance

  • Fourth quarter -- I'm not sure.

  • Again, the way that tax accounting has changed, there's a lot of volatility.

  • But certainly, for our trended tax rate that takes into account some of the drivers that have been affecting it lately, which is the increased earnings outside the US being taxed at lower rates, as well as an increase in some of the tax benefits we've seen from the domestic production, would cause us to trend at a rate that's just sub-33%.

  • Joe Altobello - Analyst

  • Okay, thank you.

  • Operator

  • Alan Robinson, Royal Bank of Canada.

  • Alan Robinson - Analyst

  • I would just like to follow-up on, I think, Eric's original question regarding the lost product offerings.

  • Did I get it right that a factor in this was resistance to higher prices?

  • Garry Ridge - President and CEO

  • Yes.

  • Alan Robinson - Analyst

  • Okay, okay.

  • You also mentioned that you have plans to enact price increases for the fourth quarter to try and get the gross margin back on track.

  • Will this be in channels different to the channels that have resisted the price increases in the third quarter?

  • Garry Ridge - President and CEO

  • No, we're through it now.

  • The price increases have been accepted.

  • Hopefully -- you know, we talk often about the prison and the playground.

  • The prison is the shelf and the playground is the retail space outside of the shelf where you get promotion.

  • During the time of pricing negotiation, we were put in solitary confinement, not in prison.

  • So although our product was still on the shelf, we had very little promotional off-shelf activity.

  • We know that we get a significant lift in sales when that happens, particularly where we put our product where consumers who use it a lot shop.

  • But the price increases have been effected and are in place as of July 4.

  • Alan Robinson - Analyst

  • Okay, I understand.

  • So effectively, the decisions made by your retail channel partners effectively mean lower revenues, but perhaps higher blended gross margins for the fourth quarter?

  • Garry Ridge - President and CEO

  • Yes -- I think -- and again, the revenues will come back.

  • This is bad weather.

  • It's not climate change.

  • I mean, this is business.

  • Alan Robinson - Analyst

  • Then in terms of the sort of decision cycle for some of the retail vendors, in terms of these lost product offerings, do they revisit their stocking quarterly?

  • Or is this an annual decision?

  • Garry Ridge - President and CEO

  • Depends.

  • They can restock -- they can revisit it daily if they want to.

  • But I certainly believe that we'll be back on track and we'll be through it.

  • But this is -- there's no such thing as always or never, Alan.

  • Alan Robinson - Analyst

  • Okay.

  • Then one other point of clarification.

  • I think in your prepared remarks, you mentioned that you expected, if I'm correct, fourth-quarter Americas sales, this fourth quarter to be about flat or down to last fourth quarter.

  • Did I hear that correctly?

  • Garry Ridge - President and CEO

  • No.

  • No.

  • Alan Robinson - Analyst

  • Okay, all right.

  • (multiple speakers) No, I misheard, okay.

  • Garry Ridge - President and CEO

  • Annual.

  • Annual.

  • Alan Robinson - Analyst

  • They're annual -- okay.

  • I understand.

  • Garry Ridge - President and CEO

  • Yes.

  • Alan Robinson - Analyst

  • All right.

  • Thank you.

  • Garry Ridge - President and CEO

  • Thanks, Alan.

  • Operator

  • There appear to be no further questions.

  • So at this point, it is my pleasure to turn the call back over to Mr.

  • Garry Ridge for any closing or additional remarks.

  • Garry Ridge - President and CEO

  • I think we're done.

  • Thank you very much.

  • Thanks for joining us.

  • We look forward to chatting with you again come the end of the fiscal year.

  • Have a great afternoon.

  • Good day.

  • Operator

  • Ladies and gentlemen, that does conclude our conference call for today.

  • Again, thank you for your participation.