WD-40 Co (WDFC) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this WD-40 Company third quarter 2013 earnings release conference call.

Today's call 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 Company, Ms. Maria Mitchell.

You may begin.

Thank you.

Good afternoon and thank you for joining us for our third quarter fiscal year 2013 earnings call.

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, the impact of introducing new product lines and fluctuating global market conditions, including foreign currency exchange rates.

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, 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 wd40company.com.

Our fourth quarter fiscal year 2013 earnings call is scheduled for Thursday, October 17, 2013.

Now I would like to pass it onto Garry Ridge.

Thank you, Maria.

Good afternoon and thanks for joining us for today's conference call.

Today we reported net sales of $93.1 million for the third quarter of fiscal year 2013, an increase of 7% over Q3 last fiscal year.

Year to date, net sales were $275.1 million, an increase of 7% over the prior-year period.

Net income for the third quarter was $10.3 million compared to $9.1 million in last fiscal year Q3.

Diluted earnings per share for the third quarter were $0.66 compared to $0.57 for the same period last fiscal year.

Year to date net income was $31.7 million, an increase of 19% over the prior-year period.

Year-to-date diluted earnings per share were $2.01, up from $1.64 for the same period last fiscal year.

Before we focus on the sales results, let's review the progress we have made during the third quarter towards our strategic initiatives, the first one being to maximize the WD-40 brand.

Sales of WD-40 multiuse product increased 9% in the third quarter compared to Q3 last fiscal year.

Apart from strong overall performance, growth was driven by a major customer-specific promotional program in the US and double-digit growth in our European distributor markets.

Our second strategic driver is to be the global leader in the Company's product categories within our productized platforms.

WD-40 Specialist has contributed incremental sales and is solidifying our leadership position in the marketplace.

We launched our new motorbike line in the UK during the third quarter.

These products meet maintenance and with their needs among motorcycle enthusiasts and mechanics for uses in garage workshops and motorcycle race events.

Expansion into other markets is under consideration.

Our third strategic driver is around building business relationships that impact favorably around our business.

This encompasses acquisitions, partnerships and strategic alternatives for our brands and products.

We did not find an acquisition opportunity that met our criteria in the third quarter, but we continue to work with partners to explore new product opportunities.

We continue to evaluate our strategic alternatives for the Americas home care and cleaning products during the third quarter.

We are in the early stages and no decisions have been made relative to the future strategic plans for these home care and cleaning product brands.

Our fourth strategic driver is around our global innovation efforts.

During the quarter, we continued to research and develop new WD-40 Specialist products in the lawn and landscape segment.

The product suite is designed to keep machine-powered lawn equipment running and operating smoothly.

The new product line is under consideration in may be launched in the US during fiscal 2014.

During the third quarter, we also launched additional SKUs for WD-40 bike, not to be confused with Motorbike.

The go-to-market strategy for WD-40 bike is different from our traditional model and retail channels, and we focus on the independent bike distributors.

WD-40 bike products are specialized in cleaning, protecting and lubricating bikes.

Our fifth strategic driver is our people development, last but in no ways least.

Under our fifth strategic initiative, we continue to attract, develop and retain Tribe members to execute our vision.

In the third quarter, we completed our Think Big reorganization by realigning our innovation teams at the trading block level and providing opportunities for our home care and cleaning product sales and marketing Tribe members so they could also support customers and initiatives under our multipurpose maintenance products.

That completes our strategic initiatives update, so let's move onto a little more detail about our third-quarter results, starting with sales.

Sales in the multipurpose maintenance products category accounted for 88% of global sales in the third quarter with category sales up 12% in Q3 and up 11% year to date compared to the prior fiscal year period.

Products under the category include WD-40 and the 3-IN-ONE brands as well as immaterial sales from BLUE WORKS brand, which is being transitioned now to the WD-40 Specialist product line.

By trading block, sales of multipurpose maintenance products in Q3 were up 17% in the Americas, were up 10% in Europe and up 1% in Asia-Pacific compared to the prior-year period.

Home care and cleaning products category accounted for 12% of our global sales in Q3 with the category down 18% in Q3 and down 15% year to date.

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

By trading block, sales of our home care and cleaning products in the third quarter were down 21% in the Americas and down 16% in Europe and down 3% in Asia-Pacific.

Now I would like to share some of the results around our performance, starting in the segment areas, starting with the Americas.

Sales in the Americas segment increased 8% in the third quarter and were up 2% year to date versus the prior-year period.

This segment accounted for 51% of global sales in Q3 as compared to 50% of the prior-year period.

Total US sales were up 9% in Q3 and up 1% year to date.

Higher sales of our multipurpose maintenance products more than offset lower sales in home care and cleaning products.

Multipurpose maintenance product sales increased 18% in the third quarter, primarily due to a significant customer-specific promotion for the WD-40 multiuse products that was not conducted in the prior fiscal year period.

New and increased distribution of the WD-40 Specialist product line also contributed to the growth.

Home care and cleaning product sales decreased 22% in the third quarter, driven by Carpet Fresh, Spot Shot and our automatic toilet bowl cleaners, which declined by 48%, 29% and 12%, respectively.

Home care and cleaning products continue to generate positive cash flows despite the sales decline with a portion of the decline stemming from our decisions to reduce businesses in low-margin products and programs which require significant trade discounts and promotions.

Sales also declined due to the decrease in promotional programs, competitive and category declines as well as the volatility of orders from within the warehouse, club and mass retail channels.

During the third quarter, the management team begin to evaluate strategic alternatives for the home care and cleaning products in the Americas segment.

To date, no decision has been made relative to the future strategic plans for these brands.

Sales in Latin America were up 15% in Q3 and up 9% year to date, driven by higher WD-40 sales throughout the region.

Sales in Canada decreased by 4% in Q3 and were flat year to date.

The sales decline in the third quarter was primarily due to lower sales of home care and cleaning products in Canada.

Changes in foreign currency exchange rates did not have a material impact on Q3 or year-to-date sales.

Now let's look at Europe.

Sales in the Europe segment were up 8% in Q3 and are up 13% year to date compared to the prior fiscal year periods.

Changes in foreign currency exchange rates had an unfavorable impact on sales in the third quarter but did not have a material impact on the year-to-date sales.

The segment accounted for 35% of global sales in both Q3 and the prior-year fiscal period.

We sell into Europe through a combination of direct operations in certain countries as well as through exclusive marketings distributors in other countries.

Sales in our European direct markets were down 2% in Q3, due primarily to the customer order flow and lower level of promotion activities period versus period as well as some unfavorable impact from changes in foreign currency exchange rates.

Sales in the direct markets were up 11% year to date.

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

Our distributor markets in total were up 28% in Q3 and are up 18% year to date.

The distributor markets accounts for 40% of Europe's total sales in Q3 compared to 34% in the prior-year fiscal period.

Sales in all of the three distributed markets were due to the continued growth of our base business.

Sales in eastern and northern Europe also benefited from the WD-40 Specialist product line.

Now let's take a look at Asia-Pacific.

Sales in Asia-Pacific were flat in the third quarter and are up 7% year-to-date.

This segment accounted for 14% of global sales and Q3 versus 15% in the prior fiscal year period.

Changes in foreign currency exchange rates versus period to period did not have a material impact on sales.

Sales in Australia decreased 4% in Q3 and were up 5% year-to-date compared to the prior fiscal year period.

The sales decrease in the third quarter was primarily due to a lower level of promotional activities and unfavorable impact on changes in foreign currency exchange rate period to period.

Year to date sales growth was attributed to a higher level of promotional activities in the first half of the fiscal year as well as the ongoing growth of our base business.

Sales in China decreased 14% in the third quarter and were down 6% year to date.

The decrease in both periods is attributed to a lower level of promotional sales year over year as well as lower economic growth and industrial activities in the region.

Our development in China is a long-term strategy.

We expect to see ups and downs in the short term, but we are confident that over time we will build a significant market in China.

Since opening our subsidiary, we have significantly grown the market, but there is plenty more growth to come in the years ahead.

Sales in the rest of Asia increased 12% in Q4 and 14% year to date.

The increase was due to continued growth of the WD-40 multiuse products throughout the distribution markets, including those in Indonesia, South Korea and the Philippines.

That's the sales update.

I would now like to pass it over to Jay, who will continue to review of the financials.

Gary, thanks.

In addition to the information that we will present today on the call, we also want to remind you to review our Form 10-Q, which we will file tomorrow.

Now let's look at the rest of the financials, but first we stop in review our 50/30/20 rule.

This is what we use to guide our business.

As you may recall, 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 is 30% or less.

And then finally, the 20 represents EBITDA.

If we keep our gross margin at or above 50% and our cost of business is 30% or less, our EBIT will be at or above the 20%.

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

The descriptions and reconciliations of these non-GAAP measures are available in the 10-Q and in our investor presentations.

Now we'll look at our gross margin, or the 50.

Gross margin in the third quarter was 51.3% compared to the 49.5% in the prior fiscal year period.

The increase of 180 basis points in gross margin was primarily driven by prior-period price increases, lower promotional discounts, benefits from our supply chain-related initiatives as well as the favorable impact of currency exchange rates.

Let's start first with input costs.

We experienced a net unfavorable impact of 10 basis points from the changes in input costs.

Changes in the cost of petroleum-based materials and aerosol cans combined to favorably impact our margin by 10 basis points.

This, however, was more than offset by changes in other input costs which unfavorably impacted our margin by 20 basis points.

These other input costs include raw materials related to our home care and cleaning products as well as valves and other componentry for our multi-purpose maintenance projects.

Sales price increases are considered and implemented on a country-by-country basis to help us offset the impact from input cost increases.

In this period versus the prior period, our gross margin improved by 110 basis points as a result of price increases implemented over the past 12 months.

Lower advertising and promotional discounts positively impacted our gross margin by 30 basis points.

A lower percentage of sales during the current quarter was subject to promotional allowances compared to the prior year.

This was primarily a result of lower sales mix in our home care and cleaning products as well as lower promotional discounts on these products.

The cost of promotional activities, such as sales incentives, trade promotions, coupon offers and cash discounts that we give to our customers are recorded as a reduction to sales.

The timing and magnitude of these may cause fluctuations in our gross margin from period to period.

Looking at the impact from our major initiatives on our cost of goods, we achieved lower manufacturing costs due to the North American supply chain restructuring project and our local sourcing project in China.

The lower cost resulting from these initiatives positively impacted our margin by 40 basis points in the third quarter.

China began transition to local servicing halfway through fiscal 2012 and we continue to realize benefits in the current quarter.

The lower manufacturing costs and transfer freight positively impacted our margin by 10 basis points this quarter.

We began our North American supply chain architecture project in the first quarter of 2012 and now have completed the majority of the transition activities.

The goal for the project was to improve service delivery to our customers, also reduce the overall costs within our supply chain network.

In the current quarter, transition costs were minimal and were more than offset by savings we realized from lower manufacturing fees.

The net of this project positively impacted our gross margin by 30 basis points this period.

We experienced a favorable impact from changes in foreign currency exchange rates within our European segment, which positively impacted our gross margin by 30 basis points.

Cost of goods are sourced in pounds sterling while revenues are generated in euros, pounds sterling as well as some in the US dollar.

The value of the euro increased period versus period, causing revenues from euro-based countries to be worth more in pounds sterling, thus improving the gross margin.

Sales mix and all other miscellaneous impacts negatively affected our gross margin by 20 basis points in the quarter.

This would also include the impact of higher sales from our lower-margin distributor markets.

The themes discussed for the quarter for gross margin also apply to year-to-date results.

Gross margin year to date was 50.8% compared to 49.1% in the prior fiscal year.

The increase of 170 basis points in gross margin was primarily driven by the prior-period price increases, lower promotional discounts, along with benefits from our supply chain-related initiatives.

This completes the gross margin discussion; now onto the 30, or the cost of doing business.

In the third quarter the cost of doing business was 34% of net sales compared to 33% in Q3 of the prior year.

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

Period versus period, our sales increased by 7% in Q3 while our operating expenses increased by 10%, causing an increase in our cost of doing business percentage.

Year to date, the cost of doing business was 33% of net sales, the same as in the prior-year period.

In the third quarter, approximately 78% of our cost of doing business came from three areas -- 45% was related to our people cost, the investments in our drive; 21% is from our investments that we make in marketing and advertising and promotion; and 12% in freight, the cost to get our products to our customers.

Now, on a little bit more detail of our SG&A expenses, in the quarter in Q3, our SG&A expense was $25.7 million versus $22.7 million in the prior fiscal year quarter.

As a percentage of net sales, it was 27.6% in the current quarter versus 26.1% in the prior-year period.

The increase was driven primarily by higher employee costs, which increased $3.3 million due to higher bonus expense accruals along with higher compensation costs associated with annual merit increases and higher staffing levels.

This was partially offset by lower professional services and the favorable impact of changes in foreign currency exchange rates.

Sales, SG&A expense year to date was $74.9 million versus $67.3 million in prior fiscal year period.

As a percent of net sales, it was 27.2% in the current period versus 26.1% in the prior year.

Advertising and sales promotion expense in Q3 was slightly lower at $6.6 million compared to $6.7 million in the prior-year period.

As a percentage of sales, A&P investment was 7.1% in Q3 compared to 7.7% in the prior-year period.

A higher level of advertising and promotional activities in Europe was more than offset by lower activities in Asia Pacific as well as lower costs in the Americas.

Year-to-date advertising and sales promotion expense of $18 million was $1.5 million lower than the prior-year fiscal period.

Advertising and sales promotion expense as a percentage of sales decreased to 6.5% year to date from 7.5% in the prior period.

The decrease in advertising and sales promotion expense was primarily due to the lower cost associated with promotional programs conducted in the Americas segment.

Amortization of intangible assets in the current quarter remained constant at $0.5 million compared to the prior fiscal year period.

Year to date amortization was $1.5 million compared to $1.7 million in the prior-year period.

Total operating expenses in the current quarter were $32.8 million versus $29.9 million in Q3 of last financial year.

Operating income in Q3 was $15 million compared to $13.1 million in the prior-year quarter.

Year to date, total operating expenses were at $94.4 million versus $88.4 million in the prior-year period.

Operating income year to date was $45.3 million compared to the $38.1 million in the prior year.

EBITDA, the last of our 50/30/20 measures, was 17% of net sales in Q3 compared to 16% in the prior fiscal year period.

Year to date EBITDA was 18% of net sales compared to 16% in the prior fiscal year.

Again, we target EBITDA of 20% of net sales but expect variations from time to time as sales, A&P investment and other expenses fluctuate with the timing of our activities.

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

The provision for income taxes in Q3 was 30.6% versus 29% in the prior fiscal year quarter.

Year to date, the provision for income taxes was also 30.6% versus 29.3% in the prior-year period.

The lower tax rate in both year periods reflect benefits from the release of uncertain tax position reserves that were associated with the expiring statutes in fiscal year 2012.

We did not have a similar benefit in the current fiscal year.

Net income in Q3 was $10.3 million versus $9.1 million in the prior year.

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

Q3 fiscal year 2013 results on a constant currency basis would have produced net income of $10.6 million.

Diluted earnings per common share were $0.66 in Q3 compared to $0.57 in the prior fiscal year quarter.

Diluted shares outstanding decreased from 16 million shares to 15.6 million shares.

Year to date, net income was $31.7 million compared to $26.5 million in the prior-year period.

Changes in foreign currency exchange rates did not have a material impact on net income.

Diluted earnings per share were $2.01 year to date compared to the $1.64 in the prior-year period, with diluted shares outstanding decreasing from 16.1 million shares to 15.7 million shares.

Regarding the dividend, on June 18, the Board of Directors declared a quarterly cash dividend of $0.31 a share, payable on July 31, 2013 to shareholders of record on July 16.

Based on today's closing price of $57.65, the annualized dividend yield would be 2.2%.

A look at our financial position at May 31 -- we have a strong, solid financial foundation to support our strategic initiatives.

Our balance sheet is supported by strong cash and short-term investment balances, low debt and additional liquidity is available under our $125 million line of credit.

This enables us to pursue our growth initiatives, which include market expansion and new product introductions.

As of May 31, our cash and cash equivalents were $52.3 million, an adequate level to support working capital needs as well as enough to weather fluctuations in the capital markets and the global economy.

We also had $35.2 million in short-term investments, which consist of term deposits and callable time deposits held at money center banks.

Our line of credit balance was $63 million at the end of the third quarter.

In addition to our regular dividends, which we target a payout ratio of 50% of net income, we also returned capital to shareholders through share repurchases.

During the third quarter we acquired just over 182,000 shares of our stock of total cost of $9.8 million.

These shares were acquired under our share repurchase plan approved by the Board of Directors on December 13, 2011, which provides authorization to acquire up to $50 million of the Company's outstanding shares through the plan's end date of December 12, 2013.

As of May 31, the Company has repurchased nearly 898,000 shares at a total cost of $43.5 million.

We expect to complete the repurchases under this plan before the end of the year and begin purchases under a new share repurchase plan that was approved by the Board of Directors on June 18.

The new plan provides authorization to acquire up to an additional $60 million of the Company's shares through August of 2015.

Well, that completes the financial overview.

Again, more information is available on our 10-Q which we will file tomorrow.

And now back to Garry.

We remain cautiously optimistic about several macro factors, which include stability in the global economy, major input costs and foreign currency exchange rates.

As for input costs, we hope that recent stability in petroleum-based materials and aerosol can costs will continue in the near-term and that our initiatives will continue to benefit our gross margin.

We have updated our guidance in light of our year-to-date results.

The following fiscal year 2013 guidance does not include any acquisitions or divestitures and assumes that foreign currency exchange rates will remain close to recent levels.

We expect our fiscal year net sales results to be in the range of $356 million to $370 million or a growth of between 4% and 8% versus fiscal 2012.

We now project our gross margin to be close to 51%.

We expect our global advertising and promotion investment to be in the range of 6.5% and 7.5% of net sales.

We now expect net income of between $37.6 million and $39 million, which would achieve a diluted earnings per share of between $2.40 and $2.48, assuming 15.7 million weighted average shares outstanding.

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

You've heard that sales grew 7% in Q3 and year to date, driven by the growth in our WD-40 multiuse product and Specialist product lines.

You heard that we launched WD-40 Specialist Motorbike in the UK in the third quarter and are working on other WD-40 Specialist category offerings to bring to market during next fiscal year.

You heard that cost savings from the North American supply chain architect project and our local sourcing initiative in China helped us to achieve our 51% gross margin.

You heard that we continue to return capital to shareholders through share buybacks and that the Board approved another $60 million share repurchase plan.

You heard that we raised our guidance for fiscal 2012 with diluted EPS now in the range of $2.40 to $2.48.

You heard that these are exciting times for our tribe members and shareholders at WD-40 Company.

In closing, I would like to share a quote with you from Nelson Mandela.

It always seems impossible until it's done.

Thank you for joining us today.

We would now pause and be pleased to open the conference for any questions.

(Operator instructions) Liam Burke, Janney Capital Markets.

Garry, could you talk a little bit more about the distribution channel in Europe?

That was up a big number.

Is there any particular country or are there any new countries online, or what is driving that number?

The marketing distributor markets in Europe.

It's across the board, Liam.

We have had development continuing in the Eastern European blocs, our business in Russia and Poland and other areas, but there is no new news.

It's just another step in the build of that business.

It does, as you know, as with most of our business, it does bounce around from time to time, but we are happy that it was a good quarter, but we're more than happy that it's a good year.

Okay, and you mentioned more applications for the multipurpose marketing.

You mentioned multipurpose on the lubricant side.

The motorbike sales in UK, bike sales in US and then the lawn and garden potential launch -- when you are dealing with more specialized distribution, do you have to approach that market differently than you traditionally know how to go after the market, where you are dealing with much more retailers?

It depends on the geography and what our competencies are.

We have set up a separate division in the United States to handle the distribution to the independent bike dealers because it is quite different, and that has been operating now for about a year.

In the United Kingdom with our motorbike product, we are selling both through the traditional motorbike distribution through wholesalers that are experienced in that trade channel.

We are also selling our motorbike range in the UK through automotive distribution because motorcyclists do ride into motorcycle stores.

As far as the potential for lawn and garden, it will be sold through our traditional trade channels in hardware/home improvement, where those stores have sections within their units that sell these types of products.

And then the other specialist range, which is what we call our flanker brand strategy, which are the products that we launched initially, of course, they are going through our regular distribution through mass merchants, hardware home improvements, automotive and industrial.

And Jay, debt stepped up about $18 million this year.

Is that just to provide you additional cash because of the international holdings?

Yes, yes.

Now, do you see having to continue that, or are you comfortable that you have sufficient cash balance?

Well, we would see our line of credit expanding gradually over time as we continue to generate cash that is -- the majority of it being held offshore.

So in some ways we would continue to see ourselves in a net cash position.

But we would continue to see some level of increase in our line of credit.

Great, thank you, Jay.

(Operator instructions) Joe Altobello, Oppenheimer.

This is [Christine] on for Joe tonight.

I had a question about gross margin and why you are more optimistic about it for the remainder of the year.

The main reason we are optimistic about it is it is trending out year to date at nearly 51%.

So we don't see that deteriorating for the rest of the year, so it's really a reflection of reality.

Okay, and that the change in A&P for the year -- what was the reasoning behind that?

Again, it's basically the way it has trended for the year and how the year has unfolded.

It seems like it will come in a little lower than normal, mainly due to the shift in advertising investment or marketing investment.

So again, it's just truing it up to reflect really the reality of where it is today.

So we shouldn't expect that going forward past this year?

I don't want to comment on that.

We have traditionally been in that 6% to 8% range for many years.

We don't see that that's going to change, but it will be somewhere within that, depending on the promotional activity and what is happening at the time.

Okay, great.

And then just one last one -- excluding the Specialist products, how much was the base WD-40 brand up?

We only -- we don't disclose WD-40 multiuse product on its own.

We report WD-40 as a brand, which includes multiuse product and Specialist.

Great, thank you so much.

Ladies and gentlemen, this concludes today's question and answer session.

At this time, I would like to turn the conference back to Mr. Garry Ridge for any additional or closing remarks.

Well, thank you.

That was short and sweet.

We hope you have a pleasant rest of the day, and we'll talk to you again in October.

Ladies and gentlemen, this does conclude today's conference;' we appreciate you participation.