WD-40 Company (WDFC) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the WD-40 Company Third Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. At this time, I'd 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 condition, 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 '13 earnings call is scheduled for Thursday, October 17, 2013. And now I'd like to pass it on to Garry Ridge.

Thank you, Maria. Good afternoon, and thank you for joining us for today's conference call. Today, we've 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 was $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've made during the third quarter towards our strategic initiatives, the first one being to maximize the WD-40 brand. Sales of WD-40 Multi-Use Product increased 9% in the third quarter compared to Q3 last fiscal year. Apart from strong overall performance, growth was driven by major -- a major customer-specific promotional program in the U.S. 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 prioritized 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 U.K. during the third quarter. These products meet maintenance and repair 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 the strategic alternatives for our brands…

Garry, thanks. In addition to the information that we'll present today on the call, we also want to remind you to review our Form 10-Q, which we'll file tomorrow. Now let's look at the rest of the financials. But first, we stop and review our 50/30/20 rule, and 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 30 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 EBITDA 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 look at our gross margin over 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 cost, which unfavorably impacted our margin by 20 basis points. These other import costs include…

Thanks, Jay. We remain cautiously optimistic about several macro factors, which include stability in the global economy, major import costs and foreign currency exchange rates. As for import cost, we hope that recent stability in petroleum-based materials and aerosol can cost 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 heard that sales grew 7% in Q3 and year-to-date, driven by the growth of -- in our multi -- WD-40 Multi-Use Product and Specialist product lines. You heard that we launched WD-40 Specialist Motorbike in the U.K. 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 and $2.48. You heard that these are exciting times for our tribe members and shareholders at WD-40 Company. In closing, I'd 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'll now pause and be pleased to open the conference for any questions.

[Operator Instructions] We'll take our first question from Liam Burke with Janney Capital Markets.

Garry, could you talk a little bit more about the distribution channel in Europe? I mean, that was up a big number. Is there any particular country or are there any new countries online or what's driving that number?

The marketing, distributor markets in Europe, it's across the board, Liam. We've had development in -- continuing in the Eastern European blocks, 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're 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 multi-purpose marketing. You mentioned multi-purpose lubricant side. The motorbike sales in U.K., bike sales in U.S. and in the lawn-and-garden potential launch, when you're dealing with more specialized distribution, do you have to approach that market differently than you traditional know how to go after the market, where you're 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's 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're also selling our motorbike range in the U.K. 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 the, what we call our flanker brand strategy, which are the products of 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 holding?

Yes, yes.

Now do you see having to continue that? Or, I mean, do you feel comfortable that you have sufficient cash balance?

While we would see our line of credit expanding gradually over time as we continue to generate cash that's -- majority of it being held offshore, so in some ways we would continue to see ourselves in a kind of a net cash position, but we would continue to see some level of increase in our line of credit.

[Operator Instructions] We will take our next question from Joseph Altobello with Oppenheimer.

This is Christina on for Joe tonight. I had a question about gross margin and why you're more optimistic about it for the remainder of the year.

The main reason we're optimistic about it is it's trending now 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 the change in A&P for the year, what was the reasoning behind that?

Again, it's basically the way it's 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 of this year?

I don't want to comment on that. We've 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's happening at that time.

Okay, great. And then just one last one, excluding the specialist product, how much was the base WD-40 brand up?

We only -- we don't disclose WD-40 Multi-Use Product on its own. We report WD-40 as a brand, which includes multi-use product and specialist.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd 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 again in October. Cheers.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation.