WD-40 Company
Q1 2021 Earnings Call Transcript

Published: 7 Jan 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company First Quarter Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question-and-answer session. I would now like to turn the presentation over to your host for today's call, Ms. Wendy Kelley, Director of Investor Relations and Corporate Communications. Please proceed.

[Wendy Kelley:]

Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-40 Company's Chairman and Chief Executive Officer, Garry Ridge; Vice President and Chief Financial Officer, Jay Rembolt; and President and Chief Operating Officer, Steve Brass.

[Garry Ridge:]

Thank you, Wendy. Good day and thanks for joining us for today's conference call. Jay, Steve, Wendy and I are, once again, dialing in from our respective homes. It has truly been a challenging year for the world and we hope that you and your families are staying safe and healthy. Our tribe continues to work through the many challenges associated with the ongoing COVID-19 pandemic. However, today I'm happy to share some much needed good news with you. We market a variety of maintenance and cleaning products that have been in high demand during these extremely unusual times. This increased demand primarily came from our maintenance products and was linked to renovation trends associated with a pandemic or what we call isolation renovation. As a result of the trend, today, we reported net sales of $124.6 million for the first quarter of fiscal year 2021, up 26% compared to the first quarter of last year. This tremendous result is due to our tribe's hard work and dedication to delivering products to meet these increased consumer demands. Thank you tribe-mates for working hard to ensure that customer orders can be fulfilled, production lines at our third-party manufacturers are functioning, and customers and end users can get the products they need. I know it hasn't been easy, but I am grateful for each one of you.

[Steve Brass:]

Thanks Garry and good afternoon. The impact of the pandemic on our operations over these last 10 months has created an unprecedented amount of uncertainty around our business.

[Jay Rembolt:]

Thanks Steve. Let's start with the discussion about our 55/30/25 business model, the long-term targets we use to guide our business. As you may recall, the 55 represents gross margin which we target to be at 55% of net sales. The 30 represents our cost of doing business, which is our total operating expenses, excluding depreciation and amortization. Our goal is to drive our cost of doing business over time toward 30% of net sales. And finally, the 25 represents our long-term target for EBITDA. First, we'll look at the 55 for our gross margin. In the first quarter, our gross margin was 56.4% compared to 54.3% last year. This represents an improvement of 210 basis points year-over-year. Changes in major input costs, which include petroleum-based specialty chemicals and aerosol cans positively impacted our gross margin by 340 basis points. Petroleum-based specialty chemicals had a positive impact on gross margin of 260 basis points and the remaining 80 basis points came from lower costs associated with the aerosol cans. Beginning in late February 2020, crude oil reached multi-year lows and has consistently remained lower year-over-year since that time. Therefore, the average cost of crude oil which flowed through our cost of goods sold in the first quarter was significantly lower than in the prior year, benefiting our gross margin. In addition, we achieved favorability in cost of aerosol cans due to higher than anticipated purchase volumes, especially in our EMEA segment. Also impacting on a positive way our gross margin were sales price increases, primarily in EMEA and Asia-Pacific which impacted gross margin by 40 basis points in the first quarter. These positive impacts to gross margin were partially offset by the negative impacts of higher warehousing and inbound freight costs in both the Americas and EMEA, which negatively impacted gross margin by 120 basis points. The unfavorable impacts were primarily due to increased freight and warehousing expense due to the high demand, labor shortages in distribution networks related to the pandemic. Finally, miscellaneous costs, unfavorable sales mix changes, and other changes in foreign currency exchange rates when combined negatively impacted our gross margin by 50 basis points. Though we cannot control market dynamics like foreign currency exchange rates or commodity-based input costs, we continue to be focused and deliberate in managing the rest of our business so that we can maintain gross margin at or above our target of 55% over the long-term. Now, I'll address the 30 or our cost of doing business. In the first quarter, our cost of doing business was approximately 32% of net sales compared to 38% last year. Although SG&A expense increased by $3.4 million compared to the first quarter last year, our cost of doing business as a percentage of sales decreased year-over-year due to the significant increase in revenue in the first quarter. The increase in SG&A expense in the first quarter was primarily due to the higher employee-related costs. For the first quarter 80% of our cost of doing business came from three areas, people costs, the investments we make in our tribe, the investments we make in marketing, advertising, and promotion. As a percentage of sales, our A&P investment was 4.4% in the first quarter. As a percentage of sales, A&P investment declined in the first quarter due to the significant increase in revenue. However, our A&P investment was relatively flat in dollars compared to the prior year. And finally, the freight costs to get our products to our customers. And this leads us to EBITDA, the last of our 55/30/25 measures. EBITDA was 24% of net sales for the first quarter, up from the 17% last year. I've shared with you many times that revenue growth is the most important factor in achieving our goal of the 55/30/25 measures that being EBITDA of 25% and this quarter clearly demonstrates just how impactful revenue is within our business model. That will complete the discussion of the business model and then now we will turn to the other items that fall below the EBITDA line. The provision for income taxes was 15.7% in the first quarter compared to 14.7% last year. We expect that our effective tax rate will be approximately 20% to 21% for the full fiscal year 2021, which compares to an effective tax rate of 19.6% in fiscal year 2020. Due to the strong revenue growth and improved gross margin, we reported net income for the first quarter was $23.6 million compared to the $12.2 million last year. Diluted earnings per common share for the first quarter were $1.72 compared to the $0.88 for the same period last year. Now, a word about our balance sheet and our capital allocation strategy. The company's financial condition and liquidity remained strong. When the pandemic began, we took numerous steps to further strengthen our balance sheet. In order to preserve cash while we monitor the impacts of the pandemic, we elected to suspend the stock repurchases we were making under our previously approved stock buyback plan, which expired at the end of August 2020. We do not expect to see Board approval for a new share buyback plan until we start to see a reduced level of uncertainty regarding the pandemic. As a result, no repurchases were made during the first quarter of the fiscal year 2021. We will continue to remain vigilant in managing our cash and liquidity during these unprecedented times. However, we continue to return capital to shareholders through regular dividends. On December 7th, our Board of Directors approved a regular quarterly cash dividend of $0.67 per share payable January 29th to shareholders of record on the close of business on January 15th. Our capital allocation strategy includes a comprehensive approach to balance investing in long-term growth, while providing strong returns to our shareholders. In fiscal year 2021, we will invest approximately $20 million in capital projects, the majority of which will be used to complete the procurement of the proprietary machinery and equipment that we are using to manufacture our next generation Smart Straw delivery system. We have historically had an asset light business model which has required very low levels of capital investment, roughly between 1% and 2% of sales. We believe that beginning in fiscal 2022, we'll begin to see CapEx return to these levels. The pandemic continues to inject a measure of uncertainty into our business, which makes it very difficult for us to accurately forecast short-term financial results for the company. As a result we will not be issuing comprehensive financial guidance for fiscal year 2021 at this time. That will complete our discussion of the financial overview. Now, I will turn it back to Garry.

[Garry Ridge:]

Thank you, Jay. In summary, what did you hear from us on this call? You heard that sales of WD-40 Multi-Use Product were up 24% in the first quarter. You heard that sales of WD-40 Specialist were up 37% in the first quarter. You heard that sales of WD-40 BIKE were up nearly 260% in the first quarter due to strong demand around the world. You heard that sales of homecare and cleaning products were up 15% in the first quarter driven by strong demand for cleaning products due to the pandemic. You heard that global e-commerce sales grew by over 90% in the first quarter with strong sales growth across all three trading blocks. You heard that we continue to return capital to investors through regular dividends. You heard that due to the uncertainties and risks the pandemic continues to present, it is very difficult for us to estimate how the pandemic might continue to impact our business over the short to mid-term. You heard that despite these uncertainties, we remain cautiously optimistic about fiscal year 2021 and believe our current market conditions suggest that for the full fiscal year total net sales are likely to be in a range of $435 million to $470 million. And you heard that while we are not issuing comprehensive guidance, we remain confident that our revenue growth aspirations remain a realistic future opportunity. In closing today, I'd like to share with you a quote from my friend Simon Sinek. It is important to celebrate our victories, but we cannot lean on them for the infinite game is still going and there is still much work to be done. Thank you for joining us today. We would be pleased to take your questions.

[Operator:]

And your first question comes from the line of Linda Bolton Weiser from D.A. Davidson.

[Linda Bolton Weiser:]

Hello. Happy New Year. Congratulations on a great quarter.

[Garry Ridge:]

Thank you, Linda.

[Linda Bolton Weiser:]

So, I guess first of all, thank you for giving the guidance for revenue for this fiscal year. And I'm just curious what holds you back from giving earnings guidance. Is it the movements in your petroleum-based input costs because there has been a recent rise in oil or is it more of the supply chain constraints? What element of the earnings profile is it that you're are a little uncertain about?

[Garry Ridge:]

That's truly -- most of it is aligned with the revenue. We don't -- we believe our gross margin will be within our range, as a historic range for the year. But also the uncertainty around the extra -- or the implied costs that may come in because of certain changes in distribution due to the pandemic are things that we can't rely on. So, we think we've got a good idea of the revenue, but we are not comfortable issuing a comprehensive EPS -- down to EPS guidance at this time and I'm sure you understand that. We're not on our own here.

[Linda Bolton Weiser:]

Okay. Also can you talk about your A&P spending? I mean, you noted that the high revenue growth kind of made the ratio lower, but I'm also wondering how much you're spending behind your brands given that maybe in some cases you're chasing demand a little bit? Is that an environment where you would actually want to pull back a little bit on brand spending because you're kind of chasing demand and don't need to spend as much? Could you comment on that?

[Steve Brass:]

No, not at all. We've continued to invest in our marketing activities. The one area that we've been not pulled back on that have been forced to reduce is areas of our marketing tool box that require physical impact, for example, sampling, our sampling programs, which are highly people-intensive. But we are continuing to use this opportunity to further strengthen our brands. And as you know, in some markets we've got a lot of awareness opportunities. So, no, we won't be -- we have no intention of pulling back on our fundamental brand building marketing activities.

[Linda Bolton Weiser:]

And also can you give us some of your thoughts on -- I know this is a long time from now, but a year from now when you're facing these strong comparisons due to the pandemic, what are your thoughts on being able to grow your revenue against such strong comparisons a year from now?

[Garry Ridge:]

Well, our long-term aspiration hasn't changed. We -- and as Steve has shared and I've shared over many years, we believe that there is still a long growth path for us in many countries around the world. As Steve mentioned in his comments, we'll see how many of the new users that have come into our brand that we've identified actually stick and historically, we would believe that will be a very, very high number. So, I wish I could give you -- I wish I had a crystal ball to give you that answer, but the game isn't over. We're playing the infinite game and other areas too Linda like specialist, our business in specialist, particularly in e-commerce is very, very exciting. So, these are all new uses we're bringing in with new products in specialist, new delivery systems. So, we hope -- we're hopeful that that will help us continue some momentum, but we'll see. A lot depends on how soon we're set free as a human race again. But we believe that during the pandemic, we've actually strengthened our position with our end user base and we've strengthened our brand position globally.

[Linda Bolton Weiser:]

Okay. Thank you. That's it for me.

[Garry Ridge:]

Thanks Linda. All the best. Stay safe and well.

[Linda Bolton Weiser:]

Thank you.

[Operator:]

And your next question comes from the line of Daniel Rizzo from Jefferies.

[Daniel Rizzo:]

Good afternoon everyone. How is everyone doing?

[Garry Ridge:]

Perfect Daniel. Good to hear you.

[Daniel Rizzo:]

Good to hear, good to talk. So, I was just looking Europe was much, much stronger than I think anybody anticipated and while I realize that a lot of that was from the remodeling trends you mentioned, I was just wondering was there something particular in that particular region that led to a strong growth. And also the margins seem much better than I think they have historically been and I was wondering what was driving that as well?

[Garry Ridge:]

I'll ask Steve to comment on the revenue side. He is very close to the European business.

[Steve Brass:]

Thank you, Garry and hi Dan. Yes, I mean it really -- it's really for Europe. There was some rebound in terms of the marketing distributors. I mean these are really kind of global trends that we've seen. Our marketing distributors rebounding strongly from kind of lockdowns and limited activity during the pandemic. That's the first thing. And the rest of it's really -- it's the same driver, our must-win battles just been translated to Europe, great growth on our Smart Straw premiumization strategy across Europe, WD-40 Specialist growing very, very nicely. Some of our markets rebounding strongly; India, Russia and some of the challenge markets we had in 2020 have rebounded very, very strongly. WD-40 BIKE has done very, very well across the world, but very strong growth across Europe as well. So, really the same kind of drivers that have driven our global results in terms of those must-win battles and a great execution from our EMEA team.

[Daniel Rizzo:]

And the margins?

[Steve Brass:]

You calling on gross margin or just --

[Daniel Rizzo:]

I was looking at the EBIT margins actually which were I think upwards of 32%.

[Steve Brass:]

It's really drive-to-revenue. We've often said that, as Jay mentioned, that we've got a business model that we've built for the future. And as we start to build revenue, we get the benefit of the leverage of the revenue. So, if you think about our future goal of 55/30/25, we are actually at 56/32/24 which does prove that the model that we've built for the future is a model that's realistic and that was something that was very -- something that we -- experiencing that in the quarter was something that we were very pleased to see.

[Daniel Rizzo:]

Okay. And then I know that there were some tailwind from lower oil prices or lower petroleum costs that kind of flow through -- well, the costs were lower, but the pricing was lower in the -- earlier in the year. Now, you're kind of feeling that -- I was wondering if that's kind of peaked and should probably ease over the next two to three quarters.

[Garry Ridge:]

Jay can speak to that.

[Jay Rembolt:]

Yes, we've seen as oil has crept up recently, we've seen or we will see 90 to 120 days, beyond a little bit, high -- a little bit higher or a little more headwind to margin from where it is today.

[Daniel Rizzo:]

Okay. All right. That's helpful. And then I guess finally, just in terms of timing, I mean has -- in the past historically has the Chinese New Year ever had an effect on sales or does it historically had an effect on -- should we expect a seasonal slowdown here in the first quarter, at least in Asia?

[Garry Ridge:]

Well, it depends when it falls. Last year, obviously it fell right in the beginning of the COVID time. So, we see that -- we always get an upswing after Chinese New Year. But we believe that it would be no different to previous years. And as you know Chinese New Year does fall at different times during the year -- during that first part of the year.

[Daniel Rizzo:]

Okay. And then finally, I think I saw in the deck and you mentioned that the cost of doing business went down previously in the quarter. I was wondering if that's -- again that's just executing better or if there is something you're doing differently to reduce those costs.

[Jay Rembolt:]

It's revenue.

[Daniel Rizzo:]

Is it revenue?

[Jay Rembolt:]

As a percentage -- cost of business as a percentage went down. In real dollars, our cost of business went up, but as a percentage of revenue, it went down and it was because of the higher revenue.

[Daniel Rizzo:]

Thank you very much.

[Garry Ridge:]

Okay. Thanks Daniel.

[Operator:]

Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please just connect your line.