WD-40 Company
Q2 2019 Earnings Call Transcript

Published: 10 Apr 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Second Quarter Fiscal Year 2019 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. [Operator Instructions]. 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 President and Chief Executive Officer, Garry Ridge; and Vice President and Chief Financial Officer, Jay Rembolt. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release, and Form 10-Q for the period ending February 28, 2019. These documents are available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available at that location shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as our earnings presentation. As a reminder, today's call includes forward-looking statements about our expectations for the company's future performance. Of course, actual results could differ materially. The company's expectations, beliefs and projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, April 09, 2019. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events, or otherwise. With that, I'd now like to turn the call over to Garry.

[Garry Ridge:]

Thanks, Wendy. Good day and thanks for joining us for today's conference call. Today, we reported net sales of $101.3 million for the second quarter of fiscal year 2019, which was flat compared to the second quarter of last year. Net income for the second quarter was $15.9 million, compared to $14.8 million last year, reflecting an increase of 7% year-over-year. Diluted earnings per share for the second quarter were $1.14 compared to $1.05 for the same period last year. Now let's start with a discussion about our strategic initiatives and the brands that support them. We aspire to drive our consolidated net sales to approximately $700 million in revenue by the end of fiscal year 2025, and to do this while following our 55/30/25 business model. We'd like to remind investors that these long-term targets are guideposts, not guidance. But our pride continues to work diligently on programs and initiatives that will help us successfully reach our 2025 aspirations. As a reminder, we refer to the brands that are going to get us there is our 2025 brands. They are

[Jay Rembolt:]

Thank you, Garry. Let's start with a 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 towards 30% of net sales over time. And finally, the 25 represents our target for EBITDA. First, we'll look at the 55 or our gross margin. In the second quarter, our gross margin was 55.4% compared to 55.1% last year. This represents an increase of 30 basis points year-over-year. The effective sales price increases which we've implemented in all three trade blocks over the past 12 months positively impacted gross margin by 120 basis points in the second quarter. Sales mix changes and other miscellaneous costs positively impacted our gross margin by 60 basis points, driven primarily by favorable product mix changes, primarily in our Americas and Asia-Pac regions. Also positively impacting gross margin this quarter by 20 basis points was lower warehousing, distribution and freight costs in the Asia Pacific segment. And finally, favorable changes in foreign currency exchange rates had a positive impact on our gross margin of about 25 basis -- 20 basis points. These favorable impacts to gross margin were partially offset by changes in major input costs, which negatively impacted our gross margin by 120 basis points this quarter. Approximately 70 basis points came from increased costs of petroleum-based specialty chemicals, while the remaining 50 basis points came from higher costs associated with aerosol cans. As reminder, there's a delay of about 90 to 120 days or more before changes in raw materials impact cost of goods due to production and inventory life cycles. The average costs of raw materials that flowed through our cost of goods sold in the quarter were higher this year compared to last year. And this put pressure on our gross margin in all three trade blocks. Also negatively impacting gross margin the second quarter were increased advertising, promotional and other discounts that we give to our customer, which negatively impacted gross margin by 70 basis points compared to the prior year quarter. As a reminder, our long-term gross margin target of 55% is not contingent upon commodity prices staying at any particular price point. We cannot control global market dynamics but we can continue to be focused and deliver in managing the rest of our business so that we will maintain gross margin at or above 55% over the long-term. Now I'll address the 30 or our cost of doing business. In the second quarter, our cost of doing business was approximately 34% which is similar to the second quarter last year. For the second quarter, 76% of our cost of doing business came from three areas

[Garry Ridge:]

Thanks, Jay. In summary, what did you hear from us on our call today? You heard that global sales were flat in the second quarter as compared to last year, yet they were up 3% in constant currency. You heard that the impacts of foreign currency exchange rates reduced our global sales by $2.8 million in the second quarter. You heard that the sales of WD-40 Multi-Use Product were down in the United States. But despite the events we experienced, we believe the United States is positioned for a solid second half of the fiscal year. You heard that the global sales of WD-40 Specialist grew 8% in the second quarter. You heard that we continue to increase distribution of WD-40 EZ Reach Flexible and it is now available in over two dozen countries. You heard that we're working on an innovation that will make our Smart Straw delivery system better than it is today. You heard that we've added Anne Saunders to our Board of Directors. And you heard that our guidance remains unchanged and we expect to end the year in line with our guidance. In closing today, I'd like to share a quote with you from Maya Angelou, you might not control all the events that happen to you but you can decide not to be reduced by them. Thank you for joining us on our call today, and we would be pleased to open the conference call to any questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Linda Bolton Weiser. Please proceed with your question.

[Linda Bolton Weiser:]

So can I just ask you about the innovation? I didn't quite catch all the elements that you said. In plain simple English, non-technical terms, is it that the straw is attached to the can, whereas before it wasn't? Or can you just simply explain it? I didn't quite -- is it on page -- is there a picture on Page 6, because I'm not seeing the picture?

[Garry Ridge:]

Yes, sorry. Maybe it's on Page 7 of the presentation, sorry. So what it basically is Linda, it's -- our Smart Straw was called Smart Straw 1. Smart Straw 2 is a new developed Smart Straw that has a lockable feature on the top of the actuator. It permanently attaches the straw, so you'll never lose the straw again. It sprays two ways, you flip it up to stream and down to spray. It's the first of its kind lockable toolbox proof design, which will reduce any accidental discharge. There’s a better actuator making it easy to spray. It's more ergonomic. It's more durable and it has an improved spray pattern.

[Linda Bolton Weiser:]

It sounds like a lot. So when you talk about the rollout in second half fiscal '20, is it going to be sort of gradual and what market would we expect first and what channels for like is it first in the US home centers? Like do you have any idea at all about how it might roll out?

[Garry Ridge:]

It will definitely be in the US first. And it will then from there rollout in the Europe and across the world. We're not completely sure yet of which channels it will touch first. But we would expect it will take us probably 18 months to two years to convert the world. It's not a minor conversion. But certainly we will start rolling it out with a complete swap out in United States.

[Linda Bolton Weiser:]

And what would be the price premium over what you have now? And how will the margins look compared to what you have now in the product line?

[Garry Ridge:]

Being so far away from when we're about to roll out, we haven't talked openly and publicly yet about pricing but we'll update you as we get closer.

[Linda Bolton Weiser:]

Okay, sounds good. Then can I ask you, when you mentioned -- when you talked about the issue with being taking out one of the warehouse clubs in the US, can you just comment in a general way, did they put another competitive type product similar to yours in there, instead of you, or did they just not put your whole category in there? And secondly, it sounds like until they try to get back in, that this maybe a like a permanent loss for a couple of more quarters until you anniversary the loss. Am I thinking of it the right way?

[Garry Ridge:]

Two questions there, firstly, they did not put another product in. This was not a competitive play. This is not unusual as you probably know Linda that in the warehouse club they have very limited floor space and from time-to-time they rotate products out to rotate seasonal products in and this is not the first time it's happened to us. It won‘t be the last, I'm sure. It happens with many products. I'm sure we'll go to warehouse clubs to buy something that we bought last time that for some reason isn’t there again. We -- the major the impact of which was really felt in this quarter because it was a promotional period in the same quarter last year, so we don’t believe it will have a major impact for the rest of the year, and we'll be working as we have done before to regain and win back that floor space at a later time.

[Linda Bolton Weiser:]

So, you are saying it was actually some kind of a program that ran for kind of like just one quarter last year, so it wasn't in for a multi-quarter period. Is that correct?

[Garry Ridge:]

We're not always in all clubs everywhere all the year. And last year, at this time, we happen to have a comparable promotion that we didn't get this year because we're not in the club this year.

[Linda Bolton Weiser:]

Okay, alright. So, as long as you feel -- I mean it sounds like you feel pretty confident that it was like this quarter was the impact. Am I reading that correctly?

[Garry Ridge:]

This is the -- this quarter is the majority of the impact, yes, the past quarter, yes. As with the other thing that we described as well, which was the promotion with a key account, which are two different events.

[Linda Bolton Weiser:]

So, in terms of the other item, so how does -- just explain it again, how does it relate to the price increase. You’re saying that, just not running a promotion because you want to keep the price high -- I don’t quite understand, like can you just explain?

[Garry Ridge:]

I won’t get into the -- in respect of the customer -- I don’t want to get into too much detail but generally what happened is that when we went last year with that price rise -- as you well know, customers don’t always open their arms and welcome us gladly with the price rise. So they do what great companies should do, they try to do the best they can for their end user and good for them to do that. In one particular customer, they decided that they would help us understand more their discomfort with us doing a price rise, hoping that we would not do the price rise by suggesting that if we did rise our price that it would be unlikely that they would be as enthusiastic as they have been in the past around promoting our product for a period of time. One may call that punishment, but anyhow. So, although we weren’t anyway delisted from this customer, they decided that they were going to engage in the normal level of promotion, so there is not as much of our product in their store and particularly it impacted us in the quarter now. Since then the issue was being resolved and we are back on the promotional calendar and we will be back in full swing in the second half of the year. So it just took a little time.

[Linda Bolton Weiser:]

Okay, thanks for that. And then, I’m just curious we’ve had some weather conditions in the US like some very rainy wet type weather in various regions. Would that affect increased consumption or usage of WD-40 products?

[Garry Ridge:]

When there is more moisture and more oxygen, a couple of things happens, one of them is rust. So, yes, we would think that there are periods of time, but we don't -- it’s very hard for us to be able to measure that spike. But we’re always used as a product to rejuvenate wet engines and when that sort of opportunity comes we do turn up the volume in talking about those uses amongst our end users. So yes, I think different weather conditions could have different -- but weather is not -- doesn’t play into us as a huge needle mover.

[Linda Bolton Weiser:]

Okay. And I guess just one last one from me. You gave your usual good run down on the gross margin, different impacts there. In terms of the oil and the can input being -- the cost being up year-over-year, I’m looking at just the commodity cost trend and I’m seeing that maybe with the delay factor those costs would start to be flattered down in your next quarter. Am I looking at that correctly in the fiscal third quarter, we may see some moderation or actually down year-over-year instead of up on the cost?

[Garry Ridge:]

We should be able to pick up some benefit in the third quarter. Your analysis is very similar to ours.

[Operator:]

Your next question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question.

[Daniel Rizzo:]

Just to follow up on that last question. So with the recent surge in oil prices that we’ve seen since the beginning of the year, I think it was 15% since the last call, wouldn’t that have a problem or would have a negative impact later, not necessarily next quarter but towards the end of the year into 2020?

[Garry Ridge:]

That will have a -- yes, in -- by the time we get into the latter half of the year or the last quarter and early 2020, we should be experiencing some of those higher prices that we’re seeing now.

[Daniel Rizzo:]

And then you guys -- you talked about your 2025 brands and that was very helpful. But you mentioned 1001 Spot Shot and Lava and some others. Were they always part of like the core brands? I saw it in the past that they weren’t and there was more about the Multi-Use Product, 3-IN-ONE and some others. I was wondering if you kind of added those recently or it’s always been and I just didn’t notice it?

[Garry Ridge:]

About six or nine months ago, we did get firm around what brands we were confident -- would be in the portfolio at 2025. The ones that are in that now are 2000 Flushes, X-14 and Carpet Fresh in some markets around the world, but we see that Lava and Solvol and 1001 in the UK and Spot Shot in the US are part include and 3-IN-ONE and GT85 and WD-40 BIKE which makes up that whole other bundle are in our expected 2025 brands.

[Daniel Rizzo:]

Okay. Thank you. And then one more question. So I’ve noticed that your corporate costs have been trending a lot lower. Could you just provide color, is there a reason for that? Is it -- I mean, is it timing? Or is it just something we can kind of extrapolate going forward?

[Jay Rembolt:]

Well, I think we do have a very concerted effort on driving our overall cost of business down towards the 30. So I think, one, there's variability in timing throughout the year. But certainly, as we look forward, our goal is to continue to drive down our cost of business. But I think some of what you're noticing might be just some variability between quarters and between years.

[Operator:]

Your next question comes from the line of Rosemarie Morbelli with G. Research. Please proceed with your question.

[Rosemarie Morbelli:]

I was wondering if you could give us a little more on how you got back into the customer’s good graces. Did you have to lower your price except that not as much as they originally wanted you to?

[Garry Ridge:]

I'm not going to -- no, we didn't rescind on our price rise. I think it was us being able to show the customer that we are very supportive of their long-term goals that we do bring significant innovation to the table, showing them how we are a very reliable on time and full supplier that supports their gross margin return on inventory. So -- and I think it just takes time. Jay, what do you -- what's your?

[Jay Rembolt:]

No, I think, you're right, Garry that it has a lot to do with just that ongoing partnership. And occasionally, it's not necessarily recognized at any given time. But we do a lot of work understanding our customers’ customer. And so when we have dialogue with our customers, we are able to share some of the insights that we’ve gained from that. And that I think those are the kind of value opportunities that we were able to share with them.

[Garry Ridge:]

Some of our competitors, the only thing they have to play with is price. And we think it's much bigger than price. It's about innovation. It's about insights into the behaviors of our end users, it’s about research. It's about innovation, like Smart Straw and EZ Reach, and we need to continue to have those conversations. And what we're about is driving category sales and profitability, not about on penny here, one penny there.

[Rosemarie Morbelli:]

Okay. So can we say that this was a surprise so to you that they would act the way they did?

[Garry Ridge:]

No.

[Rosemarie Morbelli:]

No.

[Garry Ridge:]

No, I mean, we're often asked by our investor base, why don't we just raise prices? And we don't raise prices, because price rises are disruptive. And I would expect that every good buyer and every good retailer -- and if I was running a retail organization, and finally enough I came from retailing many years ago, that's where I started, their job is to do their job and I respect the fact that they do their job and sometimes the decisions we make are ones that they would prefer we don't make and I respect that.

[Rosemarie Morbelli:]

Okay. And then still on that same subject. Given the fact that oil prices have gone up, are you planning in instituting additional price increases in order to offset what is coming your way, even though you won’t see it for a little while?

[Garry Ridge:]

No, oil prices are coming back now to where they were about eight or nine months ago, when we first implemented the price rise. So, no, we don’t have -- today we do not have in the United States another immediate price rise in our plan. Although around the world, we are taking pricing for different reasons from time-to-time.

[Rosemarie Morbelli:]

Okay, thanks. And then looking at the growth in EMEA, anything specific besides EZ Reach? And I missed it if you gave us a growth rate for EZ Reach in that particular region?

[Garry Ridge:]

We didn’t give a growth rate individually, but EZ Reach is playing well, the UK market did very well, particularly because of the promotional activity that was generated through the product of no vac. But in transaction currencies, we’re seeing most markets growing, the UK is growing well. We have seen good growth in Iberia or in Italy. We’re seeing good reasonable growth in France. So overall, our business continues to [trek] along at a reasonable rate in the EMEA markets, in line with the initiatives that we have put in place to continue to grow the business through to 2025.

[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 disconnect your lines.