WD-40 Company
Q4 2018 Earnings Call Transcript

Published: 19 Oct 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Fourth Quarter and Full Fiscal Year 2018 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 the host for today's call, Ms. Wendy Kelley, Director of Investor Relations and Corporate Communications. Please go ahead.

[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-K for the period ending August 31, 2018. 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, October 18, 2018. 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:]

Thank you, Wendy. Good day and thanks for joining us for today's conference call. Today, we reported net sales of $102.6 million for the fourth quarter of fiscal year 2018, which reflects an increase of 6% from the fourth quarter of last year. Foreign currency exchange rates had an insignificant impact on our sales in the fourth quarter. Net income was $21.6 million compared to $14.4 million in the fourth quarter of last fiscal year, reflecting an increase of 51%. Diluted earnings per share for the fourth quarter were $1.54 compared to $1.01 for the same period last fiscal year. For the full fiscal year, net sales were $408.5 million, up 7% over last fiscal year. Changes in foreign currency exchange rates had a favorable impact of $10.5 million on consolidated net sales for fiscal year 2018. On a constant currency basis net sales would have been $398 million, up 5% over last fiscal year. Net income was $65.2 million for fiscal year 2018, reflecting an increase of 23% compared to last year. Diluted earnings per share for the full fiscal year were $4.64 compared to $3.72 in the prior fiscal year. Investors should note that both our net income and diluted earnings per share were favorably impacted in both the fourth quarter and the fiscal year of 2018, due to the U.S. Tax Cuts and Jobs Act. Jay will talk about this more in detail shortly. For the purposes of this call, after discussing our strategic initiatives, we'll focus primarily on the financial and operating results for the fourth fiscal quarter. For a complete discussion of our full year results for 2018, please refer to the press release we issued earlier today and our annual report on Form 10-K, which we expect to file with the SEC on Monday, October 22. Now, let's start with a discussion about our strategic initiatives. As most of you will recall our long-term revenue target is to drive consolidated net sales to approximately $700 million in revenue by the end of fiscal year 2025, and to do so while following our 55/30/25 business model. We'd like to remind investors that these long-term targets are guideposts, not guidance. We acknowledge that our anticipated 2025 targets are aspirational. But we continue to believe that if we stay focused, we can be successful in moving towards these targets. Strategic initiative number one is to grow WD-40 Multi-Use Product. Our goal under this initiative is to make the blue and yellow can with a little red top available to more people, in more places that will find more uses more often. In fiscal year 2018, sales of WD-40 Multi-Use Product were $314.2 million, up 8% compared to last year and in the fourth quarter sales were $78.3 million, an increase of 7% compared to the fourth quarter of last year. This reflects the excellent progress towards our most important strategic initiative, to grow the Multi-Use Product to approximately $530 million in revenues by the end of fiscal year 2025. As part of that mission, we are continuing to introduce WD-40 Multi-Use Product into new markets, targeting increased growth and higher availability around the globe, in areas including Latin America, China, India and Europe. We're poised to maximize this goal in a way that we've never done before. We're doing this by taking our innovations into growing markets as well as established ones and by leveraging our global infrastructure. Our innovation is also continuing to drive revenue growth with products like WD-40 Smart Straw and WD-40 EZ-REACH. Strategic driver number two is to grow the WD-40 Specialist product line. In fiscal year 2018, sales of WD-40 Specialist were $31.4 million, up 22% compared to the last year. And in the fourth quarter, sales were $8 million, reflecting an increase of 10% compared to the fourth quarter of last year. This continues to move the company towards its goal for this initiative of growing the product line to approximately $100 million in revenues by the end of 2025. We are optimistic about the long-term opportunities for WD-40 Specialist. However, there may be some volatility in sales levels along the way due to the timing of promotional programs, the building of distribution and various other factors that come with building out a new product line. Strategic initiative number three is to broaden product and revenue base. Our goal under this initiative is to leverage the recognized strengths of WD-40 to derive revenue from existing brands as well as new sources and products. Sales under this strategic initiative were $45.2 million this fiscal year, up 6% compared to last year. And in the fourth quarter, they were $12.2 million, reflecting an increase of 7% compared to the fourth quarter of last year. We've seen solid progress under this initiative this fiscal year and we believe we're on track to reach the combined revenue of approximately $70 million by 2025. It was a great year for the maintenance brands like WD-40 BIKE and 3-IN-ONE, which saw increases in global revenue of 28% and 10% respectively. In addition, we gained greater understanding of our other brands under this initiative like GT85, Spot Shot, Lava, 1001, no vac and Solvol, which performed in their own unique channels and geographies. Strategic initiative number four is to attract, develop, and retain outstanding tribe members. Our goal under this initiative is to attract, develop, and retain talented tribe members and to grow the tribe member engagement to greater than 95%. At the end of the fiscal year, we had 480 tribe members around the globe. I believe the success, the WD-40 has experienced is linked directly to our outstanding tribe members on the exceptional motivation and dedication to WD-40 Company and its products. This year, a level of employee engagement worldwide was 93.3%, nearly triple the average for U.S. companies according to Gallup. The exceptional motivation of our tribe members is a huge factor in our financial performance and why our compounded annual growth rate has continued to ascend up year-over-year. The fact is we take care of our employees, our employees take care of our brands and customers, and our customers take care of our shareholders. Nurturing and growing that engagement will continue to be a top priority for us in fiscal year 2019 and into the future. Strategic initiative number five is operational excellence. At WD-40 Company, our cornerstone to operational excellence ties closely to one of our core values, which is to make it better than it is today. With this, our guiding mantra

[Jay Rembolt:]

Thanks, Garry. Let's start with the discussion about how we performed against our most recently issued fiscal 2018 guidance. We're pleased that our fiscal year results have met or exceeded our most recently issued guidance. We expected our 2018 net sales to be between $403 million and $411 million. And today we recorded revenue of $408.5 million, up 7% compared to fiscal 2017. We expected gross margin to be near 55%. And today, we reported gross margin of 55.1%. We expected our global advertising and promotion investment to be near 6% of net sales. And today, we reported A&P investment of 5.5% of sales. And we had expected net income to be between $56.3 million and $57 million, resulting in diluted earnings per share of between $4.05 and $4.10, assuming 13.9 million weighted average shares outstanding. Today, we reported net income of $65.2 million and a diluted EPS of $4.64 based on 14 million weighted average shares outstanding. It's worth noting that we substantially exceeded our guidance for net income and diluted EPS. This is because in the fourth quarter, we recorded an adjustment to the provisional tax amounts associated with the onetime toll tax on unremitted foreign earnings net of foreign tax credits that was available under the U.S. Tax Cuts and Jobs Act. This adjustment resulted in a favorable impact to our net income of $7.1 million, which resulted in a provisional tax benefit. This was not contemplated when we updated 2018 guidance in July. I'll discuss this in more detail later. But first, let's review the 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 20 represents our - the 25 represents our target for EBITDA. Well, the 55 were gross margin. In the fourth quarter, our gross margin was 55.2% compared to 56% last year. This represents a decline of 80 basis points. Changes in major input costs, which include petroleum based specialty chemicals and aerosol cans, were the primary driver of this decline and negatively impacted our margin by 190 basis points. As you know crude oil is one of the primary feedstocks of our petroleum based specialty chemicals. And we've experienced rising oil costs, which have put pressure on our cost of goods sold in all three of our trading blocks. Rising petroleum based specialty chemical costs negatively impacted our gross margin by 140 basis points period over period. Also contributing negatively to our gross margin by 50 basis points was the increased cost of aerosol cans. In addition, gross margin was negatively impacted by 10 basis points due to increases in other miscellaneous costs, primarily in the EMEA segment. These negative impacts to gross margin were partially offset by the favorable effects of price increases, which we've implemented in all three trading blocks over the last 12 months, and which positively impacted gross margin by 100 basis points in the fourth quarter. Reduced promotional and other discounts that we give to our customers also positively impacted gross margin by 20 basis points during the quarter. As a reminder, our long-term gross margin target of 55% isn't contingent upon commodity prices staying at any particular price point. We cannot control market dynamics, but we continue to be focused and deliberate in managing the rest of our business, so that we can maintain our gross margin at or above our target of 55% over the long-term. Now, we'll address the 30, or our cost of doing business. In the fourth quarter, our cost of doing business was approximately 34%, remaining relatively flat compared to the same period last year. Overall, our cost of doing business increased $2.4 million compared to last year, primarily due to increased employee-related costs and higher advertising and promotion investments in the fourth quarter. As we've shared with investors, we increased our investments in A&P during fiscal 2018 to support brand-building initiatives, and the majority of this incremental investment was made in the fourth quarter. For the fourth quarter, 79% of our cost of doing business came from three areas

[Garry Ridge:]

Thanks, Jay. So in closing, what did you hear from us on today's call? You heard that we had a 6% global sales growth for the fourth quarter and 7% for the full year. You heard that we continue to make progress towards our long-term revenue target, which is to drive consolidated net sales to approximately $700 million in revenue by the end of fiscal 2025. You heard that global sales of WD-40 Multi-Use Product grew nearly 8% during the full fiscal year. You heard that global sales of WD-40 Specialist grew 22% during the full fiscal year. You heard that our Asian distributor markets have recovered from the disruption they encountered earlier this fiscal year, and the region has now returned to solid growth. You heard that both our net income and diluted earnings per share were favorably impacted in the fourth quarter and the fiscal year 2018 due to the U.S. Tax Cuts and Jobs Act, and that we expect that our tax rate to normalize at about 21% to 22% in fiscal year 2019. You heard that we'll be increasing our capital investment this year to support some exciting product enhancements. You heard that we'll be increasing our A&P investment this year to support additional investments in both digital and physical brand building. And you heard that we issued guidance, which projects that the company will continue its solid top line growth into fiscal 2019. In closing, I'd like to share with you a quote from Kamil Toume. The real competitive advantage in any business is one word only which is people. Thank you for being on the call and we now go back to the operator.

[Operator:]

[Operator Instructions] Our first question comes from the line of Daniel Rizzo from Jefferies. Your line is - please proceed.

[Daniel Rizzo:]

Hi, everyone. How are you?

[Garry Ridge:]

Good.

[Jay Rembolt:]

Fine. Thank you.

[Daniel Rizzo:]

Just - I'm sorry, a clarification. You said, I think $16 million in CapEx. Is that for operational excellence or brand building? I'm sorry, I wasn't clear on that.

[Garry Ridge:]

It's true - capital is basically for equipment and tooling for some new equipment we have and then the building out of our new facilities in the UK, plus the normal maintenance capital what we have. So it's truly real capital expenditure.

[Daniel Rizzo:]

Okay. And then, could you just give us. I don't know, just some color on the cadence of promotional activities next year? I mean, there is a certain like seasonality to it or in general actually?

[Garry Ridge:]

No, there should really be no difference to the normal course of work that we do. As you know, Daniel that it varies from quarter to quarter. And it will be along the same sort of lines as last year. We are upping our investment in digital, enhancing our search engine optimization, refreshing our websites. We have a true strategy behind being the digital dominant, and we'll be working on that. And then, brand building, increased sampling in countries like India, China, Italy and other developing opportunity markets around the world.

[Daniel Rizzo:]

Are you paying down debt or the debt pay-down that we saw, is that kind of in - because of the higher interest rates? Or is that - I mean that's just coincidental that you were able to repatriate the money and this is always the plan?

[Garry Ridge:]

Yeah, I think that - we consider ourselves kind of a net-debt-neutral company. And because we had the ability to bring the cash back, we brought the cash back and used it to pay down our line of credit.

[Daniel Rizzo:]

Okay. And then, finally, for EZ-REACH and the EZ-REACH Straw, is that - that's primarily U.S. based products, right? Those are line extensions here as opposed to in other markets like Canada or Europe or any things like that?

[Garry Ridge:]

The initial launch was in the United States. We launched into two countries in Europe last year, that being Germany, and later in the year, Italy. We've launched in Australia with EZ-REACH, and we'll be launching in a number of other new countries in Europe during fiscal 2019.

[Daniel Rizzo:]

Okay. Thank you very much.

[Garry Ridge:]

Thank you.

[Operator:]

Your next question comes from the line of Rosemarie Morbelli from Gabelli & Company. Please proceed with your question.

[Rosemarie Morbelli:]

Hello, good afternoon, everyone.

[Jay Rembolt:]

Hi, Rose.

[Garry Ridge:]

Hi.

[Rosemarie Morbelli:]

I was - so if I look at the benefit, the tax benefit, I believe, Jay, you said $7.1 million to the net income.

[Jay Rembolt:]

Yes.

[Rosemarie Morbelli:]

So that would be about $0.51 per share, fully diluted.

[Jay Rembolt:]

Yeah.

[Rosemarie Morbelli:]

Okay. And therefore, you would have reported, excluding this tax benefit $4.13 versus your guidance of $4.05 to $4.10. So could you talk about the areas which had brought positive surprises?

[Garry Ridge:]

I guess, there wasn't really any real positive surprises. I think you'll see that the whole outcome is driven by revenue, and then our gross margin and then our cost of doing business. Our revenue was kind of in the center of where we predicted. Our cost of doing business was a little less in the quarter, but not for any totally identifiable reason. So I think the tribe managed the business well through the year. I think that our guidance was pretty well thought through. So overall, we're not surprised. We're comfortable with the business. And we think it's performing in a way that we can accept. We're going to have ups and downs in different markets as I shared, in different places as we go through every year. So I think we were kind of comfortable where we ended up.

[Rosemarie Morbelli:]

Okay. I appreciate that. And when we look at your advertising and promotion expenses that increased 23% in the fourth quarter, so is the benefit from those promotions going to be felt in the first quarter of next year? Or does it take longer than that? Can you give us a feel as to when we can expect the benefit from that?

[Jay Rembolt:]

Sure. All of the increased investment we're making, which was the $1 million in this year and the $2 million in 2019 are longer term. It's basically in two areas. One is in our digital optimization. So as we continue to optimize our digital presence through the refreshing of all of websites, search engine optimization, creating assets that we can use to build brand awareness and usage in digital. And the second is basically sampling. And where we've increased our efforts to sample our product in the markets we've identified as growth markets in the future, those being countries like India, Italy, Mexico, Colombia and some other areas in Europe. So we wouldn't expect to see any real uptake on that until well into 2019 and early 2020.

[Rosemarie Morbelli:]

Okay. Thanks. And if I may, so in Asia Pacific, the new business with the new marketing distributors, okay, resulted in an increase of 128%, which you did mention is not sustainable. And China was up 30%. So what should we expect in terms of sustainable growth in the region? And I understand that it will move around quarter-to-quarter.

[Garry Ridge:]

Our expectations remain the same. We would expect that our Americas business in revenue would grow somewhere between 2% and 4% in revenues a year. We would expect that our European business in revenues will grow somewhere in the area of 8% to 10% a year. And we expect Asia-Pacific in aggregate to grow somewhere in the area of 10% to 12% a year.

[Rosemarie Morbelli:]

Okay. And lastly, looking at your Multi-Use Products and could you give us a better feel for the different segments or categories?

[Garry Ridge:]

Well, the most - in our Multi-Use Product? I'm sorry, I don't understand the question.

[Rosemarie Morbelli:]

Well, in the Multi-Use and actually in the Specialties, what did BIKE do? And I apologize if I missed it, but what did BIKEs do? What the different product lines, where some of them more - grew more than others?

[Garry Ridge:]

Yeah, if you think about our - in the full year, as we reported our blue and yellow can with the little red top, the Multi-Use Product, it grew in the year about 7.5%. Specialist, as we reported, was up nearly 22%. BIKE was up about 28%. So the total of our Multi-Use Products were up 8.8% or nearly 9% for the full year. We also had good growth in our 3-IN-ONE product, which was up high-single-digits. So most of, if not, all of the product lines that are driving our long-term were up high-single or double-digits for the year.

[Rosemarie Morbelli:]

Okay. Thank you.

[Garry Ridge:]

Thank you.

[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 line.