Q3 2019 Earnings Call
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I was in earnings results for the third quarter reflect new records for the company.
Now, let's start with a discussion about our strategic initiatives in the brands that support them, we aspire to drive consolidated net sales to approximately 700 million in revenues by the end of fiscal year 2025 and to do so well following our 55 30 25 business model.
We'd like to remind investors that these long term targets a guide post not guidance, they're probably wrong and roughly right.
However, our tribe is working tirelessly tirelessly on programs and initiatives that will help us successfully reached our 2025 aspirations.
As a reminder.
We refer to the brands that are going to get us there as our 2025 brands.
Today are WD 40, multi use product WD 40 specialist three in one WD 40 bike GT 85001 spot shot Salobo LABA and Novak.
Our 2025 brands, our core strategic focus and the primary growth engine for our company.
Our 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 liver it help available to more people in more places who will find more uses more often.
We aspire to grow the WD 40, multi use product to approximately $530 million in revenue by the end of 2025.
In the third quarter sales of WD 40, multi use product were 88.4 million up 7% compared to last year.
The growth was driven by solid sales in both EMA and Asia Pacific as well as a reasonable growth in our largest market the United States.
In our developed markets, we continue to drive revenue growth through the innovation of our flagship product which includes premiumization.
As part of our Premiumization strategy, we continue to successfully convert WD 40, multi product end users to our more innovative smart straw and easy reach delivery systems.
In our developing and emerging markets, we continue to build brand awareness and drive geographic expansion and higher availability around the globe.
Year to date net sales of products included under this initiative were up 4% compared to last year.
Strategic initiative number two is grow the WD 40 specialist product line.
In the third quarter sales of WD 40 specialist were $9.1 million up 8% compared to the third quarter of last year. This continues to move the company towards its goal for the initiative growing the product line to approximately 100 million in revenue by the end of fiscal year 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 the various other factors that come along with building out a new product line.
Here to date net sales of products included under this initiative were up 10% compared to last year.
Strategic initiative number three is to broaden product and revenue base.
Strategic initiative number three includes maintenance products like three in one WD 40 bike and GT 85, but also includes such brands as Bob sharp and larger in the Americas, a thousand and one in EMA and Novak and solve all in Asia Pacific.
We believe we are on track to reach a combined revenue for these products of approximately 70 million by 2025.
Global sales of products included under this initiative were $14.2 million in the third quarter compared to 13.7 million in the third quarter of last year, reflecting an increase of 4% period over period.
Year to date net sales of products under this initiative were up 3% compared to last year.
Nearly all of the growth is attributed to the strong sales of dub of 1001 carpet fresh in the UK due to the favorable impacts of some digital marketing windfalls associated with the brand.
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 into grow tribe member engagement to greater than 95%.
The number one responsibility of our tribal leaders to share knowledge and inspire ongoing learning.
With that end in mind, we recently refreshed our internal learning program and renamed renamed It Learning Laboratory.
Which is our global ecosystem for tribal learning and development through the lab, we create and deliver learning and encompass skills sales skills technical product knowledge leadership in general competencies.
We strongly believe in strengthening our tribe from within because building a strong bench of great talent and future leaders is critical to our continued success.
We are fortunate to have a tremendous depth of talent throughout all ranks of the company and a strong succession plan in place.
To further ensure the continuation of culture and the success of our company, we announced last month that Steve Brass has been appointed to the role of President and Chief operating officer of the company and Patricia Thompson.
Has been promoted to the role of Division President of Americas in conjunction with Steves appointment I will no longer serve as president that will continue to serve as the chief Executive officer of the company.
In addition to these management changes, we shared with investors that Lynn delaying will retire as a director and as chair of the Companys Board at the and extend new Gen meeting in December 2019, and at that time, the board intends to appoint me as chip as board chair.
I'm very excited about taking on this latest responsibility and for the opportunity to mentor the future leaders of this great organization.
Strategic initiative number five operational excellence.
Handled under this initiative is best summarized by one of our core values here at WD 40 company make it better than it is today.
We are continuously focused on optimizing resources systems and processes as well as applying rigorous commitment to quality assurance regulatory compliance intellectual property protection.
Recently, we held two global summits, one in our San Diego and one in our brand New Technology Center in Prime Pine Brook, New Jersey in San Diego members of our global quality tribe gathered together to gain alignment on topics related to quality insurance innovation and regulatory compliance.
In Pine broadcast scientist human resource and supply chain tribe members gathered together with some of our key supplies to collaborate and gain alignment on on some of our global opportunities and challenges. Our tribe is facing these summits are living breathing example of our tribe consistently striving to make it better than it is today.
That completes the update on the strategic initiatives. So let's move on to the details of our third quarter results, starting with sales as I mentioned earlier.
Consolidated net sales were $114 million in the third quarter up 7% year over year, which reflects a new record for the company translation of foreign currency subsidiary results from their functional currencies to the US dollar had an unfavorable impact on sales in the third quarter.
On a constant currency basis net sales would have been $117.5 million in the third quarter up 10% compared to the last year and resulting in a diluted earnings per share of $1.35 cents.
Before I discuss what's happening in the individual segments I'd like to take a moment to remind investors that though we do not consider our business to be a seasonable one it's common for our sales results to fluctuate from one period to another due to various factors, including the level of promotional activities specific programs being run at customer locations, the timing of customer orders or the impact of new product launches. This is all a normal part of our business and we are accustomed to these types of fluctuations and manage them as part of their on.
As part of our normal business activities.
It is when something out of the ordinary happens that we will discuss the event in much greater detail here with investors.
So now let's start with the Americas net sales in the Americas, which includes the United States Latin America, and Canada remained constant at $53 million in the third quarter compared to last year year to date net sales in the Americas were also relatively flat compared to last year sales of maintenance products increased 1% or $369000 in the Americas entirely due to the higher sales of maintenance products in the United States increase in sales in the United States was nearly all offset by lower sales of maintenance products in Canada and Latin America.
Maintenance product sales in the United States increased 6% in the third problem.
Third quarter, primarily due to increased sales of WD 40 specialist sales of doubly special WD 40 specialist were up 30% in the U.S. due to new distribution and successful promotional activities sales of WD 40, multi use product in the us were up 3% compared to last year due to the successful promotional programs being run.
This increase in sales in the US was quite an achievement considering that the third quarter last year. Many of our customers were buying products in advance of a plan of our planned price increases.
The increase in maintenance product sales in the US was significantly offset by decreases in sales in both Canada and Latin America year over year sales in Canada were down 18% and sales in Latin America down 16%. This is because we are up against tough comparable period, both in Canada, and Latin America as customers in prior in the prior year bullet high volumes of product in advance of our planned price increases as a reminder, our maintenance products exclude our homecare and cleaning products.
Sales of our homecare and cleaning products in the Americas decreased 8% in the third quarter compared to the prior year largely due to lower sales of 2000, flushes and spot shot which declined six and 10% respectively.
We continue to consider homecare and cleaning products, except for those listed as 2025 brands as harvest brands that continue to generate meaningful contributions and cash flows but are generally expected to become a smaller part of the business over time.
In total the Americas segment made up 47% of our global business and over the long term, we anticipate sales within this segment will grow between two and 5% annually.
Now on to EMEA.
Net sales in EMEA, which includes Europe , the Middle East Africa, and India increased to 44.5 million in the third quarter up 13% from last year.
Year to date net sales anymore up 9% compared to last year.
Im as reported results in the third quarter were negatively impacted by foreign currency exchange rates on a constant currency basis sales in EMEA would have increased to $47.3 million in the third quarter up 20% from last year translation related impacts were immaterial in the quarter. As you know we sell into EMEA through a combination of direct operations as well as through marketing distributors, our EMA direct markets accounted for 68% of the region sales during the third quarter of this year in US dollar sales in our direct markets with $30.1 million up nearly 16% compared to last year part primarily due to strong sales of WD 40, multi use product.
This increase in sales was primarily due to higher levels of promotional activities and increased distribution of our WD 40 easy reach flexible straw product. In addition sales in the UK direct markets increased significantly due to higher sales of thousand one carpet fresh as the result of favorable impacts from digital marketing windfalls associated with the brand.
Net sales in our EMEA distributor markets, which accounted for 32% of the region sales increased by 7% during the quarter.
To 14.4 million.
This increase was primarily due to the increased sales of WD 40, multi use product in eastern Europe , but Europe , primarily Russia due to the timing of customer orders and more stable economic conditions in the region.
The Amos segment made up 39% of our global sales over the long term, we expect sales within this segment will grow between eight and 10% annually.
Now to Asia.
Consolidated net sales in Asia Pacific, which includes Australia, China and other countries in the Asian region increased to 16.5 million in the third quarter up 14% from last year changes in foreign currency exchange rates had an unfavorable impact on sales in the region.
On a constant currency basis sales in Asia Pacific would have increased to $17.1 million in the third quarter up 18% from last year.
In Australia net sales were 4.2 million in the third quarter down 11% compared to last year, primarily due to changes in foreign currency exchange rates, which had a negative impact on sales in the region on a constant currency basis sales in Australia were down 3% to.
Compared to the same quarter of last year, primarily due to lower level of promotional activities.
In our Asia distributor markets net markets net sales were $8.3 million for the quarter up 50% compared to last year.
This increase in sales was driven by successful promotional programs as well as the timing of customers orders, it's worth noting that in the comparable period last year sales in Asia distributor markets were negatively impacted due to the transitioning of distributor partners in some of the region.
This that transition has been completed for quite some time, but due to the disruption disruption last year, the comparable period looks particularly strong year over year.
Our Asian distributor markets are not impacted by currency since we sell in us dollars in that region.
In China.
Net sales in us dollars decreased to $30.9 million in the third quarter down 6% compared to last year, primarily due to unfavorable impacts of foreign currency exchange rates on a constant currency basis sales would have remained constant year to date net sales in China increased $11.8 million up 6% compared to last year, we remain optimistic about the long term opportunities in China, Although we expect a lot of volatility along the way due to the timing of promotional programs the building of distribution shifting economic patterns and varying industrial activities.
The Asia Pacific region made up 40% of our global sales over the long term, we expect sales within this segment will grow between 10 and 12% annually annually.
That wraps up my part of the the the report for today and now over to Jay who will continue with the review of the financials.
Thanks, Gary Let's first start with a discussion about our 55 30 25 business model over the long term targets that 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 toward 30% of net sales over time.
And finally, the 25 represents our target for EBITDA.
Well first the 55, our gross margin.
In the third quarter, our gross margin was 54.5% compared to 54.8% last year. This represents a decrease of 30 basis points year over year.
Sales mix changes and other miscellaneous costs negatively impacted our gross margin by 160 basis points. This period.
This is driven by a combination of unfavorable mix changes.
And increases in miscellaneous costs, primarily in our Americas and EMEA segments.
Also negatively impacting gross margin by 50 basis points this quarter or changes in major input costs.
Approximately 20 basis points came from increased cost of petroleum based specialty chemicals, while the remaining 30 basis points came from higher costs associated with aerosol cans.
When we last updated investors, we shared that we anticipated gross margin would begin to show a slight positive trend.
Driven by the lower petroleum based input costs, while we have seen this in the Americas cost increases we experienced in Eva and Asia Pacific more than offset the savings.
Even though the cost of crude oil was lower the costs in EMEA and Asia Pacific for some of the petroleum based specialty chemicals, we procure have increased.
As a result, the average cost of raw materials have flowed through our cost of goods in the third quarter was higher this year.
And this has put pressure on our gross margin.
These unfavorable impacts to gross margin were mostly offset by the effect of sales price increases, which we have implemented in all three trading blocks over the last 12 months and positively impacted gross margin by 120 basis points in the third quarter.
Also positively impacting margin in the third quarter by 30 basis points were lower manufacturing warehousing and inbound freight costs, primarily in Asia Pacific.
We made some changes to our supply chain for our Asia Pacific distributor markets in late fiscal year 2018, and we are now beginning to see some of the benefits from these changes.
Gross margin also positively impacted by lower advertising promotional and other discounts, which we give to our customers and positively impacted gross margin results by 20 basis points.
And finally changes in foreign currency exchange rates in our EMA segment positively impacted gross margin by 10 basis points.
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 delivered.
And focused in managing 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 third quarter, our cost of doing business was approximately 33% up 10 basis points from the third quarter last year.
For the third quarter, 75% of our cost of doing business came from three areas people costs or the investments we make in our tribe.
The investments, we make in marketing advertising and promotion as a percentage of sales are a and P. investment was 5.5% in the third quarter and then finally freight the cost to get our products to our customers.
While our objective is to have our cost of doing business closer to our target of 30% of net sales will continue to make necessary investments in support of our fifth strategic initiative operational excellence.
And this brings us to EBITDA. The last of our 55 30 25 measures EBITDA was 22% of net sales for the third quarter and down from the 23% last year.
And that completes the discussion on our 55 30 25 business model now lets discuss some items that fall below the line.
The provision for income taxes was 19.8% in the third quarter of this year compared to 24.3% last year.
The decrease in the tax rate was primarily due to the continued impact from the U.S tax act and its effect on the company's fiscal year tax rate, we expect our effective tax rate will be approximately 19% to 20% for the full fiscal year 29 team.
A little Lil little bit lower than we had previously anticipated.
And net income for the third quarter was 18.1 million versus $16.1 million in the prior year, reflecting an increase of 12%.
This resulted in diluted earnings per share.
Of a $1.30 for the third quarter compared to $1.15 for the same period last year.
Diluted weighted average shares outstanding decreased to 13.8 million shares from 13.9 million shares a year ago.
Now a word about capital allocation.
Our capital allocation strategy includes a comprehensive approach to balance investing in long term growth, while providing strong returns to our shareholders.
We continue.
To return capital to our shareholders through regular dividends and share repurchases.
On June 18, 2019, our board of directors approved a quarterly cash dividend of 61 cents per share payable July 31 to shareholders of record at the close of business on July 19th.
Based on today's closing price of $161.35 the annualized dividend yield is 1.5%.
During the third quarter, we repurchased approximately 62000 shares of our stock at a total cost of $10.3 million under our current 75 million dollar share repurchase plan, which was approved by the board in June 2018.
At the end of our third.
Fiscal quarter, we had $52.6 million remaining under the plan.
As a reminder.
We target our maintenance capex of between one and 2% of net sales each year.
However, this fiscal year, we're making some additional investments that are expected to bring our total capital expenditures to around $22 million.
This investment is in supply to support the renovation of our new facility in Milton Keynes and to procure some new Mitch production machinery as we previously disclosed.
So with that let's turn to fiscal years.
2019 guidance as I mentioned, we expect the provision for income tax to be a bill little bit lower than Weve previously anticipated due to the continued favorable impacts from the us tax cuts and jobs Act.
As a result of the lower tax rate, we are strengthening our net income and EPS guidance for the full year.
We continue to expect that sales growth to be between four and 7% with net sales between $425 million and $437 million.
Gross margin for the full year is expected to be near 55%.
Advertising and promotion investment is projected to be between 5.5% and 6% of net sales.
The provision for income taxes is expected to be between 19 and 20%.
With net income projected to be between $63.3 million and $64.4 million.
Diluted earnings per share is expected to be between $4.58 and $4.65 based on an estimated 13.8 million weighted average shares outstanding.
I'd like to remind investors that we continue to believe that that sales.
May be may come in at the lower end of the range that we've shared with you today due to the impacts of fluctuating currency exchange rates.
In addition, this guidance does not include any expectations regarding future acquisitions or divestitures.
And that completes the financial overview and I'll turn it now back to Garry Hey, Thanks Jay.
In summary, what did you hear from us on the call today.
You heard that both our sales and earnings for the third quarter reflect new records for the company.
You heard that global sales of WD 40, multi use product were up 7% in the third quarter.
You heard that.
Global sales of WD 40 specialist grew 8% in the third quarter.
You heard that we continue to increase penetration of smart straw district disk and distribution of the WD 40 easy reach flexible.
You heard that Linda Lang has announced her retirement from our board of directors and that I expect to be stepping into his board chair position beginning in December .
You heard that we promoted Steve brass to the role of President and Chief operating Officer, and Patricia Olsen to the role of Division President Americas.
You heard that our net sales guidance remains unchanged, but we have strengthened our guidance for net income and EPS in closing I'd like to share with you a quote today from an mulcahy.
One of the things, we often miss in succession planning is that it should be gradual and thoughtful with lots of sharing of information and knowledge and perspective. So it's almost a non event when it happens. Thank you for joining us today and we'd be pleased to open the conference call to your questions.
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One moment please for the first question.
Your first question comes from Linda Bolton Weiser with D.A. Davidson Your line is open.
Hi.
Completing all federal Matt Thanks for taking our question.
So Frank.
Did you see any shelf space changes.
Kelly.
Shelf space changes in.
Well no.
No there was no change to that shelf distribution.
Okay. Thank you.
Now that the gross margin line at around the 55 perform participant level do you for promotions to get to a higher level going forward.
Yes, we've always shared we believe we do have upside on our gross margin and it will continue to be infat impacted as we rollout our premium ization strategy, we things like smart straw smart the next generation of smart straw easy reach and has asked specialist product range.
Grows as a percentage of our overall revenue.
Great and as a follow up to that question.
Are there any updates you can provide on the new Smartstrand Tim.
And now when should we expect to learn about pricing and margin details.
The commercialization plan is currently being reviewed and we'd expect that we would start seeing some of the next generation of smart store entered the market as we predicted sometime around the middle of next year.
And we will keep you updated as we get closer.
Thank you next calendar year.
Yes.
Thank you and God.
Well from the initiate initiative to.
At the cost of doing business is 30% of sales.
The biggest driver for the cost of businesses increase of revenue.
We've often said that.
So it's really about getting leverage out of the infrastructure. We have so as our revenue grows then you will see that that will have an impact on the cost of doing business ratio.
Thank you that's all for questions.
Thank you very much.
Your next question is from the annual result, with Jefferies. Your line is open.
Hi.
Just to follow up and I think what you're talking about last call you mentioned that rotation at the warehouse was a headwind in the US I think we should just some product rotation and I think thats does we referred to in terms of shelf space is that still.
An issue now or is it the kind of ended.
In most cases, we are through.
The impacts that we had around pricing.
But we continue to have opportunities to increase distribution across the club channel.
And where we're through that first round, we havent lost any further distribution. So again, we would expect will rotate in as we were rotated out sometime in the future.
Okay and then.
I think you mentioned that.
That.
Sales.
Silver strong in Asia.
China was flat and Australia was it was down a little bit I was just wondering what region you are seeing kind of the strengthened.
What were specific country or area.
The biggest gain in the Asia Pacific region was through our distributor markets that is the countries like Malaysia, Singapore, Indonesia, Taiwan Korea, Japan.
There's a few others, but all of our distributor markets and this time last year, we had a we had a period of time, where we were changing our distributors in Malaysia, Singapore, and Indonesia. So that had a negative impact thats why there was such a large a large increase in the in the distributor markets.
As Australia, primarily is due to currency, we'd expect that to a strategy to end up in growth in the year and we have no no and as far as China is concerned we're very comfortable that we continue to grow at a reasonable rate in China as we build out the business to our long term plans.
This is kind of more of a direct market at this point.
China is a direct markets has been for 12 years, Okay. All right. Thank you for that clarification and then finally just.
You mentioned tough comps in Canada, and I think Latin America, because of your pre buying last year led to a big spike in the in the second quarter I'm, turning the third fiscal quarter I was wondering why that wasn't the case in the us or was it and you just kind of looking that.
Correct. It was and we overcame it in the US I think I mentioned in the call that the results were particularly pleasing in the us because we did have some buy up against price rise last year, but our programs this year, which enabled us to.
To combat and beat that in this fiscal year.
Thank you very much.
Thanks, Dan.
Your next question is from Rosemarie Morbelli with GE Research your line is open.
Thank you good afternoon, everyone.
And congratulations to all the promotions and follows the succession plan.
Thank you.
Okay. So I was wondering if you could give us.
A better feel for pricing versus volume and what do you expect going forward for the balance of the year.
Most of the gains that you'll see in the set in the balance of the year, our volume pricing has already.
Being five reflected into the into our trading so.
I think that would be about correct.
For the remainder of the year, yes, yeah, we don't see any additional pricing increases.
And do you see your raw material costs continuing to come down any change on the can for example.
In addition, Ken the petroleum.
Actually cans have gone up.
There's probably some residual impact of terra.
Even though even though we buy our cans in the us and in place is very close to where we sell our product.
There is there has been some.
Increase in Cannes costs.
And then it's somewhat coincident with the timing of tariffs.
And what do you hear me.
In terms of Terry.
I think generally by by your customers in the different regions.
Hey.
Is the.
The outlook kind of improving the is that the positiveness is that one may have had a year ago. It's really hasn't moved all the way into the negative territory.
I Wouldnt say things have moved into the negative I think there is a continuing uncertainty out there you've got a number of things that are impacting us at the moment the uncertainties around Brexit the uncertainties around trade talks.
So we can.
As as most companies and most people deal with risks they have a real problem dealing with uncertainty so.
That seems to be some of the or but I wouldn't say, it's gone to negative I'd say, it's moderates.
Okay, and then lastly, if I know you are looking at revenues being closer to the lower end of Q.
Have your expectations and the Dps.
No no and it's your previous high end.
So is the benefit solely from the lower tax rate are there other factors in between that are going to allow you to have.
Hi margin for all intents and purposes in order to get to those numbers.
Yes.
Most of that is it all comes from the.
That said the change in tax for the most part.
Nothing else no other benefits anywhere else.
So there could be.
But it's too soon to tell.
Okay. Thank you.
Thanks.
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.
Okay.