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WD-40 Company (NASDAQ:WDFC)

Q3 2014 Earnings Conference Call

July 09, 2014 05:00 p.m. ET

Executives

Wendy Kelley - Director of IR

Garry Ridge - President, CEO

Jay Rembolt - CFO, VP of Finance

Analysts

Liam Burke - Janney Montgomery Scott

Linda Bolton-Weiser - B. Riley

Daniel Rizzo - Sidoti

Jeff Zekauskas - J.P. Morgan

Joe Altobello - Oppenheimer

Operator

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company third quarter fiscal year 2014 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 proceed.

Wendy Kelley

Thank you. Good afternoon, and thanks to everyone for joining us today. My name is Wendy Kelley, and I'm very happy to be here today as one of WD-40 Company's newest tribe members. I look forward to interacting with many of you and my role is Director of Investor Relations in Corporate Communications.

On the call today are WD-40 Company's President and Chief Executive Officer, Garry Ridge; and Vice President and Chief Financial Officer, Jay Rembolt. Following their prepared remarks, the operator will come back on the line for the Q&A portion of the call.

Before we get started, let me remind you that our earnings press release and current quarter corporate presentation are available on our Investor Relations Web site at investor.wd40company.com. A replay of today's webcast will also be made available at that location shortly after this call.

As a remainder, today's call includes forward-looking statements about our expectations for the company's future performance. Of course, actual results could vary 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 taped or webcast replay or reviewing a written transcript of this call, please note that all the information presented is current only as of today's date, July 9, 2014. 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

Good day. Thanks, Wendy, and thanks for joining us on today's conference call. Today we reported net sales of 95.7 million for the third quarter of fiscal 2014, an increase of 3% over last year, and the highest revenue quarter in our company history.

Year-to-date net sales were $285.4 million, an increase of 4% over the prior year. Net income for the third quarter was $10.4 million compared to $10.3 million last year. Diluted earnings per share for the third quarter were $0.69 compared to $0.66 last year. Year-to-date net income was $32.2 million, an increase of 2% over the prior year period, and year-to-date diluted earnings per share were $2.10, up 4% from $2.01 in the prior fiscal year.

Before we focus on the sales results, let's take a moment to review the progress we've made towards our strategic initiatives. Strategic initiative number one is to grow WD-40 multi-use product. Our goal under this first initiative is to take the WD-40 multi-use product to more places for more people with more uses.

In line with this initiative, sales of WD-40 multi-use product increased 3% in the third quarter compared to last year. We grew multi-use product sales 14% in the EMEA segment, and 11% in our Asia-Pacific segment. Multi-use product sales decreased 8% in the Americas segment, primarily due to lowest sales activity in Canada and the U.S. Sales of our multi-use product were down by 9% in the U.S. and 17% in Canada. And I'll discuss the drivers of these changes in sales when I review the segment results later.

Strategic driver number two is to grow the WD-40 Specialist product line. Our goal under this initiative is to leverage the power of the shield to develop new products and categories with the identified geographies and platforms. The WD-40 Specialist product line continue to perform well with greater than double-digit growth across all three segments, and with a global growth rate of 27% over the prior year third quarter. We continue to work on new formulations and delivery systems for future WD-40 Specialist products. We see WD-40 Specialist as a sustainable revenue and earnings growth engine for many years to come.

Strategic driver number three is to broaden our product and revenue base. Our goal under this initiative is to leverage the strengths within our company to derive revenues from new sources outside our flagship WD-40 brand. We continue to make excellent progress with the new SKUs we launched early this year under our 3-IN-ONE brand. We've been promoting the new products throughout many tradeshows, sponsorships, media coverage and print and media online.

Strategic driver number four is to attract, develop and retain outstanding tribe members. We welcomed 10 new tribe members during the third quarter, and 36 year-to-date. During the quarter we conducted our biannual employee engagement survey, and we're delighted with the results. Our employee engagement score is a reflection of our tribe's dedication to the company and is the envy of many organizations at 93.7%.

I'd like to share details from a couple of the questions we asked in that survey; 97.6% of our global tribe members answered the question they love to tell people they work at WD-40 Company, and 99.7% of that global tribe members told us they understand how their job contributes to achieving WD-40 Company's goals. When I see results like these, it's clear to me why our tribe consistently excels at achieving what we have set out to accomplish. It's so true that it's all about our people.

In addition, our organization was recently recognized for the fourth consecutive year by WorldBlu as one of the most democratic workplaces for our high levels of innovation, accountability and transparency.

And finally, we conducted our third-year of our leadership lab in June. This program was developed in support of our bench building initiatives and to assist the next generation of leaders within the organization to develop talents and skills for both professional growth and the company's performance. To all our tribe members listening to us all around the world today, thank you for your commitment to our values.

Strategic driver number five is operational excellence. This initiative includes continuous improvement of optimizing resources, systems and processes in order to help offset rising cost and protect our gross margin. Operational excellence is also important to meet the ever-increasing customer and regulatory requirements.

During the third quarter we completed our initial transition of a major upgrade about ERP system in EMEA. The operational enhancements associated with this upgraded ERP system are expected to significantly improve back-office operations within the segment. We also continue to make progress on the new global human resource information system, which we expect to go live by the end of this fiscal year.

That completes the update on strategic drivers. So let's move on to the details of the third quarter year-to-date's results starting with sales. Sales in the multipurpose maintenance product category accounted for 89% of our global sales in the third quarter with the category sales up 3% in the third quarter and up 6% year-to-date. Products under this category include the brands of WD-40 and 3-IN-ONE, as well as sales of the WD-40 Bike product line.

By trading block, sales of multipurpose maintenance products in the third quarter were down 7% in the Americas, up 13% in EMEA and up 11% in Asia-Pacific compared to the prior year period. Year-to-date sales of the multipurpose maintenance products are up 3% in the Americas, up 11% in EMEA and down 2% in Asia-Pacific.

Homecare and cleaning products category accounted for 11% of global net sales in the third quarter with sales down just 1% in the third quarter and are down 8% year-to-date. Brands under this category include Spot Shot, 2000 Flushes, Carpet Fresh, and No Vac, 1001, X-14 and Lava and Solvol.

By trading block, sales of homecare and cleaning products in the third quarter were up 1% in the Americas, down 9% in EMEA and down 1% in Asia-Pacific. Year-to-date sales of our homecare and cleaning products were down 10% in the Americas, down 5% in EMEA and down 5% in Asia-Pacific.

Now, on to our results by segment starting with the Americas; sales in the Americas segment decreased 5% in the quarter, but were up 1% year-to-date. The segment accounted for 47% of global sales in the third quarter as compared to 51% in the prior year. Total U.S. sales were down 5% in the quarter, and up 2% year-to-date. Multipurpose maintenance products sales in the U.S. decreased 7% in the third quarter, and this was primarily due to timing of promotional activities.

Homecare and cleaning product sales in the U.S. increased 4% in the third quarter driven by increased sales of 2000 Flushes and Spot Shot, which each increased by 5%. Year-to-date homecare and cleaning products sales declined 8%. As a remainder, homecare and cleaning products particularly those in the U.S. are considered harvest brands that continue to generate positive cash flows, but are becoming a smaller part of the business as net sales of multipurpose maintenance products grow per the execution of our strategic initiatives.

Sales in Latin America were up 3% in the third quarter and are up 7% year-to-date driven by the higher multi-use product sales throughout the region. Now, to Canada; sales in Canada decreased 22% in the third quarter and 17% year-to-date. These declines are primarily due to some unusual short-term factors that negatively impacted sales, including Canada encountering the coldest winter in 35 years, as well as some challenges to distribution in the mass retail channels.

Let's now go over the ocean and visit EMEA segment which includes Europe, the Middle East and Africa. Sales in the EMEA segment were up 12% in the third quarter and are up 10% year-to-date. These sales increases in the third quarter were primarily driven by favorable impact of changes in foreign currency exchange rates. In order to remove these foreign currency impacts on sales, we also calculate sales on a constant currency basis. This means that we calculate sales for the current period using the exchange rates that were in effect for the corresponding period of the prior fiscal year.

On a constant currency basis, sales in the EMEA segment would have increased 2% in the third quarter, and are up 6% year-to-date. This segment accounted for 38% of global sales in the third quarter compared to 35% in the prior year quarter.

We sell into EMEA through a combination of direct sales operations in certain countries, as well as through exclusive marketing distributors in other countries. Sales in our EMEA direct market were up 13% in the third quarter and are up 6% year-to-date. The sales growth in both periods was primarily due to the favorable impact of foreign currency exchange rates.

In local currencies, sales in the direct markets increased 3% in the third quarter due to increased sales of the WD-40 Specialist product line stemming from new distribution and the continued growth also of the WD-40 multi-use product. The direct markets accounted for 59% of EMEA's total sales in the third quarter, which is essentially flat compared to the prior year period.

We sell through exclusive marketing distributors in Eastern and Northern Europe and the Middle East, India and Africa with virtually all sales consisting of the WD-40 brand. Our distributor markets in total were up 11% in the third quarter and are up 16% year-to-date.

The sales growth in the third quarter was primarily due to the favorable impact of changes in foreign currency exchange rates. In local currency sales the distributor markets increased 1% for the third quarter. The distributor markets accounted for 41% of EMEA's total sales in the third quarter, which was essentially flat compared to the prior year period.

Now, let's take a look at the Asia-Pacific segment. Sales in the Asia-Pacific segment were up 10% in the third quarter and down 2% in the year-to-date. Changes in foreign currency exchange rates this time had an unfavorable impact on sales in the third quarter and year-to-date.

On a constant currency basis, sales in the Asia-Pacific segment were up 13% in the third quarter and 2% year-to-date. The segment accounted for 15% of global sales on the third quarter and 14% year-to-date.

Sales in Australia decreased 7% in the third quarter, were down 3% year-to-date, although reported sales decreased period by period to period sales increased on a constant currency basis due to the ongoing growth of our base business.

Sales in China increased 24% in the third quarter and 7% year-to-date. The sales increase in the third quarter was attributed to the continued increase in promotional activity. We continue to focus on the long-term opportunities in China. But we expect to experience a lot of volatility on the way due to the timing of promotional programs, the building of ongoing distribution and shifting economic patterns and varying industrial activities.

Sales throughout the rest of Asia increased 17% in the third quarter and are down 6% year-to-date. The increased sales in the third quarter were primarily driven by the backlog of customer orders at the end of the second quarter that we are able to ship early in the third quarter. Year-to-date sales in this region have been negatively impacted this year during the transition period of our marketing distributor in Indonesia.

That's it for the sales update. I'm going to take a break, and I'm going to hand over to Jay, who will review the financials.

Jay Rembolt

Garry, thank you. In addition to the information presented on the call, we suggest that you review our Form 10-Q for the period ended May 31st, which we'll file tomorrow.

First, let's review our 50-30-20 rule; those are the measures we use to guide our business. As you may recall the 50 represents gross margin, which we target to be at or above 50% of net sales. The 30 represents our cost of doing business which is our total operating expenses excluding depreciation and amortization. Our target for that is 30% or less. And finally the 20 which represents EBITDA, if our gross margin is at or above 50% and our cost of business is 30% or less, our EBITDA will be at or above 20%. EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization, the descriptions and reconciliations of these non-GAAP measures are available in our 10-Q and in our investor presentation.

Now, let's look at the gross margin or the 50 in our 50-30-20 rule. Gross margin in the third quarter was essentially flat coming in at 51.4% compared to 51.3% in the prior year. The slight increase of 10 basis points in gross margin was driven by lower input cost as well as the impact of price increases and lower promotional discounts. These positive impacts were partially offset by unfavorable impacts from foreign currency exchange rates and increased warehousing and transportation costs.

Our cost of products sold, looking at our input costs, we experienced a favorable impact of 110 basis points from our major input cost changes. This was driven by changes in the cost of petroleum based materials along with the lower cost of cans in our EMEA and American segments. Changes in other input costs negatively impacted gross margin by 10 basis points.

We consider and implement price increased on a country by country basis to help offset the impact from input cost increases. Period over period our gross margin improved by 30 basis points as a result of price increases implemented over the past 12 months in both EMEA and Asia-Pacific regions.

We also saw gross margin improvement of 30 basis points driven by our reduced advertising and promotional discounts primarily associated with our homecare and cleaning products in the Americas. The cost of promotional activities such as sales incentives, trade promotions and cash discounts that we give to our customers recorded as a reduction to sales. The timing and magnitude of these may cause fluctuations in our gross margin period-to-period.

Changes in foreign currency exchange rates within our EMEA segment negatively impact our gross margin by 70 basis points. In EMEA, our cost of goods are sourced in Pound Sterling, while revenues are generated in Sterling, Euros and the U.S. Dollar. The value of the Euro and the U.S. Dollar both deteriorated versus the Pound Sterling. This caused revenues sourced in those currencies to be less than Pound Sterling, thus resulted in a decrease in the gross margin.

Look at our warehousing and transportation costs primarily within our Americas segment had a negative impact on our gross margin over 50 basis points. This was driven in part by a specific promotion in the U.S. that started in the third quarter and will continue into the fourth quarter. That promotion includes the display configuration that has higher storage and transportation costs.

In addition, transportation costs were also increased due to the higher fees associated with transportation disruptions caused by adverse weather conditions during the quarter. Other impacts to gross margin for the quarter includes sales mix and all other miscellaneous items, combined, these factors had an unfavorable impact of 30 basis points.

The themes discussed for the quarter gross margin are similar to those for the year-to-date results. Gross margin year-to-date was 51.6% compared to 50.8% in the prior year. The increase of 80 basis points in gross margin was primarily attributable to the lower input costs along with the impact of price increases and lower promotional discounts. Again, these items were partially offset by the unfavorable impacts of warehouse and transportation costs, foreign currency exchange rate impacts and unfavorable sales mix.

That concludes the gross margin discussion. Now, on to the 30 or our cost of doing business; in both the third quarter of this fiscal year and last year the cost of doing business remained at 34%. Year-to-date the cost of doing business was 34% this fiscal year up slightly from the 33% last year, while our goal is to have our cost of doing business at or below 30% of net sales. That percentage may fluctuate due to changes in the timing of sales, the timing of expenses, as well as investments we elect to make for our future.

Year-to-date 71% of our cost of doing business came from three areas, 39% related to people costs or the investments we make in our tribe, 19% from our investments in marketing, advertising and promotion, and 13% in freight cost, the cost to get our product to our customers.

Now, more details on our SG&A expenses. In the third quarter SG&A expense increase 5% to 26.9 million. As a percentage of net sales SG&A expense was 28.1% in the third quarter compared to 27.6% in the prior year. The increase in SG&A was primarily driven by higher professional service costs, increased freight costs, and the impacts from foreign currency exchange rate fluctuations.

Professional service costs increased by $0.8 million due to legal fees associated with certain litigation matters along with various regulatory compliance items and additional investments we've made to protect our intellectual property. When you are in 188 countries around the world, all with unique and different laws, intellectual property protection can become a bit challenging.

Brand protection in always a high priority and an investment of the company will continue to make in order to safeguard one of its most valuable assets, the blue and yellow can with the little red top.

Also, contributing to the higher professional service fees during the quarter were some general consulting service costs associated with bringing online a new third-party contract manufacturer and operational support for the system upgrade both occurring in EMEA.

Freight expense was up $0.3 million versus the prior year period due to higher sales volumes and the shift in the size of customer shipments. In the third quarter last year we had a higher volume of large shipments compared to this year. We gained efficiencies and realized savings when we can ship larger volume orders.

Finally, changes in foreign currency exchange rates had another favorable impact period to period increasing our SG&A cost by about $0.6 million. These increases were partially offset by 0.8 million decline in employee related costs primarily associated with lower bonus expense compared to the prior year.

Year-to-date SG&A was $80.2 million versus 74.9 million last year. As a percentage of net sales, SG&A was 28.1% year-to-date compared to 27.2% in the prior year period. The year-to-date increase in SG&A was primarily driven by increased employee-related expenses, higher professional service costs, increased freight, higher level of travel and entertainment expenses and a negative impact from foreign currency.

Advertising and sales promotion decreased 3% in the third quarter to 6.5 million compared to the prior year. As a percent of sales, A&P investment was 6.8% in the third quarter compared to 7.1% in the prior year. The decrease and advertising and sales promotional expense was primarily associated with the lower level of promotional programs in the Americas. The lower advertising and sales promotion expense in the Americas was significantly offset by increased expenses in EMEA and Asia-Pacific due to the increased promotional activities in both these regions.

Year-to-date advertising and sales expense was essentially flat at $18.1 million compared to $18 million in the prior year. Advertising and sales promotion expense as a percent of sales decreased to 6.3% from 6.5%. The slight change in advertising and sales promotion expense year-to-date was primarily due to the higher level of promotional activities in EMEA.

As a reminder, it is common for advertising and sales promotion expense to fluctuate period to period based on the type of marketing activity or the promotion we employ within any given period.

Amortization of our intangible assets increased to 0.7 million in the third quarter compared to 0.5 million in the prior year period. Year-to-date amortization was 1.9 million compared to 1.5 million last year. The increase in amortization in primarily due to the change in remaining usable life of the 2000 Flushes trade name, which was made in Q3 of last year.

Total operating expenses in the current year quarter were 34 million versus 32.8 million last year. And operating income in the third quarter was 15.1 million compared to 15 million last year.

Year-to-date total operating expenses were 100.2 million versus 94.4 million last year. Operating income year-to-date was 47.1 million up from the 45.3 million last year.

EBITDA, the last of our 50-30-20 measures was 17% of net sales in both the current and prior year quarter. Year-to-date EBITDA was 18% of net sales in both the current and prior year period. We target EBITDA at 20% of net sales that expect variations from time to time as sales, A&P investment and other expenses fluctuate.

Our EBITDA percentage again is also affected by investments we make fur future growth. Our interest in income and interest expense remained constant in the third quarter as compared to the prior fiscal year period. Net interest expense increased to 0.3 million year-to-date as a result of our increased borrowings on our line of credit.

Other net expenses remain constant in the third quarter, but increased $0.9 million year-to-date. The change is primarily due to the fluctuations in exchange rates for the Pound Sterling against the Euro and the U.S. Dollar. We recorded foreign currency exchange losses of 0.4 million in the current year compared to foreign currency exchange gains of 0.5 million, last year.

The provision for income taxes in the third quarter was 30.4 million versus 30.6 million in the prior year. The slight decrease in rate was driven by an increase in the domestic production deduction in the current year quarter. Year-to-date the provision for the income taxes was 30.6% in both the current and prior year periods.

Net income in the third quarter was 10.4 million versus 10.3 million in the prior year quarter. Changes in foreign currency exchange rates favorably impacted the translation of our results by $0.3 million. Our third quarter results translated at last year's exchange rates or what we would term constant currency basis would have produced net income of 10.1 million versus the 10.4 million this year.

Diluted earnings per common share were $0.69 in the third quarter compared to $0.66 in the prior fiscal quarter. Diluted shares outstanding decreased from 15.6 million shares to 15.1 million shares. And year-to-date net income was $32.2 million versus 31.7 million in the prior year. Changes in the foreign currency exchange rates did not have a material effect on the translation of our results year-over-year.

Diluted earnings per common share were $2.10 year-to-date compared to $2.01 in the prior fiscal year period, with diluted shared outstanding decreasing from 15.7 million to 15.2 million shares this year.

Look at our balance sheet at May 31st, our balance sheet continues to remain solid as our cash and term deposits exceed our debt. As of May 31st, our cash and cash equivalents were $44.9 million and we had $45.4 million in short-term investments, which consist of term deposits and callable time deposits held at monies in our banks.

The current portion of debt under our existing line of credit was $83 million up from the 73 million in the second quarter of this year. The $10 million increase in the line of credit balance during the third quarter was primarily used for share repurchase activity.

A word about our capital allocation, we continue to focus on returning capital to shareholders through regular dividends and share repurchases. Regarding the dividend, on June 24th the board of declared a quarterly cash dividend of $0.34 per share, payable July 31, 2014 to stockholders of record at the close of business on July 11, 2014. Based on today's closing price of 76.11, the annualized dividend yield will be 1.8%.

As for our share repurchases, we acquired approximately 111,000 shares of our stock at a total cost of 8.2 million during the third quarter, these share were acquired under our latest share repurchase plan approved by the board of directors in June of 2013. It provides authorization to acquire up to $60 million of the company's outstanding shares through the plan's end date of August 2015.

To date, we've repurchased approximately 474,000 shares at a total cost of $33.2 million under the share repurchase plan. We continue to expect to be executing on this program throughout the remainder of the year.

Well, that includes a financial overview. More information will be available on Form 10-Q, which we will file tomorrow. And thanks so much, and now back to Garry.

Garry Ridge

Thank you, Jay. We remain cautiously optimistic about several macroeconomic factors. We expect to see continued growth driven by our strategic initiatives which should help drive a solid end of this fiscal year. We hope that we will continue to see relatively stable input costs, and that our efforts to improve operations in-sourcing will continue to benefit our gross margin and operating results.

Given this in our outlook and the proximity to the yearend we have upgraded our guidance from that that we shared with you in April. The following fiscal year 2014 guidance does not include any acquisitions or divestitures and assumes that the foreign currency exchange rate will remain close to the recent levels. So for the year we expect our fiscal year net sales results to be in the range of 380 million to 387 million or a growth of between 3% and 5%.

We now project our gross margin to be close to 51.5%. We expect global advertising and promotional investment to be in the range of 6% and 7% of net sales. We therefore expect net income of between 41 million and 43 million, which will achieve a diluted EPS of between $2.70 and $2.83 assuming 15.2 million weighted average shares outstanding.

In summary, what did you hear from us today? You've heard we increased sales by 3% in the third quarter. You've heard that consistent with our strategic initiative we saw double-digit growth of sales of our WD-40 Specialist product line within all three of our trading blocks. You've heard that we grew gross margin by 10 basis points. You've heard that we grew diluted earnings per share to $0.69 and return capital to shareholders through the purchase of approximately 111,000 shares at a cost of 8.2 million. And you heard that our outlook is cautiously optimistic and that we are updating our full year guidance.

In closing, as I do, I'd like to share a quote with you from -- this time from Walter Bowie, "The mightiest works have been accomplished by men who have kept their ability to dream great dreams." Thank you for joining us today. We'll be pleased to now open the conference call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Liam Burke.

Liam Burke - Janney Montgomery Scott

Good afternoon, Garry. Good afternoon, Jay.

Garry Ridge

Good afternoon, Liam.

Jay Rembolt

Hi, Liam.

Liam Burke - Janney Montgomery Scott

Garry, you talked about timing of promotional activities in the Americas and how it affected third quarter sales, and then Jay alluded to the additional inventory carry on these -- related to these promotions. Are these in traditional WD-40 brands, are they in Specialist or are they both?

Garry Ridge

The majority of them, Liam, would be in traditional WD-40 brand, the multi-use product, and we are seeing those promotional activity spread over both the third and the fourth quarter.

Liam Burke - Janney Montgomery Scott

Okay. And -- I'm sorry.

Garry Ridge

More so in the fourth than in the third.

Liam Burke - Janney Montgomery Scott

Okay. You mentioned the European implementation and the Asia-Pacific; do you anticipate any expense lag or any operational setbacks there?

Garry Ridge

It was actually in EMEA, Liam.

Liam Burke - Janney Montgomery Scott

I am sorry, EMEA.

Garry Ridge

And it was the planned first stage of the execution of the new ERP system that we've been working on there for a couple of year now. We're facing in the actual implementation, we are in Phase I. It went as planned. Now, we don't expect any additional material cost from that. It all takes about nine months to have it completely embedded, but so far so good.

Liam Burke - Janney Montgomery Scott

Thank you. And, Jay, on the cash flow statement, it was down year-over-year on the working capital line, specifically current liabilities. Is there anything unusual in there or is it just timing?

Jay Rembolt

It's really just timing. We'd expect to see it normalize to about our average.

Liam Burke - Janney Montgomery Scott

Okay, great. Thank you.

Garry Ridge

Thank you.

Operator

And we will take our next question from Linda Bolton-Weiser with B. Riley.

Linda Bolton-Weiser - B. Riley

Hi. I'm sorry if you explained this with the last question, but I'm not sure I understand about the promotional activity in the Americas, because on the one hand you said that displays or transporting them or something hurt your gross margin and yet there was no promotional activity that really drove your sales. So, I'm a little confused about that. Do you expect that sales uptick to happen next quarter as a result of that cost to have those promotions, or can you explain a little bit more?

Garry Ridge

Yes. Linda, yes, the answer is yes. What Jay was speaking about was the transport and warehousing activities to get the product into our distribution centers, not the transport and warehouse activities to get it to our customers. And also, some of the product that we are building there has a higher cost because of the display configurations that we have, some of which expenses are expensed earlier than later. So, yeah, we'd expect that as in line with our guidance we'd have a reasonably solid fourth quarter particularly in the U.S.

Linda Bolton-Weiser - B. Riley

Great, thank you. And then, can you just explain a little bit more about Canada? And can you clarify; did you say Canada MPMP sales were down 78% of the quarter? Is that correct?

Garry Ridge

I think it was 17.

Linda Bolton-Weiser - B. Riley

Seventeen, okay.

Garry Ridge

Yeah.

Linda Bolton-Weiser - B. Riley

So, Canada is about, I don't know, 16 million a year or 4 million a quarter of sales.

Garry Ridge

Okay.

Linda Bolton-Weiser - B. Riley

So, I guess I am just wondering, so if it was down 17% in the quarter, I mean that's not a huge variance on sales because of Canada. I mean it affected the quarter, but not in a large way, so …

Garry Ridge

Yeah, it's event-driven. Canada just had the worst winter in 35 years, and without pushing the random excuse generator and blaming weather, that did cause some distribution issues and so people wouldn't just go into stores. In fact in the quarter it was down 22 and down 17 year-to-date. The other thing that impacts us in Canada and this has been out there for some time now. We did a -- in the retail trade channel, we did a voluntary recall of our smart store delivery system due to some regulations in Canada. And that happened earlier on this year.

So we are missing the sales of smart store in the retail channel. We are still selling it through the industrial trade channel. So it will take us a little time to lap that, but that's really the two main impacts that happened in Canada.

Linda Bolton-Weiser - B. Riley

Okay, great. And then, if I look at your change in the guidance for the year with the raising of the EPS guidance and I guess the gross margin guidance, I actually had, I think the consensus had the gross margin around 51.5 already for the year. So when we look at our models, I guess to raise EPS, we would lower maybe the A&P and/or the SG&A expense in the fourth quarter. So am I thinking of that the right way?

Garry Ridge

Well, I think two things will happen. Where we end up with sales, we've narrowed that a little bit. But, correct, we would hope that gross margin would have a positive impact, and we would therefore -- we expect, if you look at the trending of A&P that may come down a little bit. But I think those are levers. We feel like we'll have a reasonably solid year-on-year sales growth. We see margin improving, and we see good management of our A&P expenses, and we think we are well positioned to step up next year in a pretty fine way.

Linda Bolton-Weiser - B. Riley

Okay, great. And then on, just one final question on WD-40 Specialty line, you've said strong growth, I think you said up 27% in the quarter, is that right?

Garry Ridge

That is accurate.

Linda Bolton-Weiser - B. Riley

So that's strong. But I think last quarter you said it had doubled year-over-year. So …

Garry Ridge

That's accurate also.

Linda Bolton-Weiser - B. Riley

Okay. I mean it's slowing or is that just a quarter-by-quarter fluctuation?

Garry Ridge

This is going to bounce around for a while. There is no way it's slowing. We get selling, then we get new customers and then of course as we introduce new categories we're going to get spurts, but we're very, very happy with Specialist. As I said in my remarks, we are confident that Specialist will be a solid revenue and earnings machine for us for many years to come as we execute the program in a deliberate way across the markets of the world at a time that's it's appropriate.

Linda Bolton-Weiser - B. Riley

Okay. Thank you very much.

Garry Ridge

Thank you, Linda.

Operator

Thank you. Our next comes from the line of Daniel Rizzo with Sidoti and Company. Please proceed with your question.

Daniel Rizzo - Sidoti

Just one quick follow-up on the Specialist; it was up 27% in the quarter, was there any one region that it's outperforming the others or maybe you're satisfied with that, specifically how is it doing in the Americas?

Garry Ridge

Very fine; it's very good. We're comfortable that it's doing fine in all areas that we've launched it, and the growth depends too on what we launch into what areas and what regions at what time, but overall we're very comfortable.

Daniel Rizzo - Sidoti

I mean early in the quarter was there any one reason that outperform the others?

Garry Ridge

No, not necessarily. And again, it's off the basis or the base that it's performing of differs from region-to-region. So we think overall that we're going to get fluctuations from region-to-region. We don't talk about what's going on in each region. We're looking at the overall growth, and we are very happy with 27% growth quarter-over-quarter.

Daniel Rizzo - Sidoti

And one more quick question; you indicated on a call in the press release that those higher expenses are related to, I guess, protecting intellectual property rights. I'd assume that's not something new, that's kind of -- it's an ongoing thing that's been happening …

Garry Ridge

For many, many, many years we have a robust intellectual property protection program that's been put in place for many years. There hasn't been really any changes to it other than we've just got more activity, but intellectual property protection to us is a real and focused activity, and as I said we just continue to do. When we are in the 188 countries around the world, as Jay mentioned with different laws and different regulations, it takes some work.

Daniel Rizzo - Sidoti

The fact that you mentioned it for this quarter, does that mean it's uptick, it's been more of initial recently versus in the past or is it just -- I mean is it just pretty much been the same?

Garry Ridge

No, run rate is about the same, but we mentioned it, because it's a very, very important part of our business, and we actually -- we want people to know that we are investing and protecting one of, if not the most important asset we have in the company.

Daniel Rizzo - Sidoti

Okay. All right, thank you very much.

Garry Ridge

You are welcome.

Operator

Our next question comes from the line of Jeff Zekauskas with J.P. Morgan. Please proceed with your question.

Jeff Zekauskas - J.P. Morgan

Hi, good afternoon.

Garry Ridge

Hi, Jeff.

Jeff Zekauskas - J.P. Morgan

Did volumes grow in the quarter?

Garry Ridge

Overall, not much.

Jeff Zekauskas - J.P. Morgan

But they were slightly positive?

Garry Ridge

Slightly positive, yes. We haven't had any pricing really, but the two -- the other impact was exchange rates, but certainly volumes are growing year-over-year. And we expect that we will have volume growth for the full year definitely.

Jeff Zekauskas - J.P. Morgan

Because I felt that there was a positive price benefit, and I thought there was a positive price benefit and I thought that the sales not adjusted for currency were flat and so that's why I'd have thought that volumes were down a little bit.

Garry Ridge

Okay. There might be a slight decrease in volumes. You're right. There was a slight impact from the price increases. And you're right, adjusted for currency we're flat period-on-period on the quarter. Year-to-date, we are up quite a bit. So I think -- yeah, that's …

Jay Rembolt

But the other side of that too Jeff is we actually measured consumable ounces and depending on where those ounces are sold, that tells us -- reflects our volume growth. So, volume growth for the year is definitely up in ounces across the globe.

Jeff Zekauskas - J.P. Morgan

Right. So, in the fourth quarter of last year or -- let me try this a different way. Does your management compensation in the fourth quarter changed a lot as to whether you report to 70 or 283? –or it does not matter in terms of bonus compensation?

Garry Ridge

Yes. Depending on where we end up according to our targets, we will have an impact in the fourth quarter, either positive or negative if we exceed or miss our targets in any significant way.

Jeff Zekauskas - J.P. Morgan

Like this last year in the fourth quarter you really had a step up in SG&A expense …

Garry Ridge

Yes, we did have. As we hit those higher targets of last year's growth rate, yes.

Jeff Zekauskas - J.P. Morgan

So, do you expect your SG&A expenses in the fourth quarter to be up or down year-over-year?

Garry Ridge

We haven't shared that.

Jeff Zekauskas - J.P. Morgan

Shared that, okay.

Jay Rembolt

It's Jay, I'll just add to that, Jeff. We wouldn't expect the change in compensation to be as dramatic this year as it was last year.

Jeff Zekauskas - J.P. Morgan

Right. Are you selling your homecare business or you're not selling it?

Garry Ridge

At this stage we are not selling it. I mean we are selling the products, but it's not a long-term part of our business. We've looked at about a year and a half ago. We did quite an in-depth evaluation of what we should do with it. And the outcome was we can generate more cash from it over time. If we sold anything it would primarily be that in the U.S., and only some of the brands. We're quite happy with what we're doing with 1001 in the U.K. at this time, and also in Australia. So, we've stabilized that business now. And as other part of our business grows it becomes less and less.

The other thing is that we made a very deliberate decision some time ago to redirect all of the R&D and product development away from that group and pour it into Specialist and Bike, which is now paying benefits as we continue to grow Specialist.

Jeff Zekauskas - J.P. Morgan

Will Canada come back in the fourth quarter?

Garry Ridge

Canada will have a disappointing year only because of the events so far. But Canada will come -- it will be a reasonable quarter we think, but we will see Canada bounce back next year as we start to launch some more new product and we get over some of the challenges they've had this year.

Jeff Zekauskas - J.P. Morgan

Because of the timing of promotions, do you expect the U.S. business to come back in the fourth quarter?

Garry Ridge

Yes.

Jeff Zekauskas - J.P. Morgan

Okay. Thank you very much.

Garry Ridge

Thanks, Jeff. Nice to hear you.

Jeff Zekauskas - J.P. Morgan

My pleasure.

Operator

(Operator Instructions) Our next question comes from the line of Joe Altobello with Oppenheimer. Please proceed with your question.

Joe Altobello - Oppenheimer

Thanks. Hey, guys, good afternoon.

Garry Ridge

Hi, Joe.

Joe Altobello - Oppenheimer

I just want to dive into the top line, obviously you guys don't give quarterly guidance, but it was a little bit lighter than we were looking for in the quarter, it sounds like based in your commentary, Garry, that by and large the quarter was as expected in terms of where you guys were at, but for Canada, and obviously Canada is not a big piece of your business. So I'm just curious, one, is that a fair way to look at how the quarter played out? And then, two, I mean obviously you're now looking for 3% to 5% top line growth versus 4% to 8%, so it sounds like something changed in the quarter, we're trying to figure out is it the U.S. because it sounds like it was more of a timing issue this quarter, but it sounds like there are other underlying issues there.

Garry Ridge

Well, let me back up a little bit. You asked me a lot of questions there rolled into one. I think that we would have liked a little stronger quarter in revenue. It patted out a little bit towards the end, and it's not -- and really it was files falling from quarter-to-quarter as they do so. There is nothing we're really worried about. So, I think that if things would have come into the third quarter we would have had a stronger one, and we might have had a little high overall expectation. So I think just as we've got through the year, we're fine.

I think also we are still flipping through some of the changes we made in Asia, and then we've also had that little upset in Canada. So, if you roll those things together, yes, I think we could have expected a little higher overall revenue growth in the full year than we are going to get now, although it's going to be a great year. This quarter was the largest quarter in the sales history of the company. We're very much looking forward to our first $100 million quarter, and we will publicly open a bottle of lemonade when we do that. But I think overall we are okay.

Joe Altobello - Oppenheimer

Okay. But it wasn't just timing, but it did lower the full year guidance, it wasn't just pushing revenue from 3Q to 4Q for example?

Garry Ridge

But it pushes it out to the other end as well.

Joe Altobello - Oppenheimer

Okay, 1Q.

Garry Ridge

Yes. So, I think that's really where it sits at the moment.

Joe Altobello - Oppenheimer

Okay.

Garry Ridge

And once you get through three quarters, you've got a better feel of what the whole year is going to be. So -- and again, we are not dumb enough to run our business in 90-day intervals.

Joe Altobello - Oppenheimer

Good to hear. Two other questions, I guess on new products, any update on Bike, number one? And number two, what's your thought on rolling out additional products beyond Bike? I mean do you want to see how Bike does first, or are you going to be more aggressive in fiscal '15 on that front?

Garry Ridge

We will be launching Bike in Europe at Interbike coming up in a couple of week's time. We are very happy with the Motorbike business that we've launched in Europe. And we'll be expanding distribution of our overall Bike products as we move further into this fourth quarter next year. We are in the Bike business to stay. It's got a lot of positives in that. It helps us engage a very large group of passionate end users particularly helping us get into the used area. We think any of that recreational area where lubrication and protection and cleaning is important helps us replace that connection you had, Joe, when you were first introduced to WD-40 when you head your head under the bonnet of the car with your dad.

That doesn't happen any more. And we are -- at least not in the U.S. It certainly does happen in some of the more emerging markets, but we believe that this is a very strategic and important step in continuing to enhance the relevance of the brand across many generation. So -- and we've seen that evidence already. The Bike activity has been very positive towards the brand.

Joe Altobello - Oppenheimer

Okay, and in terms of the cadence of new products?

Garry Ridge

Yes. In the Bike range of products, it will probably remain fairly stable. But in Specialist, which is really the other side, we will be continuing for many years to come to introduce categories of products. We are just shipping WD-40 Specialist Lawn and Garden in Australia in the next month or so. We are testing that down there as you know, we are happy so far with the response we are getting. We've done Motorbike in the U.K. We've extended the range of products in Specialists in the U.S. But this is deliberate. We are not going to be like a blind dog in a meat house here. This is a very valuable shield, and we will not slap it on anything. It will be deliberate and controlled and ensuring that we continue to keep our promise to our end users, which is delivering above expectation performance at great value.

Joe Altobello - Oppenheimer

When could we see Lawn and Garden in the U.S. dealing?

Garry Ridge

I don't know. It depends how it proves out in Australia.

Joe Altobello - Oppenheimer

Okay, great. Thank you, guys.

Garry Ridge

Thank you, Joe.

Operator

Ladies and gentlemen, that does conclude our allotted time for questions, as well as our conference call for today. We thank you for your participation, and ask that you please disconnect your lines. Thank you.

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Source: WD-40's (WDFC) CEO Garry Ridge on Q3 2014 Results - Earnings Call Transcript
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