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..

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..

we continuously focus on optimizing resources, systems and processes, while applying rigorous commitment to quality assurance, regulatory compliance and intellectual property protection. Using our 55/30/25 model is a framework, we measure our sales against this operational excellence initiative.

In fiscal year 2019, we are excited about new innovations and projects coming down the pipeline that will help us enhance operational efficiencies, sustain the WD-40 economy and improve our end-user experiences with products. I'm looking forward to updating investors on some of these initiatives in the coming quarters.

That completes the update of our strategic initiatives. So let's move on to some details of our fourth quarter results starting with sales. As I mentioned earlier, consolidated net sales were $102.6 million in the fourth quarter, up 6% versus the fourth quarter of last year.

Translation of our foreign subsidiary results from their functional currencies to U.S. dollars had an immaterial impact on sales in the fourth quarter. Transaction related impacts in EMEA will also insignificant in this quarter.

Before I discuss what's happening in individual segments, I'd like to take a momentum to remind investors that though our business is not a seasonal one.

It is common that our sales results fluctuate from period-to-period due to other 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 normal part of business and we are a custom to these types of fluctuations and manage them as part of normal business activities. It's when something a little out of the ordinary happens that we discuss it here with more with - here in more detail with investments. So let's start with the Americas.

Net sales in the Americas, which includes United States, Latin America and Canada, increased to $48.8 million in the fourth quarter, up 2% from last year. For the full fiscal year, net sales in the Americas were up 4% compared to last year.

Sales of maintenance products increased by 4% or $1.8 million in the Americas, due entirely to higher sales of maintenance products in the United States.

Maintenance products in the United States increased 9% or $2.8 million in the fourth quarter primarily due to strong sales of WD-40 EZ-REACH as well as the timing of promotional programs in the region. Partially offsetting these increases were declines in sales and maintenance products in both Canada and Latin America.

In Canada, maintenance products were down 13% for the quarter due to the lowest sales of WD-40 Multi-Use Product as a result of timing of promotional activities in the country. Maintenance product sales in Latin America were down 14% in the fourth quarter when compared to last year due to the timing of customer orders.

The shift in timing was primarily due to the fact that in the third quarter fiscal year, customers were buying product in advance of a price increase that took place at the beginning of the fourth quarter. As a reminder, our maintenance products exclude our homecare and cleaning products.

Sales of our homecare and cleaning products in the Americas decreased 15% in the fourth quarter compared to the prior year largely due to lower sales of 2000 Flushes, Spot Shot and Carpet Fresh.

Now on to EMEA, net sales in EMEA, which includes Europe, The Middle East, Africa and India, increased to $36.6 million in the fourth quarter, up 2% from last year. For the full fiscal year, sales in EMEA were up 10% compared to last year. EMEA's reported results in the fourth quarter were positively impacted by foreign currency exchange rates.

On a constant currency basis, sales in EMEA were essentially flat compared to the prior year fiscal period. As you know, we sell into EMEA through a combination of direct operations as well as through marketing distributors.

Net sales in our EMEA direct markets, which accounted for 72% of the region's sales, increased 10% during the quarter to $26.3 million. The growth was a result of increased sales of maintenance products throughout most of our EMEA direct markets with the exception of the Germanics region and Italy.

Net sales in our EMEA distributor markets, which accounted for 28% of the region's sales, decreased 14% during the quarter to $10.4 million. This decline was primarily due to decreased sales of WD-40 Multi-Use Product in Russia as a result of the continuing instability in that region. Now let's take a look at Asia-Pacific.

Consolidated net sales in Asia-Pacific, which includes Australia, China and other countries in the Asian region, increased to $17.2 million in the fourth quarter, up 36% from last year. For the full fiscal year, net sales in Asia-Pacific were up 10% compared to last year.

In Australia, net sales were $4.2 million in the fourth quarter, down 15% compared to last year. Changes in foreign currency exchange rates had a negative impact on sales in the region. On a constant currency basis, sales in Australia decreased 12% for last year - compared to last year.

The decrease in sales during the fourth quarter was primarily due to lowest sales of Multi-Use Product as a result of the major Australian customer reducing inventory levels of aerosol can products due to new regulatory constraints. In our Asia distributor market, net sales were $7 million in the fourth quarter, up 128% compared to last year.

We had informed investors last quarter that our Asian distributor markets had been negatively impacted in the third quarter due to the transitioning of three major marketing distributor partners in the region. We had predicted this disruption was temporary and the region has now returned to solid growth.

There is clearly some catch up in this quarter's number, we would expect the region to normalize in the coming quarter, our Asian distribution markets are not impacted by currency since we sell our product in U.S. dollars in the region. In China, net sales in U.S. dollars were $6 million in the fourth quarter, up 29% compared to last year.

Changes in foreign currency exchange rates did not have an impact on the reported results for China for the fourth quarter. The increase in sales was primarily due to the timing of customers' orders as well as buying in advance of a price increase that went into effect on September 1.

Fiscal year 2018 is the 12th year, that we've had a direct distribution operation into China. Over the last 12 years, we sold approximately $120 million of products into the country. And recently, the Chinese market became the third largest Multi-Use Product market in the world. This is a tremendous accomplishment for our China tribe.

We continue remain optimistic about the long-term opportunities in China. Although, we expect there to be volatility along the way due to the timing of promotional programs, the building of distribution and the shifting of economic patents and varying industrial activities.

That's about it from me for now, so I'm going to pass over to Jay who will continue with the review of the financials..

people costs or the investments we make in our tribe; the investments we make in marketing, advertising and promotion. As a percentage of sales, our advertising and promotion investment was 6.3% in the fourth quarter; and then finally, freight costs to get our products to our customers.

While our long-term objective is to have our cost of doing business closer to our target of 30% of net sales, we will continue to make necessary investments in support of our fifth strategic initiative, operational excellence.

In fiscal year 2019, we expect to make an additional $1 million investment in support of both digital and physical brand-building activities this year. Ultimately, revenue growth is the most important factor in helping to achieve our long-term target of 30%. And this brings us to EBITDA, the last of our 55/30/25 measures.

EBITDA was 21% of net sales for the fourth quarter of this year. And that completes our discussion on our 55/30/25 business model for the current quarter. Let's move on and have a discussion of net income and the U.S. Tax Cuts and Jobs Act.

Net income for the fourth quarter was $21.6 million versus $14.4 million in the prior year, reflecting an increase of 51%. This resulted in diluted earnings per share of $1.54 compared to $1.01 for the same period last year. And diluted weighted average shares outstanding decreased to 13.9 million shares from 14 million shares a year ago.

Fiscal year 2018 has been a year of transition and learning as it relates to the Tax Act. Fortunately, the SEC recognized the complexity of the Tax Act and had the foresight to include a provisional period of one year for companies to finalize their tax accounting.

In the fourth quarter, our net income and diluted earnings per share were positively impacted by a $7.1 million adjustment to our provisional tax amount associated with the toll tax on unremitted foreign earnings. We've previously recorded a $6.8 million toll tax expense during the second quarter.

However, revised analysis during the fourth quarter determined that foreign tax credits associated with the toll tax are expected to exceed the toll tax and will result in a small net tax benefit of $300,000.

Based on our initial analysis, we had expected and told investors our effective tax rate for the full fiscal year would be in the 22% to 23% range. However, since we've determined - we've now since determined that our effective income tax rate for the fiscal 2018 is much lower at 13.3% compared to the 29.1% last year.

I strongly recommend that investors review our Form 10-K for the period ended August 31, 2018, for a full explanation on the impacts of the U.S. Tax Cuts and Jobs Act on the company's provision for income taxes. We expect to file our 10-K on Monday, October 22, 2018.

We expect that our effective tax rate for full fiscal year 2019 will be in the 21% to 22% range. However, the provision for income tax is subject to changes resulting from our continued analysis of the Tax Act and any legislative changes in the income tax laws. Now a word about our balance sheet and capital allocation.

Following the recent tax changes, we repatriated $80 million of earnings generated abroad and used the proceeds to pay down our line of credit. As a result, you'll see some large fluctuations on our balance sheet this fiscal year.

Overall, our capital allocation strategy remains largely unchanged and includes a comprehensive approach to balanced investing and long-term growth, while providing strong returns to our stockholders. We typically target maintenance CapEx of between 1% and 2% of net sales, but we're planning to take - make some additional investments in fiscal 2019.

So in addition to the roughly $6 million in normal maintenance CapEx, we anticipate investing approximately $16 million during 2019 in support of our fifth strategic initiative operational excellence. During fiscal 2018, we have purchased a new building to house our UK-based tribe members, and we are currently renovating the space.

We will make a capital investment of approximately $5 million during 2019 to complete the renovation of this office facility. In addition, we'll be making a capital investment to support an exciting new innovation that will enhance our end users' experience, lower our manufacturing costs and ultimately, improve our gross margin.

And we look forward to updating investors on this exciting new innovation in the months to come. We understand the importance of regular dividends to our stockholders, and we target a dividend payout ratio of 55% of net income and have consistently increased our dividend over the last eight years.

On October 9, 2018, our Board of Directors approved a quarterly cash dividend of $0.54 per share payable October 31 to stockholders of record at the close of business on October 19. Based on today's closing price of $156.50, the annualized dividend yield is 1.4%.

During the fourth quarter, we repurchased just over 30,000 shares of our stock at a total cost of $4.8 million under our $75 million share repurchase plan, which had been approved by the board in June 2016.

This plan expired August 31, 2018, but a new $75 million board-approved share repurchase plan went into effect for us on September 1, 2018, and will expire on August 31, 2020. So with that, let's turn to our fiscal 2019 guidance. One of the things that is concerning us this year is the predicted instability of crude oil prices.

Brent, the benchmark for global crude prices, and WTI, the reference price for U.S. crude, have both risen more than 20% since January of 2018. In fact, some experts are speculating that $100 per barrel of crude could be a reality for the first time in five years. In addition, as a U.S.

based company generating almost 40% of our revenue in currencies other than the U.S. dollar, shifts in foreign currency exchange rates can have a significant impact on our reported results.

So while we're comfortable with the things that are within our control as it relates to the guidance I'm about to give, we acknowledge that there are some global dynamics that can impact our results that are entirely out of our control.

But with that, we expect net sales growth projected to be between 4% and 7% with net sales expected to be 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.

And the provision for income tax is expected to be between 21% and 22% of sales. Net income is projected to be between $62.2 million and $63.2 million. And diluted earnings per share is expected to be between $4.51 and $4.58 based on an estimated 13.8 million weighted average shares outstanding.

This guidance does not include any future acquisitions or divestitures, and assumes that foreign currency exchange rates and commodity prices will remain close to current levels for the remainder of fiscal 2019.

The provision for income tax is subject to changes resulting from our continued analysis of the tax cut and any legislative changes to the tax laws. Well, that completes the financial overview. Now, back to Garry..

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

Hi, everyone.

How are you?.

Good..

Fine. Thank you..

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..

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..

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?.

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..

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?.

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..

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?.

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..

Okay. Thank you very much..

Thank you..

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

Hello, good afternoon, everyone..

Hi, Rose..

Hi..

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

Yes..

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

Yeah..

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?.

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..

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?.

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..

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..

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..

Okay.

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

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

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?.

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..

Okay. Thank you..

Thank you..

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..