Good day, and welcome to the WD-forty Company Third Quarter Fiscal Year 2019 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen only mode. At the end of the prepared remarks, we will conduct a question and answer session. I would now like to turn the presentation over to the host for today's call, Ms.
Wendy Kelly, Director of Investor Relations and Corporate Communications. Please proceed.
Thank you. Good afternoon and thanks to everyone for joining us today. On our call today are WD-forty Company's Chief Executive Officer, Gary Ridge and Vice President and Chief Financial Officer, Jay Remble. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release and Form 10 Q for the period ending May 31, 2019. These documents are available on our Investor Relations website at investor.
Wd40company.com. A replay and transcript of today's call will also be made available at that location shortly after this call. On today's call, we will discuss certain non GAAP measures. The descriptions and reconciliations of these non GAAP measures are available in our SEC filings as well as our earnings presentation. As a reminder, today's call includes forward looking statements about our expectations for the company's future performance.
Of course, actual results could differ materially. The company's expectations, beliefs and projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, July 9, 2019. The company disclaims any duty or obligation to update any forward looking information, whether as a result of new information, future events or otherwise.
With that, I'd now like to turn the call over to Gary.
Thanks, Wendy. Good day, and thanks for joining us for today's conference call. Today, we reported net sales of $114,000,000 for the Q3 of fiscal year 2019, up nearly 7% compared to the Q3 of last year. Net income for the Q3 was $18,100,000 compared to $16,100,000 last year, reflecting an increase of 12% year over year. Diluted earnings per share for the Q3 were $1.30 compared to $1.15 for the same period last year.
And I'm happy to share with you that both sales and earnings results for the Q3 reflect new records for the company. Now let's start with a discussion about our strategic initiatives and the brands that support them. We aspire to drive consolidated net sales to approximately $700,000,000 in revenues by the end of fiscal year 2025 and to do so while following our 50fivethirtytwenty 5 business model. We'd like to remind investors that these long term targets are guideposts not guidance, they're probably wrong and roughly right. However, our tribe is working tirelessly on programs and initiatives that will help us successfully reach our 2025 aspirations.
As a reminder, we refer to the brands that are going to get us there as our 2025 brands. They are WD-forty Multi Use Product, WD-forty Specialist, 3 in 1, WD-forty Bike, GT85, 1,000 and 1, Spot Shot, Solvol, Lava and Novak. Our 2025 brands are our core strategic focus and the primary growth engine for our company. Our strategic initiative number 1 is to grow WD-forty multiuse product. Our goal under this initiative is to make the blue and yellow can with little red top available to more people in more places who will find more uses more often.
We aspire to grow the WD-forty multiuse product to approximately $530,000,000 in revenue by the end of 2025. In the 3rd quarter, sales of WD-forty Multi Use Product were $88,400,000 up 7% compared to last year. The growth was driven by solid sales in both EMEA 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-forty multiproduct 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 2 is to grow the WD-forty Specialist product line. In the Q3, sales of WD-forty Specialist were $9,100,000 up 8% compared to the Q3 of last year. This continues to move the company towards its goal for the initiative, growing the product line to approximately $100,000,000 in revenue by the end of fiscal year 2025.
We're optimistic about the long term opportunities for WD-forty 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. Year to date, net sales of products included under this initiative were up 10% compared to last year. Strategic initiative number 3 is to broaden product and revenue base. Strategic initiative number 3 includes maintenance products like 3 in-one, W40 Bike and GT85, but also includes such brands as Spot Shot and Lava in the Americas, 1,001 in EMEA and Novak and Solvol in Asia Pacific.
We believe we are on track to reach a combined revenue for these products of approximately $70,000,000 by 2025. Global sales of products included under this initiative were $14,200,000 in the 3rd quarter compared to $13,700,000 in the Q3 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 1,001 Carpet Fresh in the U. K.
Due to the favorable impacts of some digital marketing windfalls associated with the brand. Strategic initiative number 4 is to attract, develop and retain outstanding tribe members. Our goal under this initiative is to attract, develop and retain talented tribe members and to grow tribe member engagement to greater than 95%. The number one responsibility of our tribal leaders is to share knowledge and inspire ongoing learning. With that end in mind, we recently refreshed our internal learning program and 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 and 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 Olmson has been promoted to the role of Division President of Americas.
In conjunction with Steve's appointment, I will no longer serve as President, but will continue to serve as the Chief Executive Officer of the company. In addition to these management changes, we shared with investors that Linda Lang will retire as a Director and as Chair of company's Board at the our next Annual General Meeting in December 2019. And at that time, the Board intends to appoint me 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 5, operational excellence.
Our goal under this initiative is best summarized by one of our core values here at WD-forty 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 2 global summits, 1 in our San Diego and 1 in our brand new technology center in 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 Brook, our scientists, human resource and supply chain tribe members gathered together with some of our key suppliers to collaborate and gain alignment on some of our global opportunities and challenges our tribe is facing.
These summits are a 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 Q3 results starting with sales. As I mentioned earlier, consolidated net sales were $114,000,000 in the 3rd 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 U.
S. Dollar had an unfavorable impact on sales in the 3rd quarter. On a constant currency basis, net sales would have been $117,500,000 in the 3rd quarter, up 10% compared to the last year and resulting in a diluted earnings per share of $1.35 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 seasonal 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 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 $53,000,000 in the Q3 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 $369,000 in the Americas entirely due to the higher sales of maintenance products in the United States. The 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 3rd quarter, primarily due to increased sales of W-forty Specialist. Sales of WD-forty Specialist were up 30% in the U. S. Due to new distribution and successful promotional activities. Sales of WD-forty multi use product in the U.
S. Were up 3% compared to last year due to the successful promotional programs being run. This increase in sales in the U. S. Was quite an achievement considering that the Q3 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 U. S. Were 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're up against tough comparable period both in Canada and Latin America as customers in the prior year bought high volumes of product in advance of our planned price increases.
As a reminder, our maintenance products exclude our home care and cleaning products. Sales of our home care and cleaning products in the Americas decreased 8% in the Q3 compared to the prior year largely due to lower sales of 2,000 Flushes and Spot Shot, which declined 6% 10% respectively. We continue to consider home care 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 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 2% 5% annually. Now on to EMEA.
Net sales in EMEA, which includes Europe, the Middle East, Africa and India increased to $44,500,000 in the 3rd quarter, up 13% from last year. Year to date net sales in EMEA were up 9% compared to last year. EMEA's reported results in the 3rd quarter were negatively impacted by foreign currency exchange rates. On a constant currency basis, sales in EMEA would have increased to $47,300,000 in the 3rd 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 EMEA direct markets accounted for 68% of the region sales during the Q3 of this year. In U. S. Dollars, sales in our direct markets were $30,100,000 up nearly 16% compared to last year, primarily due to strong sales of WD-forty Multi Use Product.
This increase in sales was primarily due to high levels of promotional activities and increased distribution of our WD-forty EZ Reach Flexible Straw product. In addition, sales in the U. K. Direct markets increased significantly due to higher sales of 1,001 Carpet Fresh as the result of the 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 $14,400,000 This increase was primarily due to the increased sales of WD-forty Multi Use Product in Eastern Europe, primarily Russia due to the timing of customer orders and more stable economic conditions in the region.
The EMEA segment made up 39% of our global sales. Over the long term, we expect sales within this segment will grow between 8% 10% annually. Now to Asia. Consolidated net sales in Asia Pacific, which includes Australia, China and other countries in the Asian region increased to $16,500,000 in the 3rd quarter, 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 $17,100,000 in the 3rd quarter, up 18% from last year. In Australia, net sales were $4,200,000 in the 3rd 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 market, net markets net sales were $8,300,000 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 last year, the comparable period looks particularly strong year over year. Our Asian distributor markets are not impacted by currency since we sell in U. S. Dollars in that region.
In China, net sales in U. S. Dollars decreased to $3,900,000 in the 3rd 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 Year to date, net sales in China increased to $11,800,000 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 14% of our global sales. Over the long term, we expect sales within this segment will grow between 10% 12% annually. That wraps up my part of the report for today. Now over to Jay, who will continue with the review of the financials.
Thanks, Gary. Let's first start with a discussion about our fifty Fivethirtytwenty five business model, 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 are our gross margin. In the Q3, 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 were 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 had anticipated gross margin would begin to show a slight positive trend, driven by the lower petroleum based input costs. While we've seen this in the Americas, cost increases we experienced in EMEA and Asia Pacific more than offset these 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 that flowed through our cost of goods in the Q3 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've implemented in all three trading blocks over the last 12 months and positively impacted gross margin by 120 basis points in the 3rd quarter. Also positively impacting margin in the 3rd 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 EMEA 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 deliberate 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 3rd quarter, our cost of doing business was approximately 33 percent, up 10 basis points from the Q3 last year. For the Q3, 75 percent of our cost of doing business came from 3 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, our A and P investment was 5.5% in the Q3. 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, we'll continue to make necessary investments in support of our 5th strategic initiative, operational excellence. And this brings us to EBITDA, the last of our fifty fivethirtytwenty five measures.
EBITDA was 22% of net sales for the 3rd quarter and down from the 23% last year. And that completes the discussion on our fifty fivethirtytwenty five business model. Now let's discuss some items that fall below the line. The provision for income taxes was 19.8% in the Q3 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 2019, a little bit lower than we had previously anticipated. And net income for the 3rd quarter was $18,100,000 versus $16,100,000 in the prior year, reflecting an increase of 12%. This resulted in diluted earnings per share of $1.30 for the Q3 compared to $1.15 for the same period last year.
Diluted weighted average shares outstanding decreased to 13,800,000 shares from 13,900,000 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 $0.61 per share payable July 31 to shareholders of record at the close of business on July 19.
Based on today's closing price of $161.35 the annualized dividend yield is 1.5%. During the 3rd quarter, we repurchased approximately 62,000 shares of our stock at a total cost of $10,300,000 under our current $75,000,000 share repurchase plan, which was approved by the Board in June 2018. At the end of our 3rd fiscal quarter, we had $52,600,000 remaining under the plan. As a reminder, we target our maintenance CapEx of between 1% 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 $22,000,000 This investment is to support the renovation of our new facility in Milton Keynes and to procure some new production machinery as we previously disclosed.
So with that, let's turn to fiscal year 2019 guidance. As I mentioned, we expect the provision for income tax to be a little bit lower than we previously anticipated due to the continued favorable impacts from the U. S. 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 net sales growth to be between 4% and 7% with net sales between $425,000,000 $437,000,000 Gross margin for the full year is expected to be near 55%. Advertising and promotional investment is projected to be between 5.5% 6% of net sales. The provision for income tax is expected to be between 19% 20%, with net income projected to be between $63,300,000
$64,400,000
Diluted earnings per share is expected to be between $4.58 $4.65 based on an estimated 13,800,000 weighted average shares outstanding. I'd like to remind investors that we continue to believe that net sales 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 Gary. Thanks, Jay. In summary, what did you hear from us on the call today? You heard that both our sales and earnings for the Q3 reflect new records for the company. You heard that global sales of WD-forty Multi Use product were up 7% in the 3rd quarter.
You heard that global sales of WD-forty Specialist grew 8% in the 3rd quarter. You heard that we continue to increase penetration of Smart Straw and distribution of the WD-forty EZ Reach Flexible. You heard that Linda Lang has announced her retirement from our Board of Directors and that I expect to be stepping into her Board Chair position beginning in December. You heard that we promoted Steve Brass to the role of President and Chief Operating Officer and Patricia Olson 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 Ann 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 nonevent when it happens. Thank you for joining us today, and we'd be pleased to open the conference call to your questions.
Your first question comes from Linda Bolton Weiser with D. A. Davidson. Your line is open.
Hi. This is Cindy Ding on for Linda. Thanks for taking our questions. So first, did you see any shelf space changes at any retailers?
Shelf space changes. Well, no.
Okay.
No, there was no change in our shelf distribution.
Okay. Thank you. And then now that the gross margin is at around the 55% targeted level, do you see potential to get to a higher level going forward?
Yes. As we've always shared, we believe we do have upside on our gross margin, and it will continue to be impacted as we roll out our premiumization strategy with things like Smart Straw, the next generation of Smart Straw, Easy Reach and as
question, are there any updates you can provide on the new Smart Straw system? And when should we expect to learn about pricing and margin details?
The commercialization plan is currently being reviewed. We'd expect that we would start seeing some of the next generation of Smart Straw into the market as we predicted sometime around the middle of next year. And we'll keep you updated as we get closer.
Thank you. Is it next calendar year?
Yes.
Thank you. And then what are some initiatives to get the cost of doing business to 30% of sales?
The biggest driver for the cost of business is increase of revenue. We've often said that 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 of our questions.
Thank you very much.
Your next question is from Daniel Rizzo with Jefferies. Your line is open.
Hi. Just to follow-up on, I think, what she was talking about. Last call, you mentioned that rotation at the warehouse was a headwind in
the U. S. I think
it was just some product rotation. And I think that's what's being referred to in terms of shelf space. Is that still an issue now? Or is that 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 we're through that 1st round. We haven't lost any further distribution. So again, we would expect we'll rotate in as we were rotated out sometime in the future.
Okay. And then, I think you mentioned that sales were strong in Asia, but China was flat and Australia was down a little bit. I was just wondering what region you were seeing kind of the strength in? Was it I mean, was it specific country or area?
The biggest gain in the Asia Pacific region was through our distributor markets. Those are 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 period of time where we were changing our distributors in Malaysia, Singapore and Indonesia. So that had a negative impact. That's why there was such a large increase in the distributor markets.
Australia primarily is due to currency. We'd expect that to Australia to end up in growth in the year. And we have 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.
Is China more of a direct market at this point?
China is a direct market, 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 pre buying last year led to a big spike in the 2nd quarter I'm sorry, in the 3rd fiscal quarter. I was wondering why that wasn't the case in the U.
S? Or was it and you just kind of overcame that?
Correct. It was and we overcame it in the U. S. I think I mentioned in the call that the results were particularly pleasing in the U. S.
Because we did have some buy up against price rise last year, but our programs this year enabled us to combat and beat that in this fiscal year. Thank you very much. Thanks, Daniel.
Your next question is from Rosemarie Morbelli with G. Research. Your line is open.
Thank you. Good afternoon, everyone. And congratulations to all the promotions and for the succession plan.
Thank you.
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 balance of the year are volume. Pricing has already been flatured into the our trading. So Jay, I think that would be about correct?
For the remainder of the year? Yes. Yes. Yes, we don't see any additional pricing increases.
And do you see your raw material continuing to come down? Any change on the cans, for example, in addition to the petroleum?
Actually, cans have gone up. There's probably some residual impact of tariffs, even though we buy our cans in the U. S. And in places very close to where we sell our product. There has been some increase in canned costs and it's somewhat coincident with the timing of tariffs.
And what do you hear in terms of tariffs anecdotally by your customers in the different regions? Is the outlook kind of improving the or is it or the positive net that one may have had a year ago is really has moved all the way into the negative territory?
I wouldn't say things have moved into the negative. I think there's 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 most companies and most people deal with risks, they have a real problem dealing with uncertainty.
So that seems to be some of the but I wouldn't say it's gone to negative. I'd say it's moderate.
Okay. And then lastly, if I may, you are looking at revenues being closer to the lower end of your expectations and the EPS now lower end is your previous high end. So is the benefit solely from the lower tax rate? Or are there other factors in between that are going to allow you to have a higher margin for all intended purposes in order to get to those numbers?
Yes. The that is it all comes from the change in tax for the most part.
Nothing else? No other benefits anywhere else?
There could be, but it's too soon to tell.
Okay. Thank you.
Thanks, Rajvind.
Ladies and gentlemen, that does conclude our allotted time for questions. Thank you for your participation on today's conference call and ask that you please disconnect your line.