WD-40 Co (WDFC) 2004 Q3 法說會逐字稿

Good day everyone, and welcome to the WD-40 Company third quarter 2004 earnings release conference call.

Today's call is being recorded.

At this time I would like to turn the call over to the Vice President of Corporate and Investor Relations for WD-40 Company, Ms. Maria Mitchell.

Please go ahead.

Thank you for joining us for our third quarter earnings call for fiscal 2004.

Today we're pleased to have Garry Ridge, President and CEO, and Michael Irwin, Executive Vice President and CFO.

This conference call contains forward-looking statements concerning WD-40 Company's outlook for sales, earnings, dividends and other financial results.

These statements are based on an assessment of a variety of factors, contingencies, and uncertainties considered relevant by WD-40 Company.

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward-looking statements, including impact of competition, impact of marketing expenditures, changes in customer ordering habits, impact due to legal and regulatory costs, impact of new product and line extensions, impact of exchange rates, and the uncertainty of international market conditions, and the Company's outlook for the fiscal year.

The Company's expectations, beliefs and projections are expressed in good faith and believed by the Company to have a reasonable basis.

But there can be no assurance that the Company's expectations, beliefs or projections will be achieved or accomplished.

The risks and uncertainties are detailed from time to time in reports filed by WD-40 Company with the SEC, including Forms 8-K, 10-Q, 10-K.

And readers are urged to carefully review these and other documents and to stay up-to-date with our most recent Company developments provided in the Investor Relations section of our website at wd-40.com.

At this time I would like to turn the call over to Garry Ridge.

Good day and thanks for joining us.

Innovation in new products are important to the success of our business.

As competition in the household products area heats up we must face that with smart marketing and a level of innovation that insures we have maintained market share and consumer share.

Standard & Poor's in their June 17th, 2004 household nondurables industry survey say -- depending on the nature of the product, the time frame for a manufacturer to conceive a new product, develop and test market, and get it on the shelves can take one to two years or longer.

Although we're well within the one to two year window, timing has not been on our side this year, as we've had delays in launching some of our planned new products under our brands.

This has contributed to us not meeting our sales goals in our household products area.

We had two new in bowl toilet cleaners slated to launch early in the year.

We had delays in the pharma production of one of the products, one containing a deodorizing and bleach.

It has now been launched, and it will be -- and it did ship in June.

We did launch on schedule four new line extensions in our lubricant category under the 3-IN-ONE Professional brand, plus the new WD-40 Big Blast can.

These new line extensions and our strong growth in Europe have helped to fuel growth of our lubricant category which year to date is up 11.9 percent.

This year also saw an increase in the brand support for WD-40 in both the USA and Europe.

Our Lava review is on plan, and we will share the outcome with you in the fourth quarter as we had planned.

Carpet Fresh has had four new power fragrances and two new aerosol fragrances as well as a new size.

We also innovated with a new spray through cap.

The new items will progressively roll out over the next three to six months.

We did meet our integration goal in the UK.

Just 75 days after the close of the acquisition of the 1001 brand, we launched -- with two new products under that brand, a carpet stain remover and an aerosol carpet freshener.

This is a great example of our sweat the assets approach.

We took technology from the U.S. brands of Carpet Fresh and Spot Shot and matched it to the opportunities created by the 1001 acquisition in the UK.

We have two new items under the X-14 brand that will start to ship in the September, October time period -- both our first, and we're excited about the potential.

We did get our new X-14 mildew into distribution with the unique competitive advantage of performance claim of prevents mildew stains up to two weeks.

With all of this we continued to support our brands with increased marketing investment.

Carpet Fresh sales were also impacted with delays as customers decided what SKUs to range for this upcoming season, so the anticipated sales didn't come when expected.

Most of these decisions have now been made, and we should see these sales come later in Q4 and in Q1 of next year.

Meanwhile Nielsen May 29th reports Carpet Fresh is the undisputed No. 1 fern (ph) aerosol brand with a 62.5 percent dollar share, up almost 9 points versus a year ago.

Nielsen also reports that Spot Shot is the number one brand of aerosol carpet stain remover with a 52 percent share.

Three brands share the balance of the market.

Increased competitive activity in the carpet stain category with new entrance and increased marketing activity dampened our progress to grow Spot Shot at the rate we had hoped this year.

At the same time we were hit with some rising costs.

Freight costs are up over last year due to the increased fuel prices and the change in behavior of our U.S. customers, who are buying smaller quantities more often.

And we, like most companies, have seen an increase in costs of regulatory compliance stemming from Sarbanes-Oxley.

We will continue to build on the strong platform we have created and to manage our business for the long-term growth, not the short-term.

So this year has not worked out the way we had hoped.

But in real-life it does not always go to plan.

The good news is the Company has opened the door to innovation to meet the competitive demands of the industry.

We have never had so much innovation in new product development in the pipeline in all our categories.

Our commitment -- our core commitment is strong, that is being disciplined people using disciplined thought in creating disciplined actions.

For this year we now expect that our full growth of sales to be about 2.2 percent.

By product segment our current full year sales estimates are lubricant sales up 11.5 percent, household products down 12, hand cleaners down 15.

We have revised our full year net income guidance to be between 26 and $27 million for this fiscal year.

The results reflect the impact of the delays in some of our new product launches, increased competitive activity in the household products segment, the increase in freight and other general overheads, and the increased marketing investment which is running 2 full percentage points higher as a percent of sales in 2003.

Investment in global advertising and sales promotion for this fiscal year of 2004 is expected to be in the range of 8 to 10 percent of net sales.

I will now pass back over to Mike Irwin, who will cover the quarter in more detail.

We will begin with a review of sales and then onto the rest of the financials.

Starting with sales, total third-quarter sales were $59.7 million, up 8.5 percent over the third quarter last year, while sales through nine months were $170.8 million, up 3.6 percent over last year.

Lubricant sales, which are WD-40 and 3-IN-ONE, for the third quarter were $39.7 million, up 22 percent from Q3 last year.

We had strong growth in Asia, Australia, Canada, Latin America, the U.S. and Continental Europe within our lubricant business.

Lubricant sales for the first nine months were $111.4 million, up 12 percent over the nine months last year.

And hand cleaner sales, which are Lava and Solvol, were 1.7 million in the quarter, up 7 percent from Q3 a year ago.

For nine months hand cleaner sales were $4.7 million, down 12 percent versus a year ago.

Our household products segment, which include 2000 Flushes, Carpet Fresh, X-14, Spot Shot and 1001, third quarter sales were $18.4 million, down 13 percent compared to the same quarter last year. 1001 contributed $1 million in Q3 sales.

Through nine months household products sales were $54.7 million, off 9 percent compared to the same period last year.

Without 1001, household products sales were $53.7 million.

Moving on, despite sales growth in lubricant and hand cleaners in Q3, total U.S. sales declined, and shortfalls were -- versus the prior year were evident in Carpet Fresh rug and room deodorizers, X-14 hard surface cleaners, Spot Shot stain remover, and 2000 Flushes' X-14 automatic toilet bowl cleaners.

These declines are a result of a variety of reasons, including increased advertising and promotional discounts for automatic toilet bowl cleaners compared to the prior quarter, reduced promotional activity by customers compared to the prior year period, along with the effects of competitive factors both within and surrounding our product categories.

The Company's household brands are currently experiencing significant competition within their categories, but also suffered due to the introduction of products in related categories as well.

Spot Shot sales declined in the current quarter from heightened competitive activity and because of promotion of ours in the prior year third quarter was not repeated in the current year quarter.

The recent effectiveness of the Spot Shot television advertising has been dampened due to the concurrent increases in marketing investment by competitors.

Sales of 2000 Flushes X-14 automatic toilet bowl cleaners are down in the current quarter compared to prior quarter due to advertising and promotional discounts associated with the launch of the 2000 Flushes clip on products.

Advertising and promotional discounts include things like slotting fees paid to gain shelf space for a new product, and are expected to continue through the end of the fiscal year and into the first quarter of 2005.

These costs are considered investments into the launch of a new product in order to build distribution.

Sales of the automatic toilet bowl cleaner category are down overall due to competition from new product introductions in the manual bowl cleaning category.

This decline is currently considered the short-term effect of innovation and surrounding categories, and does not necessarily indicate that consumers will continue to purchase outside the automatic bowl cleaning category.

The new 2000 Flushes clip on product continues to build distribution, and is doing well competitively, although the category is declining for the reasons just mentioned.

In the Americas region, retailers have reduced shelf space for traditional rug and room deodorizers for reallocation to other air care products.

As a result, the rug and room deodorizer category as a whole has declined.

Although sales of the Carpet Fresh brand have declined due to losses in distribution resulting from the above-mentioned events, the brand has increased dollar share of the grocery segment, as Gary had mentioned.

At the same time we've also seen the growth of the NoVac, which is an aerosol carpet freshener in Asia-Pacific region.

The X-14 hard surface cleaners have been negatively affected by competitive product introductions within the categories.

Two other competitive brands are now participating in the mildew and stain remover category, and those have negatively impacted X-14's marketshare within the category.

The Company has repositioned the X-14 product to respond to this competition by recently introducing a larger size and a long-lasting mildew prevention claim.

This repositioning highlights a proven claim that X-14 produces more effective results compared to the products in the category.

The Company continues to address the challenges and opportunities that exist within the competitive environment of household products through product and promotional innovation.

Recent innovations, as we have indicated, include the 2000 Flushes in bowl clip on product, new X-14 mildew stain remover with a long-lasting claim, and the new Carpet Fresh fragrances with the spray through cap.

We continue to work on other product packaging and promotional innovations.

America's third quarter sales were $40.8 million, down 0.3 percent against last year.

Growth in Canada and Latin America was offset by declines in the U.S.

For nine months America's sales were $120 million, down 3 percent compared to last year.

Both Canada and Latin American nine month sales are above last year, while the U.S. trailed due to the household products as previously discussed.

Asia-Pacific Q3 sales were $4.1 million, up by 15 percent.

Australia achieved strong growth across lubricants and household products.

Asia sales were up by 8 percent.

For the nine months Asia-Pacific sales were $11.4 million, up 15 percent.

Following a difficult first quarter, Asia sales are above last year.

Australia has continued its robust growth with nine month sales up 46 percent versus the nine month period last year.

Australian results also reflect a benefit from changes in exchange rates.

Europe's third quarter sales were $14.9 million, up 41 percent versus a year ago.

Third quarter sales without 1001 were $13.9 million, up 31 percent.

France, Germany, Spain and distributor markets all contributed double-digit growth versus the same quarter last year in U.S. dollars.

Through nine months Europe sales were $39.4 million, up 27 percent compared to the same period last year.

And we have had growing sales in the UK, Russia, France, Germany, Spain, Italy, Eastern Europe and the Middle East.

Europe results also reflect the impact of changes in exchange rates.

Gross profit was 51.7 percent of sales in the third quarter, compared to 50.7 in Q3 last year.

The 1 percentage point increase in gross margin percentage is due to a number of items including the mix of products sold, the effect of the U.S. price increase, changes in other supply chain costs, and the decrease of advertising and promotional discounts during the quarter.

The overall impact of advertising and promotional discounts on gross margin percentage, which include coupon redemption, slotting fees, display allowances, cooperative advertising and promotion activity was 4.0 percentage points in the -- 4.0 percent in the current period compared to 4.1 percent in the prior year period.

Changes in product mix and other supply chain costs resulted in a 0.6 percent decrease to gross margin percentage.

The increase in pricing of certain products in the U.S. added 1.5 percent to gross margin percentage compared to the prior year period.

Through nine months gross profit was 52.2 percent of sales compared to 51.1 percent last year.

The 1.1 percentage point increase in gross margin percentage is due to reduced advertising and promotional discounts, the mix of products sold, the effect of the U.S. price increase and other supply chain savings.

The overall impact of advertising and promotional discounts on the gross margin percentage was 3.8 percent through nine months compared to 4.0 percent year-to-date last year.

The increase in pricing of certain products in the U.S. added 1.1 percent to the gross margin percentage compared to last year.

And changes in product mix and other supply chain costs added 0.1 -- had a 0.1 percent decrease in gross margin percentage.

The timing of certain promotional activities and shifts in product mix may continue to cause significant fluctuations in gross margin from period to period.

And we foresee increased pressures on the cost of components, raw materials and finished goods.

The Company expects that its fiscal 2004 gross profit percentage will remain in the range of that achieved in fiscal 2003.

Selling, general and administrative expenses for the third quarter increased to 4. -- $14.3 million from 13.1 million in Q3 last year.

The increase is attributable to a number of items including 0.5 million related to exchange rates, 0.4 million increase in accounting and professional fees, and $100,000 related to the increased insurance costs.

Other higher costs include $400,000 of freight, and 300,000 of other corporate costs including Investor Relations meeting and other office expenses, offset by $0.4 million reduction in other miscellaneous costs.

As a percent of sales SG&A increased to 24 percent in the third quarter from 23.7 in the same period last year.

Advertising and promotional expense rose to 5.8 million in the third quarter from 4.6 million for Q3 last year, and as a percent of sales increased to 9.8 percent in the third quarter from 8.3 percent in the comparable period last year.

Increases were mainly related to investments in TV media, product demonstrations, print media, and market research.

As a percent of sales A&P expense may fluctuate period to period based on the type of marketing activities employed by the Company, as the cost of certain promotional activities are required to be recorded as reductions to sales, and others remain in advertising and sales promotion expense.

Investment in global advertising and sales promotion expense for fiscal 2004 is expected to be in the range of 8 to 10 percent sales.

Operating income for the quarter was $10.6 million compared to 10.2 million in Q3 last year.

And for nine months operating income was $30.2 million compared to $32 million last year.

Amortization expense in the quarter is a reflection of 1001 acquisition.

A portion of the purchase price has been allocated to the customer base acquired, which is being amortized over the expected life of the customer relationship.

At 5/31/04 exchange rate that amortization cost would annualize at about $545,000 per year.

Net interest expense for the quarter was $1.6 million, down $127,000 versus the same period last year.

And year-to-date net interest expense was $4.9 million compared to $5.1 million through nine months last year.

Net income in the quarter was $6.1 million compared to 5.8 million last year.

On a dilutive per share basis earnings were 35 cents compared to 35 cents last year.

And through nine months net income $16.7 million versus 18.4 million last year, which equates to earnings per diluted share of 97 cents compared to $1.10.

Diluted shares outstanding have increased to $17.2 million for the year to date period compared to 16.7 million last year.

Changes in foreign currency rates compared to prior year periods contributed to the growth of sales and expenses.

Through nine months the foreign exchange impact increased sales by $6.2 million and net income by $880,000.

Third quarter sales were lifted by $2 million and net income by $272,000 due to changes in foreign exchange.

Those effects were spread over Europe, Australia and Canada.

Regarding the dividend on July 6th, Board of Directors of the Company declared a regular quarterly dividend of 20 cents per share, payable on July 30th to shareholders of record on July 19.

Based on today's closing price at 27.65 the annualized dividend yield will be 2.9 percent.

About our balance sheet at May 31, cash and cash equivalents were $34.6 million at the end of the quarter, down from 42 million at the beginning of the fiscal year.

The drop in cash balance partially reflects the following significant items -- the May 31, principal payment on our debt of $10 million; the 1001 brand acquisition that closed on April 2nd, and the payments for that of approximately $11 million was made in cash.

We also used $5.2 million during the quarter for the share repurchase program we announced in April.

We have $9.8 million remaining on that program which runs until April 2005.

We also made a quarterly dividend payment of $3.4 million.

Accounts receivable declined due to a lower level of third quarter sales compared to sales in the fourth quarter.

The $11.7 million combined increase in goodwill and other intangibles primarily related to the 1001 acquisition.

Inventories rose to $6.5 million, up from 4.7 million at August 31.

The changes reflect the impact of the 1001 acquisition and the flow of our business.

Current inventory levels are in line with what we would expect, and inventories continue to remain low relative to a business of this size.

Accounts Payable also declined due to the flow of the business.

We will be filing our 10-Q tomorrow afternoon for further information.

And that is it for the financial uptake.

Thanks very much, and I turn it back over to Garry Ridge.

As we approach the end of this fiscal year we're setting the table for 2005 with innovation and new products across our brands.

Our lubricant brands are strong with growth coming from continued market development outside the U.S.A. and innovation in packaging and product.

Our household brands have new products and line extensions that will continue to enter the market over the next few months.

We would be pleased to take your questions.

(OPERATOR INSTRUCTIONS).

Sile Kueck, J.P. Morgan.

A couple of questions.

The first thing is I dialed in a little bit late so I don't know whether you have spoken about the impact of sales?

What was volume?

What was price?

What was currency?

We haven't described the split among those three.

The only thing we talked about was the currency impact.

Did you get any -- did you get any pricing power this quarter at all?

We did describe pricing -- the pricing impact on gross margin related to the increase of certain -- interest in prices of certain products within the U.S.

And let me just go back to that.

I think it was 1.5 percent.

Yes, it is 1.5 percent on the gross margin -- and in the quarter.

And on the year-to-date it was 1.1 percent.

And the exchange rate impact in the quarter was about $2 million, and that came from Europe and Asia and Australia.

In terms of the household product line, do you have stuff like an outlook for '05 where you see that going and whether you think the competitive pressures will -- you know, in the toilet bowl cleaning business will -- they go away or will they continue?

If you could (ph) give us like a heads up on that?

Of course competitive pressure will never go away.

And the way to fight them are with innovation and alternate trade channels.

And as I shared, we have a number of products that are slated to ship late in this quarter, early in the next quarter, that I think address the number of issues that we have had, particularly in X-14 brand and in the 2000 Flushes brand.

Mimi Sokolowski, Sidoti.

A tough quarter, so I have got a couple of questions for you.

Just some bumps in the road, Mimi.

Yes.

Well, every cloud has a silver lining, right?

Yes.

Could -- did you quantify exactly how many product delays were there?

Yes, there was the 2000 Flushes in bowl product.

There was the new fragrances of Carpet Fresh and the Carpet Fresh spray through cap.

Those were the major contributors.

And all of those are in the areas where we have had the major challenges.

That closely ties into my next question.

I don't know if you can do this, but if could gauge it on a percentage basis, how much of the shortfall to the bottom line do you think is from competition, and how much do you think is stuff that you are really in control of and you can correct sometime over the next -- I don't know six months or so?

I think there is an answer that is worthy of consideration here.

Innovation does not only grow business but it sustains it.

So some of the competition we have had is due to us not getting what we wanted out there quick enough.

As far as the categories are concerned, some of the shrinkage in the categories is due to expansion in other categories.

And it is pretty hard to give a feeling on that, particularly because a lot of the numbers we rely on, particularly Nielsen, only covers 30 percent of the non-food grocery measurement.

The Wal-Mart numbers are not in there.

So as categories shift around, we've got to try and link up a couple of things.

There is no doubt that the grocery trade channel is going through some enormous turmoil.

You don't have to be Sherlock Holmes to work that out.

And so our goal is really to make sure that we have products that A, replace or put us back in the innovation drive, and secondly can go into alternate trade channels.

Now if I could turn to Mike for a second.

That increase in SG&A -- you probably said it, but I was fiddling around with something else.

Where does that come from?

It is really a number of things.

If we look at the third quarter, about $500,000 of that increase in SG&A is related to exchange rates.

About 4 million -- I'm sorry -- 400,000 of that is related to an increase in accounting and professional fees.

And we also had some -- kind of the balance related to higher insurance costs.

As well as we have also had higher costs of freight.

And some of those were offset just kind of by miscellaneous other things that came in our favor.

So the big drivers again were exchange rates, accounting and professional fees, insurance, freight, things like that.

Mimi, when you ask (ph) SG&A do you include marketing in that?

No, not the advertising component just as the --.

Because that was also -- had a significant --.

Right.

And correct me if I'm wrong, but at some point that anniversaries.

You get to a point where you say -- you have already reached the point one year ago you were dedicating 8 to 10 percent of revenue.

Yes.

Okay.

Can you see yourself going beyond that 10 percent threshold at all?

No.

You are about a 1.5 month through the fourth quarter, and you have given your guidance for the full year on the net income line.

Are you pretty confident in that number, or do you think it is unreasonable to assume you might have the same hiccups that you had in the second and third quarters?

I think, Mimi, what we're talking about now is given that we're talking about it one quarter out we can't obviously comment on anything in the fourth quarter.

But simply due to the fact that the time period is shorter I think gives us a better ability to get a sense of things.

But things can happen and our principle behind when we talk about guidance we look at it, take that seriously, and we do our best to estimate what we think is really going to happen.

And one last question, I will get back in the queue.

Heavy-duty hand cleaners.

You got a quarter of growth in there.

What happened there?

Well we had just -- the business is pretty small so individual things with individual customers can have a sway on the business.

So this particular quarter was higher on a year-to-date basis that is down.

You're right.

Small base.

That's it.

Thank you very much.

Liam Burke, with FBW.

You had some long-term financial goals beyond this year.

I know this has been a setback.

You've had to sit -- you have reduced guidance a couple of times.

Where are you with this plan?

Do you have to adjust your long-term goals or can you continue to shoot for those objectives?

Vis-a-vis the goal pages that we have, and we will update that when we finish this year we are on.

We see that we are within a range of those.

It will depend certainly how this year ends up landing and how the traction starts with our new products.

We had a bump in the road, and we're not happy about it.

But life doesn't always go the way you plan it.

But fundamentally what is very encouraging to us is that our lubricant business is doing better than we anticipated.

And that has a high contribution to us, as you know.

And we believe that for the most we have innovation in place that is going to get us back on track in the household growth area.

And so a number of things I think converged on us in the last quarter and a little earlier in the year that caused us to be different to what we thought we would be.

You have had a little bit of time to look at the acquisition -- this year's acquisition.

How much is it going to help next year?

I think when we announced it we announced the styles (ph) were somewhere in the vicinity of 4.5 million pounds.

So that was the base.

And we're now working -- and we're happy that we have secured that business, that the distribution has moved over.

And really the upside now will be the new brands that we have, which are the 1001 Spot Shot and the 1001 Carpet Fresh.

We already have -- we have them on the shelf in the UK selling now.

We've got them up and going in 75 days, which we were really happy about.

Early indications are that we feel that we've got the product right.

We will start the marketing in essence in those in the first quarter of next year.

So the upside is really what will they deliver over the year?

So in fiscal '05 it is not unreasonable to think that you would be able to build off that 4.5 million pounds base?

Absolutely.

Frank Magdalene (ph), The Robbins Group (ph).

Gerry, I might have missed your number for the year.

Did you give one for sales expectations?

We said growth of about 2.2 percent, which may -- I think ends up in the range of 244 million, plus or minus.

And when you look at the lubricant sales part of it, is there a way of tracking what industrial use is as opposed to, say, the consumer?

It depends what country it is in.

When we first -- we know in developing markets the majority of WD-40 is consumed in the for profit area where people use it for making profits.

In the more developed markets like the U.S.A. it is more of a household/trade consumption.

So we have tried to put estimates on it from time to time, but it depends on the development of the market.

And then going back to the long-term goals, I think you had historically looked at 8 to 11 percent organic growth.

Are you still living with that?

We're going to update that at the end of the year.

And really why I'm saying that is when we would land this year we will know.

And we also want to see the traction we get from the products that we have developed.

All right.

And then the share count out there, and you may or may not utilize the buy back for the balance of the year.

I missed the number of what is left on the buy back?

It is $9.8 million.

(OPERATOR INSTRUCTIONS).

Tim Crow (ph), Value Holdings (ph).

I'm sorry, I'm a little new to this story.

And so I just was wondering if I could get you to review one of the legal contingencies.

Why is the plaintiff arguing that 2000 Flushes and X-14 may have voided their toilet bowl warranties?

We will be updating that in the disclosure in the 10-Q.

We have done that -- the prior 10-Q does cover it.

That will be out tomorrow, so I think for completeness I would refer you to the factual background information regarding that in tomorrow's filing.

But the prior 10-Q, it doesn't actually say why they think it voided their warranty?

What did -- what hare they maintaining the product did that could have voided the warranty?

Really those details of the case have not been totally disclosed.

There may be some more information in that in the Q tomorrow.

Mimi Sokolowski.

I was just looking over my numbers, messing around with my model a little bit, and I must say I misunderstood your numbers, Mike.

Where you projecting for each of your categories to be at for the full year implies that growth is either going to -- growth is going to decline dramatically in two of the categories for the balance of the year.

Does that logic follow with you?

I can't comment obviously on your model, but let me just pull out some more information.

If I heard you correctly, I think you said that household products for the full year would be down 12 percent.

And hand cleaners, it would be down 15 percent for the full year.

That's right.

Yes.

And they are currently down --.

Household products through nine months were down 9 percent.

Okay.

So why the acceleration at the last quarter?

I think it is largely due to a year-on-year comparison.

And also one of the things we described earlier is the impact of slotting fees which work out to be a reduction in sales revenue.

And we have -- with the product innovation that we've talked about, slotting fees become a bigger factor within our business than they had been before, because we have just more things in the pipeline that are coming out.

And the way that that works is the slotting fees that are paid are taken as expense at the time of the first shipment.

And that works out to be a full year's worth of slotting fees, so to speak, against a hope for year of sales.

Okay, so it is very front-end loaded and not something you would expect to see for the next -- for the three quarters following?

Yes, it is very front-end loaded.

You have to take the full reduction of the slotting fee as a reduction in sales before you even get at the first order, which is disappointing.

Okay.

And with the delays you had --?

That is the time (ph) off the order really.

Is it the delays you had in the third quarter you are expecting an irregular number of primary orders in the fourth quarter?

Correct.

And how many new products are slated to ship in the first quarter, excuse me, in the fourth quarter?

Well the slotting fees -- and let me just comment on the way that we build our business -- at the point of launch in the shipments the slotting fees are paid, and then therefore is recorded as a reduction in sales at the point of shipment.

But those shipments then are the shipments to new customers, and it could be that a product that is introduced in one quarter has a shipment -- a new shipment to a new customer the following quarter, and therefore a slotting fee is paid.

So I guess what we see happening in our business is the more things that we have coming out that are new versus things that had been around for a while, the higher the slotting fees are going to tend to be.

And we didn't want to unnaturally say, okay, we're going to hold off getting slotting because it is going to impact the fourth quarter.

You are kind of paying up in advance a little.

We could have said, okay, we're not going to make presentations to be able to ship until the fourth quarter, but I think that is a bad business decision.

So would a better question be that how many products are going to get slotted in the fourth quarter?

And is that a fair question?

It's a fair question, of course.

But it is one that is (multiple speakers).

The other part of it is that we can't comment on actual results in the fourth quarter, obviously.

But again the more new products that we have the more slotting issues are going to come up.

Howard Choe, Standard & Poor's.

I think you mentioned that the 1001 brand contributed $1 million dollars in sales this quarter.

And I was just wondering how are the sales weighted in the quarter for the brand?

For 1001?

Right.

What is happening with 1001 is that that that closed at essentially the -- we had a couple of months worth of sales in there.

So we don't describe in detail the weighting within a quarter, but because that was an acquisition that closed during the quarter, we had the integration part of it, it kind of is what it is.

Okay.

Can you just comment whether certain quarters are heavier than others or --?

It didn't look to us in the acquisition that there were material shifts in the 1001 business quarter to quarter.

Were you -- your question, was that related to 1001 or are you talking about overall?

Yes, it's 1001.

Okay, that's fine.

Thank you.

Peter Udall (ph) with the Presidium (ph).

I wanted to follow up on a question that was asked earlier about the decline in the household products revenue.

I know -- you obviously explained it, but I'm still not -- I'm a little stunned at the magnitude of the slotting fees then because if you just -- you're implying a 30 percent decline, if I'm doing my numbers right -- a 30 percent decline year-over-year in household products revenue.

And obviously part of that is due to slotting fees as an offset to revenue.

If revenue would just decline 12 percent as it has in last couple of quarters, if you take the difference there, that is about 4 or $5 million.

Is that the number that you have to pay for slotting fees?

Am I doing that right?

No, I think that what we were trying to describe as slotting fees are one cause of an impact in sales.

As we have talked about earlier, competitive issues also come to play.

And we have seen those through the year, and in some cases they have intensified.

So on a year-on-year basis slotting is part of a competitive -- aspects are part of it, as well as the expansion of product innovation and within categories and within other categories that cause a reduction in shelf space allocated to the categories in which we compete.

So it is a whole variety of factors and slotting is one of them.

That does conclude today's Q&A session.

Mr. Ridge, I will turn things back to you for any closing comments.

Thank you very much, and we will talk to you in about another 90 days.

Good afternoon.

And that does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.