WD-40 Co (WDFC) 2005 Q4 法說會逐字稿

Good day and welcome to this WD-40 Company fourth quarter 2005 earnings release conference call.

Today's call is being recorded.

At this time, I will turn the conference over to the Vice President of Corporate and Investigator Relations for WD-40 Company, Miss Maria Mitchell.

Please go ahead.

Good afternoon and thank you for joining us for our fourth quarter earnings call for fiscal 2005.

Today we are 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 new product introductions and innovations, impacts of cost of goods, and the uncertainty of market conditions, both in the United States and internationally.

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 sections of our website, at wd40.com.

Please also note the following dates: our annual share holder meeting is scheduled for Tuesday, December 13, 2005 at 2 p.m.

Pacific Standard time.

The presentation will be webcast.

Our first quarter fiscal 2006 quarterly earnings conference call is scheduled to take place on Monday, January 9, 2005 at 2 p.m., Pacific time.

At this time, I'd like to turn the call over to Garry Ridge.

Thank you, Maria.

Good day and thanks for joining us.

Today we reported fourth quarter earnings, and announced record sales for fiscal year ended August 31, 2005.

Net sales for the year were 263.2 million, an increase of 8.6 over the 242.5 million last year, a record for the Company.

Net income for the year was 27.8 million, compared to 25.6 million last year, an increase of 8.4 percent.

Earnings per share for the year grew 10.4% to $1.65, compared to $1.50 per share last year.

Net sales for the fourth quarter was 76.3 million, an increase of 6.4%, from sales of 71.7 million in the fourth quarter last year.

Net income for the fourth quarter was 10.5 million, an increase of 17. 7% over the same period last year.

Earnings per share for the quarter was $0.63, compared to $0.53 for the prior year's quarter.

Our focus on innovation and the introduction of new products, allowed us to continue to perform, even though we had some real challenges due to the increases in cost of goods that have plagued many manufacturers.

While it is difficult to predict increases in the cost of goods and when they will occur, our plan is to continue to manage expenses while we invest in the long-term growth of our brands.

There is absolutely no doubt in my mind, that the major challenge that we have this year is the rising costs that we're seeing in raw materials, and the impact that is having on our gross margin.

Also the increased costs due to the rising cost of fuel, which has impacted the cost of freight and distribution, is also a major concern.

I'd like now to pass over to Mike Irwin, who will review the quarter and the year in greater detail.

Thank you, Garry.

We'll start off with a review of sales and then we'll move on to the rest of the financials.

Total fourth quarter sales were $76.3 million, up 6.4% from Q4 last year, and for the year sales, as we said earlier, 263.2million, up 8.6%.

Lubricant sales, which include WD-40 and 3-IN-ONE, for the fourth quarter, were $50.8 million, up 9.1% from Q4 last year, while lubricant sales for the year were $174.1 million, up 10.2% over last year.

We had strong growth in the U.S., Latin America, Canada, Australia, Germany, Spain, Italy, and the Middle East.

This is the third conservative year of 8% plus growth in lubricant sales.

Hand cleaner sales, which are Lava and Solvol, were $1.9 million in the quarter, down 3.3% from Q4 a year ago.

Fiscal year hand cleaner sales were $6.9 million, up 4% versus last year.

Household products which include the 2000 Flushes, Carpet Fresh, X-14, Spot Shot, and 1001 brands, fourth quarter sales were $23.6 million, up 1.8% compared to the same quarter last year.

And for the year, household products sales were $82.2 million, up 5.5% compared to last year. 1001 contributed $8.9 million in sales during fiscal year 2005, versus $3.1million in the partial year of 2004.

The Company continues to address the challenges and opportunities that exist within the competitive environments of our product categories, through product and promotional innovation.

Overall, our innovations touched almost every one of our brands during fiscal year 2005, and those included under WD-40, the WD-40 No-Mess Pen, and the WD-40 Smart Straw.

Under Carpet Fresh, we introduced new fragrances.

Under the X-14 brand, we introduced the X-14 Oxy Citrus hard surface cleaner.

Under Spot Shot, we introduced the Spot Shot Liquid Trigger cleaner, and the Spot Shot Professional line.

And under Solvol, the Citrus Bar and the Citrus Liquid were introduced.

Under the 1001 brand, we introduced a wood floor cleaner, and under the 3-IN-ONE brand, we continued on the expansion of the 3-IN-ONE Pro line, with new items introduced into various countries.

These product introductions were completed at various times through the year.

As a result, we did not see the full year impact in fiscal year 2005.

This follows a busy innovation schedule from 2004, when we introduced 13 new items.

Moving on to the geography, America's key force sales were $51.3 million dollars, up 11.1% against last year.

The U.S. sales grew by 13%, slightly offset by declines in Latin America and Canada.

For the year, America's sales were $176.1 million, up 6% compared to last year.

U.S. sales were up 5.7%, Latin America sales grew by 11.6%, and Canada sales increased by 5.3%.

Asia-Pacific Q4 sales were $5.9 million, down 18.5%.

Australia achieved strong growth in lubricants, hand cleaners and household products, with overall Q4 sales up by 36.1%.

Asia Q4 sales were down 31.1%, due to slower sales caused by higher prices in market such as China, Taiwan, and Malaysia.

For the year, Asia-Pacific sales were $18.8 million, up 1%,with strong growth in Australia offset by weakness in Asia.

Europe fourth quarter sales were $19.1 million, up 4.6% versus a year ago, and for the year, Europe sales were $68.4 million, up 18.5% compared to the same period last year.

Gross profit was $129.4 million, or 49.2% of sales in fiscal 2005, compared to $125.5 million or 51.8% of sales in the prior fiscal year.

The 2.6 percentage point decrease in gross margin percentage is due to rising cost.

The increase in cost to products sold, negatively affected gross margins in all regions.

The increases were primarily related to the significant rise in costs of components and raw materials, including aerosol cans and petroleum-based ingredients.

We remain concerned about the possibility of continued rise in costs of components, raw materials and finished goods.

To reduce the impact of rising costs, the Company implemented price increases for some products, the majority of which took effect during the third quarter.

The price increase added approximately 0.8% to the FY 05 gross margin percentage.

To put that fiscal 2005 decline in gross margin in perspective, had we been able to maintain 2004 margins, our 2005 gross margin would have been $6.9 million higher, net income would be $4.5 million higher, and earnings per share would have been $0.27 higher.

Selling, general and administrative expenses for fiscal 2005 increased to $63.5 million from $58.3 million for the prior year.

The increase in SG&A is attributable to a number of items, including $800,000 due to exchange rates, $1.9 million in higher freight costs, $2 million in employee-related costs, and $600,000 higher for RD.

As a percent of sales, SG&A increased to 24.1% in fiscal 2005, versus 24% in 2004.

Compliance with Sarbanes-Oxley section 404 is an obligation that we have taken very seriously right from the start.

As we expected, we are in compliance at August 31, 2005.

That outcome reflects the effort of all of our people who see their professional commitment to run the business to the best of their ability, to manage it with effective controls in place, and to report the results as they actually are.

While there are many benefits of this new environment, there are also many costs.

In addition to internal staff time, audit fees are also significant.

Due to higher rates and additional work for Sarb-Ox, Pricewaterhouse Cooper has estimated their total fiscal 2005 audit fees at $976,000.

Audit fees in fiscal 2002, by comparison, were $135,000.

For the next fiscal year, which is the year two of Sarb-Ox for us, Pricewaterhouse Cooper expects that they will continue to raise their hourly rates charged to us, though there is potential that the total hours may decline.

Advertising and sales promotion expenses declined to $17.9 million in 2005, down from $21.5 million for the prior year, and as a percent of sales, decreased to 6.8% in fiscal 2005 from 8.9% last year.

The decrease is mainly due to reduced print and tv advertising in the U.S., partially offset by higher television advertising in Europe.

The Company has been evaluating new marketing strategies through 2005.

For fiscal year 2006, we expect to increase our advertising and promotion investment to support sales growth and recent product introductions.

Operating income for the quarter was $17.3 million, up 12.9% from Q4 last year, and for the year, operating income was $47.4 million, up 4.3% versus last year.

Net interest expense for the quarter was $1.1 million, down $400,000 versus Q4 last year, and full year interest expense was $5.1 million, versus $6.4 million last year.

Both periods reflect the impact of repayment of principal on our debt.

The provision for income taxes was 35.15% for the year, compared to 34% last year.

The increase in tax rate is due to the impact of reduced low income housing credits, growth of worldwide income, and the reduction of extra territorial income, or ETI benefits.

Net income in the quarter was $10.5 million, compared to $8.9 million in the same quarter last year, and diluted earnings per share grew by 18.6% to $0.63 on the quarter.

For the year, net income was $27.8 million, up 8.4%.

In fiscal year 2005, earnings per share grew by 10.4% to $1.65.

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

The for-ex impact on sales was $3.4 million, and on net income, was $400,000.

Diluted shares outstanding have decreased to 16.8 million shares for the year, compared to 17.1 million for the prior year, reflecting the share repurchase program completed in the third and fourth quarters of fiscal 2004.

Regarding the dividend, on October 6, the Board of Directors of the Company declared a regular quarterly dividend of $0.22 per share, payable on October 28, to shareholders of record on October 17.

Based on today's closing price of 27.50, the annualized dividend yield would be 3.2%.

About our balance sheet, at August 31, 2005, cash and cash equivalents were $37.1 million, up from $29.4 million at the beginning of the fiscal year; and significant uses of cash in the prior year included a $10 million principal payment on our debt in Q3, dividend payments totaling 14 million during the year.

And as a reminder, the Company increased its quarter dividend by 10% in March 2005.

Accounts receivable grew due to the high level of sales in the fourth quarter of 2005 versus the prior year.

Inventories rose to $8 million, up from $6.3 million at the beginning of the year, due to inventory in transit, increased costs of inventory, the purchase of certain inventory from suppliers in the fourth quarter, and inventory acquired to support new product introductions and promotions.

Along with other measures, we believe that the quality of business performance can also be illustrated by return on invested capital.

Our calculation for ROIC is as follows: where ROIC equals net operative profit after tax, divided by average total assets, less other cash, minus non interest bearing liabilities.

Accordingly, the FY 05 ROIC for WD-40 Company was 18.4%, up from 17% in 2004.

Our long-term goal is to grow the return on invested capital.

The details for the way we calculate ROIC can be found in the financial tables attached to the press release, as well as posted on our website.

We'll be filing our 10-K tomorrow, and that's the financial update.

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

Thanks, Mike.

I'd like to spend a little time to look at the year ahead.

Here are some fiscal guidance for 2006.

In fiscal year 2006, we expect net sales to grow in a range of 9 to 14% to $288 or $299 million.

In accordance with statement of financial accounting standards, SFAS number 123-R, shared based payment, the Company will begin expensing stock options in the first quarter of fiscal 2006.

Stock options and expense after taxes expected to be in the range of 1 to 1.3 million for 2006, which would reduce the earnings per share by $0.06 to $0.08.

After tax stock option expense in 2005, would have been 1.2 million, $0.06 a share, and 1 million or $0.05 a share in 2004.

We expect net income of between the range of 24.7 and 28 million in 2006, achieving earnings per share of 147 to 264, based on a estimated 17 million shares outstanding.

This includes the $0.06 to $0.08 per share incremental impact of stock option expense.

Our plan is to continue the innovation path we started down several years ago.

And we have a few products in the pipeline that will be coming to the market.

But we do not yet know if we will be ready to launch in 2006.

It's also prudent to continue R&D efforts.

We are increasing our R&D investment this year by $1.5 million to nearly $4 million.

We are also ramping up our investments in marketing for our new products launched in 2005, including the WD-40 Smart Straw, the WD-40 No- Mess Pen, the Spot Shot Trigger, as we continue to gain distribution.

As a percentage of sales, marketing investment in 2006 is planned to be in the range of 7.5 to 9.5% of sales, compared to 6.8 in 2005.

And my good staff around me here have picked me up and I misquoted earlier on.

It would be a misquote that I wish was real.

And I go back to the statement of, we expect net income of 24.7 million to 28 million in 2006, achieving earnings per share of between $1.47 and $1.64, based on an estimated 78 million shares outstanding.

This includes the $0.06 to $0.08 per share incremental impact of stock options expense.

Sorry about that.

Proves I'm human.

Where do we see our sales growth coming from in 2006?

Well, firstly from new products.

This year, we will see the full impact of the innovations we launched last year.

Those are: WD-40 No-Mess Pen, WD-40 Smart Straw, Spot Shot Trigger, Solvol Citrus, the new fragrances in Carpet Fresh, and expanded items in the 3-IN-ONE Pro range.

These products are planned to add in excess of $30 million of new revenues in fiscal 2006, a large portion of which will be incremental sales that do not cannibalize the core business.

Growth will come from geography.

We continue our geographic expansion.

Europe is the biggest area for international growth.

Europe is a large and important part of our business.

Sales in Europe in 2005 were 68.4 million, up an impressive 18% on 2004.

Our European operation has grown from 45.2 million in 2003, to 68.4 million in 2005.

That is a 51.1% growth in two years.

The trend continues.

As an update, we now have fully developed direct sales and marketing operations in the United Kingdom, Germany, France, Spain, Italy, Portugal, Austria, Denmark, Netherlands.

Our distributor business in Europe continues to build distribution in the emerging markets.

In Russia alone this year, we expect to continue the growth of the WD-40 brand, where in 2005, we had in-market sales of over 4 million cans of WD-40, a 33% increase from the prior year.

We expect sales in Russia to reach the 5 million can in-market this year.

Turning to Asia, we have a lot of potential in Asia.

We are turning up the volume in China.

We have strengthened our leadership team in our Kuala Lumpur office, to help us get faster at executing our expansion plans in the Asian region.

We did complete our first consumer attitudes and usage study in China during 2005, and we'll be using that research to help formulate our plans to now start moving into more household usage programs for the WD-40 brand.

As we see our traditional customer base like Wal-Mart, B&Q, Metro, Carrefour, and we believe soon, Home Depot, moving to China, we also see the opportunity to increase the presence of the WD-40 brand to the household consumer.

Even now, if you you were to visit any of the stores currently in China, I think you would be impressed by the distribution we have already gained, and in this important future market of shopping destinations for our Chinese consumers.

We're also looking at growth from new customers.

Our innovations have taken us into more trade channels.

We have already seen the WD-40 No-Mess Pen in the office supply trade channel.

We also see opportunities in hobby supplies, in the premiums market, and in specialty retail.

And this year, we were successful at expanding our household products into the janitorial trade show.

And of course, from current products, we will continue to expand the distribution of our current brand into trade channels where we have business relationships.

Emphasis has been on household products, where in the last year, we took several of our current brands, primarily the household products, to new trade channels, like the hardware home improvement centers.

And what about something about our operations?

As previously discussed, the impact of rising raw materials in energy costs is a major concern.

Why?

The uncertainty of the magnitude and the timing of these costs, are the things that concern us.

We can deal with risk, but uncertainty is troubling.

Our focus needs to be to continue to be faster at innovation, increased quality products, and a lower cost of manufacture.

Our global outsourcing model allows us the flexibility to ensure we are making the right products in the right place at the best value.

We need to pay attention to the global sourcing opportunities, and take full advantage of them where it meets our business needs.

We are also active in our acquisition search, and although we did not make an acquisition in the past fiscal year, we are particularly looking for brands that we can roll up into our operations, to leverage our wide distribution outside the grocery channel.

And finally, an update on the 2000 Flushes class action lawsuit.

On March 25, 2005, the court granted the Company's motion for summary judgment as to both of the San Diego actions, and entered judgment in the Company's favor, dismissing the two lawsuits.

On September 27, 2005, the California Court of Appeal dismissed as untimely an appeal filed by the plaintiffs.

Plaintiffs have not sought review of this dismissal by the California Supreme Court, so the Company's judgment is now final.

With that, we'd be happy to answer any questions.

The first question is from Jeffrey Zekauskas, with JPMorgan Chase.

Hi.

Good afternoon.

Hi, Jeff.

I guess a few questions.

Is the raw material squeeze getting better or worse, in that, though your gross margin was down year-over-year, no, it improved sequentially?

So I was wondering if you could first comment on that.

Okay.

I would be happy to.

Then Mike, you butt in here where you need.

I think we need to divide that into a few areas, Jeff.

Firstly in the case of steel cans, my comment on that would be, it has stabilized.

Now where our concern is, what's next?

In relation to oil and fuel, on the fuel side, we continue to see surcharges hit us for transportation costs, and then unfortunately with Katrina hitting, we had some unexpected costs come our way, particularly in the plastics area.

So your question really, really puts to me what I'm mostly uncertain and concerned about this year, is I'm not sure where we are and where it's going to end up.

We are ruthlessly and rigorously attacking all of our opportunities in the supply chain, to both use whatever leverage we have to be good partners with our suppliers, and at the same time, it's the uncertainty that is not -- is something that is causing us to have, this year, such a wider range in our guidance, as we don't know what's coming next, and then what can we do about passing it on.

Well, maybe what would be helpful is if you could talk about the sort of prices and volumes and currency in the quarter versus last year, so this way, we have a sense of sort of your current pricing power.

Well, I think as Mike mentioned, we had a price increase that was implemented during the third quarter.

The reflection of that was about 0.8% increase in gross margin in the fourth quarter.

The currency impact on the full year, I recall, was about 400,000.

On profit.

On profit, net, so it wasn't material.

So we saw a somewhat of an increase in our gross margin in the fourth quarter due -- which due to pricing inputs, and then price rise that we took.

And we're not -- to be honest, Jeff, we're not that -- our concern right now is with pricing is, is it right to try and execute pricing, when we're not sure what it's going to be in a couple of months.

And the reason we do that, Jeff, is we've always been a Company that does not want to tax our consumer.

Our core -- one of the cores of this business is about expectation performance and extremely good value to the consumer.

We want to bring pricing to the consumer when we can deliver better value.

For example, Smart Straw in WD-40, Pen with WD-40, our Trigger product in Spot Shot.

So we're very aware of that as being one of the cores of our business, is that we want our consumers to see value.

So that I'm not missing a subtlety, if it turns out that you increase your gross margin by 0.8% from price, does that mean your average prices were up a little less than 1%?

No.

With pricing, as we talked about before when we first mentioned the price increases, we had price increases on certain products in certain markets.

So those pricing -- the price increases in certain markets, were in some cases more like 7%, but they weren't 100% of our products across 100% of our markets.

And so I don't think that the conclusion you just reached is a fair one.

As an average price.

So what's the average price?

We don't have an average price.

I'll get back in the queue.

Thanks.

The next question is from Liam Burke, with Ferris, Baker Watts.

Gary and Mike, how are you today?

Okay.

Could you give us a little more color on southeast Asia?

For the quarter it was down, even though for the full year you were about flat.

Was there something that was out of the ordinary?

It was really, as we said in the discussion, Liam, we had to take some price rises into southeast Asia on WD-40 product, and it caused some disruption in distribution at that time.

So, I would -- we would hope that that would settle out now.

But it was really the impact of our Asian distributors getting fairly nervous about having to put pricing into the market, that they weren't, honestly, commonly used to.

So I mean, were you able to push the price increases through or --

Yes.

Okay.

Fine.

Thank you.

Moving on to Frank Magdlen, with the Robins Group.

Good afternoon.

Hi, Frank.

Hi.

I'm going in the same direction of trying to figure out price increases versus maybe volume increases.

Maybe that would be easier for you to give some guidance that way.

Well, if you said look at volume increases, if you look at our sales in the fourth quarter, we had no price increases in the fourth quarter to our customers.

They happened in the third quarter.

Okay.

So what you're seeing is -- and in the third quarter, they were not on all products, not on all regions, not everywhere, so -- and they were up to 7%.

So, without getting into the minutia of the mix of sales, it's hard for us to be able to pull out and answer the question that I guess you're looking for, is what's volume and what's pricing.

What we can tell you, is that our volumes, certainly, if you look at the full year and look across the categories -- and most of the price increases were in WD-40.

They were not in the household products area.

Okay.

And then, just for next year, you said your advertising promotion would be 7.5 to 9.5%, so you are going to go back to a higher number than you did this year?

Yes, it was -- this year I think it finished at about 6.8%, and we gave the range for next year of between 7.5 and 9.5.

The reason behind that is we will be turning up the volume on some of the product that we now have in full distribution, example -- well, not in full distribution yet, but we need to support the launch of Spot Shot Trigger, which is the new Spot Shot product.

We need to support the efforts behind our No-Mess Pen.

So we'll be doing that.

And already you would have, in trade magazines, seen some support behind our Smart Straw product.

Plus, we have increases in other areas of marketing for our other brands, including support to 1001 in the U.K. which we've carried on from this year.

All right.

And two other questions, the tax rate should be about the same?

We haven't guided specifically on the tax rate.

You'll notice that in year-on-year basis, we had some increase in the tax rate.

And that's something of focus in the coming year as well.

Okay.

And then you mentioned, I think, that you took in an inventory some product to be launched?

Yeah.

What's happening, Garry had mentioned before our, kind of our global outsource supply chain.

We really are becoming more global in terms of where we manufacture things.

For instance, the WD-40 No-Mess Pen is made in China and Taiwan right now, and that's something that's new for us.

The outcome of us, as we evolve towards sourcing products in places other than where they are sold, is that there's the possibility of having an impact on inventory, as we saw in the year with our inventory rising.

So yes, if we source things in different places that involve significant transport, there's a chance that we'll end up with higher inventory than we had before.

Okay.

And then is it fair to ask what percent of products are sourced to North America versus elsewhere?

Well, in the case of WD-40, as an example, we try to source that where it makes the most sense.

And we don't have -- I can't give you a hard percentage, but as an example, we source WD-40 in both Asia and the U.S. for Asia, and for Australia, we source it only in Australia.

For Europe, we source WD-40 in the U.K., as well as having the No-Mess Pen, as I mentioned before, that's sourced in China and Taiwan.

In North America and in Latin America, we source primarily in the U.S., but we also have, in some cases, produced in Brazil.

So it's a bit moved around than what it had been historically, where it was primarily made in just a few locations around the world.

All right.

Thank you, gentlemen.

We'll go back to Jeffrey Zekauskas, with JPMorgan Chase.

Hi.

I'll just try my strategy one more time.

How much did volume grow in the quarter?

Can you quantify that, exclusive of acquisitions, if there were any?

Well, there weren't any acquisitions and there was no pricing in the quarter.

So everything is volume.

Well, no, if we talk about year-on-year, we had -- the impact that we had on pricing is that we had a price increase during the third quarter.

Right.

Which would effect year-on-year of Q4 comparison versus the prior year.

So there was some effect, as we mentioned, in price increase during the fourth quarter.

And we mentioned that the full impact was 0.8% on gross margins.

So long story short, we haven't broken out volume.

But the other thing that has affected us year-on-year, and we highlighted it when we talked about 1001, is that I think we had 1001 sales of 8.9 million during this year compared to 3.1million, so --

For the whole year.

For the whole year.

And the reason for that is that we had acquired 1001 in early calendar year 2004, so there was only a partial impact on last year, so there is that year-on-year difference.

For the year, it had no effect on the quarter in terms of comparing it against a period when we didn't own the brand.

You talked about the new products you're introducing.

Yes.

You know, the Trigger and the Pen and the Solvol Citrus.

And you said that it might add 30 million to revenues?

Yes.

So if your revenues are 263 for this year, and we add 30, we get 293?

And that's pretty much right in the middle of your revenue target for next year.

So is the conclusion that we're to draw is that all of the revenue growth next year comes from new products and not from the base business?

Or am I missing a step?

No.

You might have noticed it, but I said a lot of it would be incremental, but not all of it will be incremental.

Okay.

How much will be incremental?

Well, on the case of No-Mess Pen, we would expect that most of that would be incremental.

Certainly, on the case of Smart Straw, for example, it will replace some of the standard WD-40 products, so we will get the incremental difference in the price of a normal can to a standard can.

And in Spot Shot, the Trigger product, there may be some cannibalization of the aerosol.

So we said that of the $30 million, a lot of it would be incremental but not all of it.

And I haven't been specific on exactly how much.

Because to be honest with you, I don't know.

Right.

I do know the indications we have, but I don't know exactly.

So through the first three quarters, excluding the fourth quarter you just reported, your sales to Wal-Mart in gross terms were about flat.

But last year, if I remember correctly, you had a weaker Wal-Mart quarter.

So did your sales to Wal-Mart grow this year or did they not grow?

Or if they grew, by how much?

We don't disclose the --

It will come in the K tomorrow, actually.

You'll see what percentage of our sales is to Wal-Mart.

That will be declared in the K tomorrow.

You know, if you look at it, Jeff, summarizing without asking -- answering a question you haven't answered, what we see now is top line sales growth is something that we've been able to address with innovation.

It took us three years to do it.

But with the innovation across all our brands, we want to increase gross margins by innovation, innovations in all brands, even WD-40, which has been the cornerstone of the business.

Our biggest concern is really being the impact of cost of goods.

And when you look at how many steel cans make up our cost of goods, we make a lot of steel cans.

And that was significant.

We shared last time, that it was about a 22.5% increase in the cost of steel cans.

Now, that may have stabilized a little bit, and hopefully, if you can believe people, it might come down.

But they didn't tell us it was going to be up.

We're sort of hit.

But anyhow, so it's really the gross margin we've got to continue to work on.

And then, if you look internationally, we've really started to deliver on our promise many years ago of how the, particularly Europe, and now we'll be changing in Asia, how we're growing significantly off a bigger base.

And that business in Europe continues to ratchet on.

It's up 51.1% in two years.

And that's our traditional WD-40 business basically, with some 1001, but we're breaking into new and emerging markets and doing what we know very well.

So that's kind of where we see it.

So if the conclusion I should draw is that, all things being equal, you're relatively satisfied with your volume growth, but what's happening is that your profit growth is being limited by the raw material cost inflation, and it's difficult to know whether it will abate or whether it won't abate, and that's what's making fiscal '06 look, at this time, like a good year but not a great year.

Is that --

Let me just say, the back end of that, you're exactly right.

I am never happy with our sales growth.

If I was to say I was happy with our sales growth, there would be a lot of our sales and marketing people out there would be very disappointed.

But what I am happy with, is that the innovation program has now started to give us real incremental growth across all our brands.

And that's -- we are going to invest $4 million in R&D next year.

It was 2.5 million the year before.

Three years ago, Jeff, we did not invest a penny in our R&D.

And I'm happy to say that innovation is now starting to play in across our brands, which is taking the pressure off us as far as sales growth is concerned.

And we're looking in this year for another year of actually increasing the sales of WD-40 in the U.S. again, particularly with Pen.

Okay.

Thank you very much.

Thanks for your patience.

We have a question from Frank Magdlen, with Robins Group.

Yes, gentlemen.

With the new product introductions, is there going to be any change in the seasonality of your business?

The only change that may happen would be when we actually introduce them.

Right.

So we're still looking at a primarily back-ended loaded year for '06?

I don't know.

We don't guide by quarters.

Historically, we've had a Q4 that's been higher than the other quarters in terms of sales.

I would hope that the No-Mess Pen may give us a little extra around the different times of the year when maybe WD-40 wasn't as popular.

It may be a gift item, or so.

I don't know yet, though.

It's too early with it.

The No-Mess Pen is really only in distribution right now in Home Depot, Wal-Mart, Lowe's, and Office Depot.

So we've got a lot to do there yet.

All right.

And then are you willing to share any market share data, or are you still -- like Spot Shot is still the number one in its category?

I don't have the latest information since we last talked.

So whatever we said last time is the best information I have.

All right.

Thank you.

You're welcome.

The next question is from Justin Maurer, with Lord Abbett.

Good afternoon, guys.

Hi.

Just a follow up on the Wal-Mart question a bit, Garry.

I know just looking at the IRI data, it seems like, and this is in the non WD-40 categories, household products and whatnot, that there has been -- just trying to understand to what extent there has been a fairly dramatic shift in your business away from the traditional IRI channels, towards the Wal-Marts of the world that don't report into it.

Because the numbers haven't necessarily looked all that appealing, but obviously you guys are picking it up somewhere else.

Well, yeah.

I think it's, if you look at any brand, it's the same.

If you go into a Wal-Mart now, you'll see that we have a number of sku's in their household products area.

And certainly if you go into home centers, you'll see that you can find 2000 Flushes and Carpet Fresh and Spot Shot and those sort of products in Depot and Lowe's.

So the IRI data from the grocery trade channels is really now just a small snapshot of the total market, and as you are rightly referring to.

And we have always had, and will continue to have the goal of increasing distribution in trade channels where our consumers shop, and that's really what we're doing.

Okay.

And then just on the advertising promotion expense, I mean, I know you guys were looking at that last year, trying to take a pause and figure out where it would make sense to apply those dollars.

Any sense yet, TV versus print versus other media?

One of the things we learned last year was that we may be better to focus more of the media in a concentrated way against innovation and support of new products.

So, we think that that is a good strategy.

Instead of having minimal TV or any media spread across the year, is really bulk it up at the launch of innovation, and then you'll get the halo effect across the total brand.

So that's what we're looking at.

And we've also got two or three -- well, two that I'm really aware of, new initiatives that we're looking at, in more of the tipping point area of spreading the word of products than the mainstream media.

The noise in mainstream media channels now is immense.

And it's not that we're alone on this.

Everybody's in there.

So we've got to get smarter, and certainly make sure that we're in categories, too, that we can make enough noise.

And we think that we are in those.

So we'll continue to work on looking for more effective ways of making the end user aware of our product, whether it be dropping it from helicopters or putting it on a main screen.

We need to look at all of those.

It's really about learn, measure, or sorry -- measure, learn, react.

Measure, learn, react.

And that's the way our marketing departments think.

Yeah.

Okay.

And then just lastly on the R&D expense, what did that run '05 versus '04?

I know it was incremental, as you guys were pumping up a new product.

What's the thought for '06 then?

I think I said in the thing, it's about -- we look at R&D in this '06 at about $4 million.

It was around $2.5 million in '05, and it was less than that in '04, about 2 million.

And in '02, it was about nothing.

Okay.

Thank you, sir.

Thank you.

At this time there are no further questions.

I'll turn the conference back over to you.

Well, thank you very much.

And thanks for the questions.

We appreciate your support, and we'll be back talking to you again at our annual shareholder meeting, and then of course in January.

All the best and have a great day.

Thank you.

That does conclude today's conference call.

Thank you for your participation.