WD-40 Co (WDFC) 2006 Q3 法說會逐字稿

Good day and welcome to this WD-40 Company third quarter 2006 earnings release conference call.

Today's conference is being recorded.

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

Please go ahead.

Good afternoon and thank you for joining us for our third quarter earning's call for fiscal 2006.

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 global sales trends, impact of new product innovations, impact of costs of goods, the timing of advertising and sales promotions activities, and the uncertainty of marketing conditions both in the U.S. 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 section of our website at WD40.com.

Our fourth quarter fiscal 2006 earnings conference call is scheduled to take place on October 18, 2006, at 2:00 p.m.

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

Good day and thanks for joining us for today's conference call.

Today we reported net sales for the third quarter ended May 31, 2006 of 73.1, million an increase of 12.1% over the third quarter last year.

Year-to-date net sales were 211.7 million, up 13.3% over the same period last year.

Net income for the third quarter was 7 million, up 10.8% compared to the prior year's quarter.

Earnings per share for the third quarter grew to $0.42 compared to $0.38 during the same period last year.

Year to date net income was 21.8 million, an increase of 26.1% from last year and through nine months earnings per share were $1.29, compared with $1.03 for the same period last year, an increase of 25.8%.

Looking at sales via product segments, in Q3 our lubricant sales were 48.8 million, up 13%, and for the full year there are 140.3 million up 14%.

Our hand cleaner sales were 1.5 million, or down 16% and through the year they are 4.7 million, down 6%.

Our household products in Q3 were 22.8 million a 12% increase and through the year are running at 66.7 million, a 14% increase.

Lubricant sales were affected by the edition of the WD-40 Smart Straw No-Mess Pen which were introduced in the third and fourth fiscal quarters of last year.

Household products sales growth also reflects the impact of innovation such as our Smart Shot Liquid in a spray bottle which we call Trigger.

Spot Shot Professional line, 2000 Flushes Clip On, our exporting Orange Aerosol, and Oxy Citrus products.

We are pleased to see sales growth across most of our brands as well as across our geographic regions.

We are seeing the sales impact from our innovation program as we move into increasing distribution and building consumer product demand for these new products and packaging innovations.

Looking at our regions in a little more depth, the Americas, which is our largest sales region, which covers the U.S., Canada, and Latin America, sales for the quarter were 47.2 million, an 8% increase and year to date are138.9 million, an 11% increase.

In the U.S. sales grew 4% in the quarter and are 10% up for the year.

The U.S. sales growth in Q3 was driven by the U.S. household product sales which were up by 14% in the quarter due to higher promotional activity, increased distribution, and the addition of new products such as Spot Shot and Spot Shot sales in the U.S. were up 21% in the quarter compared with the same period last year.

And through nine months the growth in the U.S. is the result of the impact of Smart Straw and Pen, and WD-40 sales were up 5% in the first nine months.

Household product sales were up 18% in the U.S. through nine months due to the promotional activity, the impact of new product,, and Spot Shot sales are up 20% in the U.S. for the first nine months of the year.

Of course we continue to face stiff competition in our household product segments and from related categories in the battle for self space.

In Latin America in the quarter sales were up 37% and are up 28% for the year.

Our Latin American business is primarily based on lubricants, WD-40 and 3-IN-ONE.

WD-40 sales were up 41% in the quarter and 29% year to date as a result of increased promotional activity and growth in distribution.

In Canada, Q3 our sales were up 34% and are up 12% for the year.

We sell lubricants, hand cleaners, and household products in Canada.

Canada sales growth was driven by the impact of WD-40 Smart Straw No-Mess Pen and also Spot Shot which grew 32% in the quarter in Canada.

Crossing the pond to Europe, sales in Q3 were in U.S. dollars 20.6 million, a 23% increase and year to date a 58 million, or 18% increase.

Our European business includes lubricants and household products.

We sell into Europe through a combination of direct operations in certain countries as well as through distributors into other countries.

Changes in foreign currency exchange rates compared to the same prior fiscal year period partially offset the growth of sales in Q3 by approximately 1.6 million. 4-X impact through nine months reduced sales by 3.7 million.

When we look at our European direct markets we have direct sales forces in the UK, Spain, Italy, France, Germany, Portugal, Austria, Denmark, and the Netherlands.

Sales in U.S. dollars grew in the quarter compared to the same period last year in these areas as follows--the UK up 2%;

France up 32%;

Germany, Switzerland, Austria, Denmark, and Netherlands were up 70% in the quarter;

Spain, and Portugal was up 2%; and Italy was up 26%.

No doubt there will be some celebrations in Italy today after their winning the World Cup.

For nine months the UK market benefited from sales both of WD-40 3-IN-ONE and 1001 Carpet Fresh No Vac which reflects innovation on those brands.

The sales growth in the Germanics markets which include Germany, the Netherlands, Denmark, Austria, and Switzerland was the result of increased awareness and distribution of the WD-40 brand and the introduction of WD-40 Smart Straw and further development of direct sales into the Netherlands.

Sales in Spain were obviously the result of the launch of WD-40 No-Mess Pen which was launched under the 3-IN-ONE brand.

In our European distributor markets business in Spain in Q3 sales were up 25% and up 20% year to date.

We sell through independent local distributors in eastern and northern Europe, the Middle East, and Africa.

Sales growth in distributor markets were the result of the continued growth in eastern Europe.

These markets continue to experience growth in distribution and usage resulting from increased market penetration and brand awareness.

And flipping over to Asia Pacific.

Sales in Asia Pacific were 5.3 million in Q3, a 13% increase and year to date of 14.9 million a 15% increase.

In Australia sales were up 10% for the quarter and up 5% for the year.

Sales in Australia are up 10% in the current fiscal quarter due to the growth of WD-40 as a result of promotional activities and the launch of the WD-40 No-Mess Pen, 3-IN-ONE and No-Vac contributed growth. 3-IN-ONE growth was due to the launch of new products and No-Vac sales increased as it continues to gain market share in Australia.

In Asia, sales in Asia were up 15% for the quarter, and up 22% for the year, and that's primarily due to the increases of sales of WD-40 to customers across the Asian region including China, Taiwan, the Phillipines, India, Singapore, and Japan as the Company continues to expand into this region.

That's it for me for now for the sales update now I would like to pass it to Mike Irwin who will continue the review of the financials.

Thank you, Garry.

In addition to the information presented on this call we suggest that you review our 10-Q that was filed this afternoon.

As Garry's already covered the sales results I'll move on to the rest of the financials and we'll start with the discussion of Q3 results and then move into the year to date numbers.

Gross profit was 48.5% of sales in the third quarter compared to 48% of sales in Q3 last year.

The 0.5% lift in gross margin percentage was mainly due to the recent price increases implemented to offset increased cost of goods and a favorable product mix in sales.

Selling, general, and administrative expenses for the third quarter increased by 19% to $18.4 million.

The increase in SG&A stems in part from stock options expense of 0.4 million as the Company began to expense options this fiscal year.

A higher R&D investment of 0.4 million reflecting the Company's commitment to innovation, higher employee-related expenses of 0.8 million for salary increases, benefits, and additional staffing, and a bonus accrual of $1.2 million versus Q3 last year as many regions did not achieve profit and other performance expectations in the prior fiscal year period which resulted in a lower bonus accrual in the prior fiscal year.

Also higher freight expense of 0.4 million due to sales growth and increased fuel surcharges.

For the third quarter SG&A increased to 25.1% of sales compared to 23.7% in the same period last year.

Advertising and sales promotion expenses were $5.9 million in the quarter versus 4.7 million in Q3 last year, and as a percent of sales increased to 8.1% from 7.1% in the third quarter last year.

The increase is mainly related to investments in television print media in the U.S. versus the prior fiscal year third quarter.

The Company expects to continue to increase its investment in advertising and promotional expenses during the fourth quarter of this fiscal year.

Operating income for the quarter was $11 million, flat compared to Q3 last year.

Amortization expense in the quarter is as a result of the 1001 acquisition, a portion of the purchase price has been allocated to customer base acquired which is being amortized over the expected life of the customer relationships.

Net interest expense for the quarter was $1 million, down 0.4 million versus Q3 last year reflecting the continued reduction in debt which we have reduced by 10.7 million since Q3 last year.

And by 20 million in the last 12 months.

The provision for income taxes was 31.2% for the current year quarter, down from 35.2% in Q3 last year.

The decrease in tax rate is due to a determination that previously non-deductible stock options expense related to certain non-U.S. tax payers is now a deductible expense and is a year to date benefit of the IRC 199 related to qualified production activities provided by the American Jobs Creation Act of 2004.

Net income in the quarter was $7 million, up 11% from Q3 last year.

And on a diluted per share basis earnings were $0.42 compared to $0.38 in Q3 last year.

Diluted shares outstanding have increased to 17 million shares compared to 16.9 million for the prior year quarter.

Now for our year to date financial information.

Gross profit through nine months was 48.2% of sales compared to 48.9% of sales in the same period last year.

The 0.7% decrease in gross margin percentage was mainly due to increased cost of goods, partially offset by recent price increases on some products to our customers.

This increase in cost of goods was primarily due to the significant rise in cost for components and raw materials including aerosol cans and petroleum based products.

As a result of the general upward trend of costs in the market we remain concerned about the possibility of continued rising costs for components, raw materials, and finished goods.

Gross margin percentage was also negatively impacted during the year as the Company incurred costs associated with slow moving, reworked, and impaired inventory.

These additional costs are partially offset by a decrease in certain traditional advertising and promotional activities that have experienced declines in consumer response.

Advertising and promotional activities that are recorded as a reduction to sales include coupon redemptions, consideration allowances given to retailers for space or for favorable display positions in their stores, and/or cooperative advertising and promotional activity.

The reductions in advertising and promotional discounts positively impacted gross margin percentage by 0.6%.

Selling, general, and administrative expense for the first nine months increased by 9.3% to $52 million.

This increase in SG&A stems in part from stock options expense of 1.4 million as the Company began to expense options this fiscal year, higher R&D investment of 0.6 million due to the increase in new product development activity, higher employee-related expenses of $1.5 million for salary increases benefits and additional staffing, and a bonus accrual increase of $1.3 million versus the first nine months of last year, again as many regions did not achieve profit and other performance expectations in the prior fiscal year period which resulted in a lower bonus accrual last year.

Also higher freight expense of 0.9 million due to sales growth and increased fuel surcharges and higher expense in professional services related information technology marketed in legal and tax related activity.

These increases were partially offset by $1.1 million of decreased bad debt expense related to recoveries of bad debt including preference claim.

Despite the higher costs we did gain operating leverage on a year to date basis as SG&A decreased to 24.5% of sales in the first nine months.

Compared to 25.4% in the same period last year.

The combination of stock options expense and increased investment in R&D has lifted our SG&A percent of sales by 1 full percentage point in Q3 and year to date fiscal '06.

Advertising and promotion expenses were $14.1 million in the first nine months versus 13.4 million in the same period last year and as a percent of sales decreased to 6.7% from 7.1% in the first nine months last year.

The increase in dollars is related to the timing investments and advertising activities compared to the prior year and in the current fiscal year increased investment began in the second quarter, continued into the third quarter and is expected to continue in the fourth quarter as the Company aligns its advertising and sales promotion activities with the distribution of it's current new products.

Investment in global A&P costs for fiscal 2006 is expected to be in the range of 7% to 8% of net sales.

Operating income for the first nine months of $35.5 million compared to 30.2 million in the same period last year.

Amortization expense is a result of the 1001 acquisition.

Net interest expense for the year to date period was $2.8 million, down 1.2 million versus the same period last year reflecting the continued reduction in debt again which we have reduced by $20.7 million in the past 12 months.

The provision for income taxes was 34.2% for the current year, down from 35% in the last fiscal year period.

The decrease in rate is due to the determination of previously non-deductible stock options expense related to certain non-U.S. taxpayers are now deductible and again benefits related to production activities provided by the American Jobs Creation Act of 2004.

We expect that full year tax rate to be in the range of 34 to 35%.

Net income in the quarter was up -- was 21.8 million, up 26% and on a diluted per share basis year to date earnings per share were $1.29 compared to $1.03 in the first nine months last year.

Diluted shares outstanding have increased to 16.9 million shares up from 16.8 million last year and on the dividend on June 27, the Board of Directors declared a regular quarterly dividend of $0.22 per share payable on July 31, 2006 to shareholders of record on July 17, 2006.

Based on today's closing price of $33.88 the annualized dividend yield would be 2.6%.

About our balance sheet of May 31, cash and equivalents along with short-term investments were $44.7 million up from 37.1 million at the end of the fiscal year.

Inventories rose to $15.4 million.

The increase reflects inventory acquired to support new product introductions and promotions.

Recent product introductions have required the Company to acquire products outside of its historical contract packager model which has resulted in the need for the Company to carry higher levels of inventory.

Long-term debt declined to $53.6 million starting at $10.7 million principal payment we made in Q1.

The next principal payment is due in October of this year and that's it for the financial update.

More information again is available on the 10Q that we filed today.

Thanks very much and back to Garry Ridge.

Thank you, Mike.

As a result of the year to date performance as well as the things we see up ahead, we are updating our guidance on net income.

Our initial guidance was we expected net income to range between 24.7 and 28 million generating earnings per share between 1.45 and 1.65 based upon 17 million shares outstanding.

We now expect the range to be between 26.4 and 28 million, which would reduce earnings per share of $1.55 to $1.65 based on 17 million shares outstanding.

Looking ahead towards our final quarter we expect to continue to ramp-up our marketing investment in the fourth quarter.

We certainly do still remain concerned about higher cost of manufacturers as our recent experience indicates that trailing cost of goods is still going up and we continue to look for the right acquisitions that meet our guidelines.

We'd be happy and pleased to answer any of your questions.

[OPERATOR INSTRUCTIONS] Our first question will come from Liam Burke with Ferris, Baker & Watts.

Mike, real quick on the SG&A expense you ticked off a bunch of changes year-over-year, all of them I can assume will be continuing except it seems the bonus accrual was only in the third quarter.

Is that something that -- I mean, can we look at 1.3 million as the annual delta for fiscal 2006?

I think-- there's a few things that are ongoing and Liam just to recap again, stock options expense, we weren't expensing last year so that will be an ongoing thing.

The higher R&D investment is something that we committed to upfront in the year.

With respect to the bonus accrual there's a couple of things going on.

One of them is, is that we're comparing against a year last year where many of our regions didn't reach our targets and so we didn't have the level of bonus accrual to this point last year that we have this year as our year is turning out better this year.

And the impact on the quarter is on a year to date catch-up basis as opposed to something that's truly reflective of just the quarter expense.

Okay.

Well, I guess let me ask it a different way.

If I'm looking at your current SG&A -- the G&A for the quarter would that be a normal run rate or would I step it down based on some adjustment to the bonus accrual?

We don't -- you may remember, Liam, that we don't guide specifically by line item.

Right.

All we can say is kind of what has happened in the past.

Fair enough.

Garry, on household it looks like Spot Shot had a good year and it looks like product development is helping you put more household items into the nontraditional grocery shore.

Aside from Spot Shot do any of the others show particular strength?

During the year we -- Spot Shot certainly has.

Spot Shot Professional certainly has.

Our 2001 -- sorry, 2000 Flushes clip-on and our No-Vac product have all been performing well during the year and benefiting from innovation.

No-Vac in it's form in the UK is now in full distribution.

So that continues to grow, and as -- and X-14 is also doing well.

So overall as we continue to revamp the products and bring in new innovation, we're particularly pleased that we're able to see a 20% growth in Spot Shot with our trigger which is something we've been working on.

So so so far so good.

Great.

Thank you.

You're welcome.

Net we'll hear from Jeff Zekauskas with J.P. Morgan.

Good afternoon.

This is Silka Coop for Jeff, how are you?

Hi.

Can you talk about your business with Wal-Mart, and that is, I think last quarter Wal-Mart and the U.S. represented 8% of total sales and I think Wal-Mart globally was 12%, and now that seems to have grown to -- Wal-Mart U.S. is now 9% of sales and 14% globally.

And how did you expand -- how did you expand your business with this retailer?

That sales concentration at the moment, as you said Wal-Mart stores account for 9% and 8% of the Company's consolidated net sales during the three months.

I'm not sure that that was much of a shift from where we were last quarter, but as Wal-Mart expands we expand with them.

They are both geographical expansion and then also Wal-Mart stocking more and selling more of our product.

Is that something that's true for WD-40 only?

Or are you beginning to see that -- because there used to be some fear that Wal-Mart was over reducing inventories, and do you think they're now beginning to see a pick up and a restocking of inventory at Wal-Mart?

I don't think that affected us.

I think if we were in Cincinnati it might have affected us, but I don't think we saw that.

We have -- the product that we have in Wal-Mart is fast-moving inventory in most cases and we have got a very good supplier rate with Wal-Mart, and we hit their supply on time and in full target, so I don't think there was a lot of excess inventory their in the Wal-Mart system.

Yes.

Okay.

In terms of pricing I think in your 10-Q it says that the price at 1.7% of the gross margin, which means it probably contributed maybe like 2% to your sales growth.

Can you also talk about what the impact of new product introduction was on your sales growth since those carry a higher price point?

And that is there's no WD-40 Smart Straw and No-Mess Pen and there are two additions to Spot Shot and there's the X-14 Orange Aerosol and the X-14 Oxy Citrus what is the impact of these product line extensions to your sales growth?

Well, actually, those are all detailed pretty well in the Q. I think we talk about the increases on sales of each one of those brands.

I think we haven't broken out -- I appreciate your question, we haven't broken out the sales impact of new items because there's a couple things that happen with new items.

One of them is we hope that we can grow our overall sales, but to some extent particularly with household products innovation is required to stay in the game and it's not all an incremental impact.

As we've said, our goal with new product introductions is twofold.

To grow our sales, but also to grow our profit by having things that come forth at higher pricing, and that's largely true for something like the WD-40 No-Mess Pen, the WD-40 Smart Straw.

But nonetheless there's a portion of our new product impact that's simply helping us stay in the game.

I guess I have two more questions.

So sales in Europe through the direct sales force is roughly 70% of regional sales, and how should that look two years from now?

Should that be -- should that go down to a number like 50% as you are trying to increase sales through local distributors.

Well, no.

In fact it has been increasing because our trend has been to establish more direct operations, just in the last year or so we have opened direct operations in Denmark and the Netherlands.

The year before we expanded into Italy.

The trend is that as we develop the markets and we identify the potential, that our direct operations would become a larger part of our business than a smaller part of our business.

Okay.

So the goal is actually to increase the direct sales force?

Over time that's been our trend for many years is that as we've gained market share and been able to put in the infrastructure, we have then -- expanded that -- those resources into neighboring and relevant counties.

And Silka, that's not specifically our intent to grow the direct sales operation.

Our intent is to grow our sales.

What we find is that at some point in the development of our business in a particular country, we reach a point where our best way to take it the next steps is to have control over the full business rather than go through an exclusive distributor.

But it's -- and that's just been what has happened, but it's not our specific intention just to convert everything to a direct sales because we automatically think that's better.

It all has to do with stage development and market and the other things that play in each particular country.

We have some distributors, an example would be in Korea and Hong Kong that have been with us for 30, 35 years and continue to grow our businesses.

And then maybe like a last question and I'll go back into queue.

So for nine months you already have recorded earnings of $1.29 or $1.30 and I know you increased the lower end of your guidance, but that still wouldn't apply a range of like $0.25 or $0.35 for the fourth quarter.

Why is that number so low given your recent trend?

Well, I mean as we have talked about here today and even before, we continue to invest in marketing and brand support, and as we have said through the years some of the year on year comparisons for our A&P expense and our investments that we make there we really had to deal with timing and the phasing of those investments based upon when our products were distributes.

So we see the fourth quarter as Garry mentioned as a quarter in which we'll continue to ramp-up that marketing investment in the business, and the result will be what the result is.

What we're also seeing, though, is that if we look back years, we used to have a fairly predictable pattern of having the second and fourth quarters being the biggest quarters for the fiscal years.

What I think we're seeing this year and even if reflecting back to last year is a bit of a change where that predictable pattern of second and fourth may not be true.

And so it's -- we could be in the midst of a shift in phasing, quarterly phasing of our business.

That number still seems low given that you all could have cut the number -- or the annual number for promotional expense from 7 to 9% to 7 to 8%, it just seems like a low number.

Well, it's the number that we have had all year.

We have not changed it.

And as we've said we don't run our business on a quarter to quarter basis.

We have continued to have more confidence in the higher end of that number as we have narrowed the gap over time, but we had that number there and it's been the number that we put out four months ago, so.

Thanks very much.

I'll jump back into queue.

And Frank Magdlen with The Robins Group has our next question.

Good afternoon and congratulations on a nice quarter.

Thank you, Frank.

Do you have any specifics as to new product introductions, line introductions for the fourth quarter that you may not have talked about that you are ready to talk about?

No, not at this time, Frank.

We're really in the process of continuing to build the distribution and demand of the product that we already launched earlier, so we don't have any surprise new introductions in the fourth quarter.

Okay.

And secondly, Mike, the build-up in inventory is that primarily product sourced from Asia.

Yes, what is going on Frank is that our historical model, or historical packager model called for us to source things from packagers who also manufactured them.

And then from those packagers that would make the WD-40 for instance, they would also ship directly to customers.

So our ownership of inventory was very limited, it was almost a flash point between as it crosses the dock into the truck to be shipped to customers.

So it was very short-term.

What we have done now is we have opportunistically looked at -- well, we have opportunistically taken advantage of the fact that we can source things in multiple places across the world, and we do so depending upon whichever area of sourcing makes the most sense.

So we are sourcing things like the WD-40 No-Mess Pen in Asia, and as a result it takes time to ship those things and those -- the packager that makes WD-40 No-Mess Pen is not one who ships directly to customers and so we do own that inventory.

So your question is right, but I did want to kind of give background into the evolution of our supply chain.

And just to add one more thing to that too.

We are also as part of our process even with Smart Straw, the Smart Straw that's currently being sold in Europe is actually being made in the U.S.

So we have that in our inventory a little longer because we are controlling the production of the tooling and whatever and so we've got a little more WD-40 Smart Straw inventory in our system than we would normally have if we had made it in Europe.

Okay.

Could you expand a little bit more on the seasonality of your business a little bit?

We just talked about that.

But it's changing a bit.

And maybe what are the drivers for that?

I think, there's a couple of obvious ones.

We have more different products.

We have business outside of the U.S. now that is bigger.

Like Europe is a third the size -- is a third of our business now, and it has different drivers so where -- the seasonality was probably driven by the historical point that we were a single product company with primarily all of our business in the U.S. we are now a multi-faceted product company that has an ever increasing amount of its business outside of the U.S.

So the big animal that was causing it to happen hasn't -- the impact that it used to have before because it's a smaller part of the bigger organization.

All right.

And just to refresh my memory, on the professional product side how big -- or what can that be, or what percent of that revenue do you expect that to be?

We haven't really discussed what percentages will be.

I don't know how big it will be.

We're currently working on that in a few trade channels, to really identify what the long term is, but it's really taking products that we have now and packaging them in a way that makes it easy for the professional janitorial type area of -- to consume and use them.

And so how many quarters have you been delving and trying to pull it through that channel?

Well, we have been in the professional side for probably most of this year.

All right.

Okay.

Well, thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] And we'll have a follow-up from J.P. Morgan.

Yes, good afternoon.

The tax rate was low this quarter at 31% or 31.2%, is that what we should see in the fourth quarter?

Was that like a one-time unusual event?

Well, we don't give quarter to quarter guidance, but what we did say about the tax rate is that we expect the tax rate for the full fiscal year 2006 to be in the range of 34 to 35%.

So to answer the question about, the third quarter was unusual in terms of the tax rate itself.

If you would have had a 35% rate as you usually have, that would act like -- probably taken out maybe like $0.03 out of your earnings.

Can you just like talk about what the items were that caused the low tax rate?

In the quarter, it was a catch-up adjustment related to the fact that we have employees in the UK, for instance, who receive stock options.

We have just come to the determination that those stock options are deductible for tax purposes, whereas before we believed that they weren't.

So as a result this quarter, we had a catch up in the tax related to that determination.

We also had the year to date benefit of the -- of qualified production activities related to the American Jobs Creation Act.

So that's why this particular quarter was below where we had been on the tax rate through the first half of the year, and it's below where we expect the full year to be.

Which again with the full year tax rate we expect to be somewhere between 34 and 35%.

Okay.

And then maybe like a last question.

What happened to like the hand cleaning business during the quarter?

In that I think it was like down 15% and maybe it was like down 3% in the second quarter.

Is that something more structural or is it just the comparisons are tough?

Can you just explain?

Well, the Solvol business -- our total hand cleaning business is really a harvest business for us and there's promotional activities that flow in and out from time to time.

We -- our plan on one page we said the business would probably be flat for the year, and that's probably the way it's somewhat heading.

There's nothing to report that is unusual.

It's just that it's a small part of our business, and we didn't expect it to be doing too much because we're not investing in it this year for the full year's activity.

Just to put that in perspective, we did say it's down 6% on a year to date basis.

That works out to be about $300,000 in sales and so as Garry mentioned it's a harvest business for us.

Given it's size it's one that just doesn't have as much of an impact as the other brands do.

In the toilet bowl cleaning business what were the items there that caused the decrease in the quarter?

I think the business was down for everybody this quarter just based on -- at least in the U.S. base in like Neilsen data.

Let me check the notes on that one.

You are referring to the 2000 Flushes X-14 automatic toilet bowl cleaners in the U.S.?

Yes.

Really has to do with -- as we said in the Q it has to do with competitive activity as well as reduced distribution within AP customer.

At the same time as we said also that although we had a decline in the U.S. we had an increase in sales of toilet bowl cleaning products in Canada.

So there's like a reduction in business as one customer or you lost a customer?

Well, I mean, with -- throughout our business we have ebbs and flows of distribution, where we would lose distribution with a customer.

We would have reduced distribution with a customer.

We would have increased distribution with a customer.

We would just pick up new distribution with a customer.

And there's a whole range of things that happen quarter to quarter, year to year, and this is one of those -- one of those kind of ebbs and flow sort of things.

At the same time the sales in the automatic toilet bowl cleaning category, as we said in the Q are under pressure from other products in the manual bowl cleaning product.

Again, just to clarify what that is.

Automatic toilet bowl cleaners are the things that are dropped in the tank or hang over the rim of the bowl and cleanse the bowl as the toilets flushed.

The manual clean category is made up of liquids that are squirted inside the bowl and then rubbed off with a brush as well as other ones that are attachments to brushes that other companies have come out with.

Yes.

Do you expect this business then to like rebound similar to what happened to like Spot Shot?

Well, it hasn't got the same level of innovation in it at this time.

Spot Shot is rebounding for a couple of reasons.

Mainly because of the increased support and the new product lines that we've put -- that we've -- we have in there with the Trigger product.

But the 2000 Flushes business or the automatic toilet bowl business is still a healthy business for us and year-over-year has been showing growth, so.

Yes, and as we said in the quarter again, you asked on a year to date basis is up 8% for the first nine months?

Yes.

You are down on the quarter, up on a year to date basis.

Thanks very much.

Okay.

We'll move on to Robert Felife with Gabelli and Company.

Hi, gentlemen, congrats on a nice quarter.

Given your current year to date earnings and your earnings guidance it would appear that you would need a dramatic pick up in marketing expense in Q4 to knock your earnings or future earnings guidance.

So couple of questions for you around that.

First, why is the expense back-end loaded?

And then specifically, which products will the additional money be spent on in terms of marketing?

Okay.

It's not back-end loaded.

It's distribution loaded.

The thing that you don't want to do is advertise to empty shelves, and particularly given that we had quite a focus this year on Spot Shot, there are levels of what is called ACV which is all commodities volume that we want to get to which is a reflection of how much inventory is available to the consumer before we turn on any of the TV or media activity.

So the offset of that is you don't to out and -- it's not good business to turn on that type of activity if you've got a low ACV.

We monitor this during the year and that's why it can shift from quarter to quarter or sometimes year to year.

We didn't say we were going to do it in a certain month.

We said we were going to do it when we saw a certain level.

We started to see that in the last quarter, when we started to turn up the volume in regional areas around the U.S.

We have been heavied up with Spot Shot TV in the northeastern part.

About 10 major markets.

That will be increasing a little more in the next quarter.

The other thing that we have started is the program behind our No-Mess Pen.

We have been working on getting that into distribution, and we have -- you may have read in the press just recently about a program call Tremor that we were mentioned in.

It's an affinity marketing plan where through opinion leaders, particularly females we're participating in that program.

We are sending -- through that program stating some information on the Pen on usage and that will also start to flip into the fourth quarter.

So that's two significant events that--

Okay.

Thank you very much.

That's helpful.

Thank you.

Moving on to Howard Choe with Standard & Poor's.

Yes, good afternoon.

I was wondering if you had seen any slowdown from the price increases that you've put through?

Slow down in what?

Pen volume.

Nothing that we can comment on that is materially measurable.

Okay.

And also I was wondering if -- you mentioned a target for A&P as a percentage of sales for the year.

Have you mentioned what it is for SG&A?

No.

No.

No, and just to put that in perspective, Howard, I mean typically we have given fiscal year goals on sales, on net income, on earnings per share, and the reason why we have also given kind of targets on the advertising and promotion investment is that's something that -- that has flexed from time to time, and we see that as one that provides more insight, but we don't get into any more details on the income statement than that.

Okay.

Thank you very much.

[OPERATOR INSTRUCTIONS] Seems there are no further questions at this time.

Mr. Ridge, I would like to turn the conference back over to you for any closing remarks, sir.

Thank you.

Thank you to all of the participants today and we'll see you at the end of the year when we'll see how the game plays out.

Thanks and have a great afternoon.

That does conclude today's conference.

Thank you so much for your participation.