WD-40 Co (WDFC) 2006 Q4 法說會逐字稿

Thank you for standing by, everyone, and welcome to this WD-40 Company fourth quarter 2006 earnings release conference call.

Just a quick reminder today's call is being recorded.

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

Please go ahead, ma'am.

Good afternoon and thank you for joining us for our fourth quarter earnings call for fiscal 2006.

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 may cause actual results to differ materially from forward-looking statements, including global sales trends, impact of new product innovations, impact of cost of goods, the fluctuation of advertising and promotion expenditures 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 8K, 10Q, 10K, 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 web site at WD40.com.

Our first quarter fiscal 2007 earnings conference call is scheduled to take place on January 9, 2007 at 2:00 p.m.

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

Thanks, Maria, good day, and thanks for joining us for today's conference call.

Today, we reported record net sales for fiscal year ended August 31, 2006, of $286.9 million, an increase of 9% over last year.

Fourth quarter net sales was $75.2 million, down 1.5% from the same period last year.

Net income for the fiscal year was $28.1 million, up 1.1% compared to last year.

Earnings per share for the fiscal year was $1.66 compared to $1.65 last year.

Fiscal year 2006, however, the results included the expensing of stock options which were not included in the previous years.

The fiscal year 2006 stock option expense after tax was $1.3 million or $0.08 per share.

Fourth quarter net income was $6.3 million, a decrease of 39.9% from Q4 last year and earnings per share--quarter earnings per share was $0.37 compared to $0.63 for the same period last year.

By product segment, our lubricant business in the quarter was $50.2 million, up 1.2% but for the year, was $190.5 million a growth of 9.4%.

Our hand cleaners was $1.9 million for the quarter, up 1.6% and $6.6 million for the year, down 4.1%, and our household products sales were $23.1 million in the quarter, down 2.3% and $89.8 million for the year, up 9.2%.

Lubricants were affected by the continuing geographic expansion along with the addition of the WD-40 Smart Straw and WD-40 No-Mess Pen which were introduced into the market in the third and fourth fiscal quarters last year.

Household product sales growth also reflects the impact of innovation such as the Spot Shot liquid in a trigger bottle.

We call it trigger spray.

Spot Shot Professional line and X-14 items.

We're pleased to see the sales growth across every single lubricant and household product and brand.

Our hand cleaner brands continue to generate profit on a minimal investment.

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

Looking a little bit at the regions now, in the Americas, with the America's region is our largest segment covering 65% of sales.

Sales in the fourth quarter were $47.9 million down 6.7% but for the year, $186.8 million, up 6.1%.

In the U.S., our sales in the fourth quarter were down 7.7% but were up 4.7% for the year.

Our sales growth--our sales growth through the year was driven by our household products.

We're happy to see that Spot Shot was up 11% for the year during--due to promotional activities and the impact of our new products like Spot Shot trigger, Carpet Fresh was up 11% for the year due to promotional and expanded distribution and X-14 was up 32% for the year due to promotions, growth outside the grocery trade channel and new products.

We still continue to face stiff competition in our household segments and from related categories in the battle for shelf space.

In Latin America, sales in Q4 were down 2.1% or up 21.6% for the year.

Our Latin-American business is primarily based on lubricants of WD-40 and 3-In-One.

WD-40 sales were up 3.5% in the quarter and up 22.6% for the full year to date, as a result of the increased promotional activities and growth and distribution.

In Canada, our sales were up 9.2% for the quarter and up 11.1% for the year.

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

Canadian sales growth was driven by the impact of WD-40 Smart Straw and WD-40 No-Mess Pen, 2,000 Flushes and Spot Shot.

We had a great year in Europe.

Sales in the quarter were $21.1 million up 10.3% for the year--for the quarter and for the year our sales in Europe were $79.1 million, up 15.7% for the year.

European business includes lubricants and household products.

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

Changes in foreign currency exchange rates compared to the same period of fiscal year partially offset the growth of sales reducing the fiscal year sales by approximately $2.9 million or 4%.

Looking at the regions within Europe.

Our European direct markets were up 9% for the quarter and 15% for the year.

We have direct sales forces in the United Kingdom, Spain, Italy, France, Germany, Portugal, Austria, Denmark and the Netherlands.

For the year sales in U.S. dollars, they grew as follows.

The U.K. grew 11%, France grew 16%, Germany, Switzerland, Austria, Denmark and the Netherlands as a group grew 23%, Spain and Portugal, 7% and Italy, 21%.

The U.K. market benefited from the growth of WD-40 3-In-One and the 1001 Carpet Fresh No Vac product which reflects innovations on those brands.

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

Sales in Spain were up as a result of the launch of the WD-40 Smart Straw and No-Mess Pen and the No-Mess Pen in Spain was launched under the 3-In-One brand.

Our distributor markets in Europe were up 13% for the quarter and 18% for the year.

We sold through independent local distributors in the Middle East and Northern Europe and Eastern Europe and South Africa and Africa.

Sales of growth in distributor markets was the result of the continued growth in Eastern Europe.

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

In Asia Pacific, sales were up--were $6.2 million in the quarter, up 5.1% and were $21 million for the year up 12.1%.

In Australia, sales in the quarter were down 4.1 but up 2.7 for the year.

Sales in Australia are up for the year due to the sales growth of WD-40 as a result of the increased promotional activities and the launch of WD-40 No-Mess Pen and 3-In-One and No Vac also contributed sales growth.

In the Asian region, sales in the quarter are up 9.3% and are up 17.4% for the year.

Sales in Asia were up 9% in the fourth quarter due to the increases in WD-40 sales to customers across the Asian region including Taiwan, China, Philippines, India, Indonesia, Singapore, as the countries continue to expand their distribution.

That's it from the sales update.

I'll now pass it over 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 10K that will be filed on October 25th.

Garry has already covered the sales results, so I'll cover the rest of the financials.

We'll start with the discussion of the Q4 results and then move into the year.

Gross profit was 48.4% of sales in the fourth quarter compared to 49.7% of sales in Q4 last year.

The 1.3 percentage point decrease in the gross margin percentage was mainly due to the increase in the cost of raw materials and components used in our finished goods and the cost we incurred associated with impaired, slow moving, and reworked inventory.

The price increase implemented in Q3 partially offset the higher cost of goods as did reduced discounts in the current period.

Selling, general, administrative expenses in the fourth quarter increased by 23.7% to $19.8 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.

Higher R & D investment of $0.7 million reflecting the Company's commitment to innovation.

Higher employee-related expenses of $0.4 million for salary increases, benefits and additional staffing, and a bonus accrual increase, $1.5 million versus Q4 last year as many regions in our company did not achieve profit and other performance expectations in the prior fiscal period which resulted in a lower bonus accrual in the prior fiscal year.

Higher expense also in professional services related to I.T., marketing, legal and tax related activity.

For the fourth quarter SG&A increased to 26.3% of sales compared to 21% in the same period last year.

Advertising and sales promotion expenses were $6 million in the quarter versus $4.5 million in Q4 last year, and as a percent of sales increased to 8% from 5.9% in the fourth quarter last year.

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

The Company expects to invest 6.5 to 8.5% of sales in A & P in fiscal year 2007.

Operating income for the quarter was $10.5 million, down $6.8 million compared with Q4 last year.

Amortization expense in the quarter 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 those customer relationships.

Net interest expense for the quarter was $0.7 million down $0.4 million versus Q4 last year reflecting the continued reduction in debt which we have reduced by $10.7 million since Q4 last year.

The provision for income taxes was 35% for the current year quarter down from 34--35.4% in Q4 last year.

The decrease in rate is due to foreign tax credits, the tax benefit of municipal bond interest and the year-to-date benefit of IRC-199 related to qualified production activities provided by the American Jobs Creation Act of 2004.

Net income in the quarter was $6.3 million down 40% from Q4 last year and on the diluted per share basis, earnings were $0.37 compared to $0.63 in Q4 last year.

Diluted shares outstanding have increased to 17.1 million shares compared to 16.8 million shares in the prior year quarter.

Now, for our full year financial information.

Gross profit was 48.2% of sales for the fiscal year compared to 49.2% of sales in the same period last year.

The 1% decrease in gross margin percentage was mainly due to increased cost of goods partially offset by recent price increase on some products to our customers.

This increase in cost of goods was primarily due to the significant rise in costs 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 cost 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 were 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 allowance given 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 percent by 0.3%.

Selling, general, administrative expense for the year increased by 13% to $71.8 million.

The increase in SG&A stems in part from stock options expense of $1.8 million as the Company began to expense options this year.

Higher R & D investment of $1.3 million due to increased new product development activity.

Higher employee related expenses of $1.9 million for salary increases, benefits and additional staffing.

A bonus accrual increase by $2.8 million versus last year.

Again, as many regions didn't achieve profit and other performance expectations in the prior fiscal period which resulted in a lower bonus accrual last year.

Higher freight expense of $0.6 million due to sales growth and increased fuel surcharges and higher expensive professional services related to I.T., marketing, legal, and tax related activity of 0.7 million.

These increases were partially offset by $1 million of decreased bad debt expense related to recoveries of bad debt including a preference claim.

SG&A increased to 25% of sales for the year compared to 24.1% last year.

The combination of stock options expense, increased investment in R & D and increased bonus expense has lifted our SG&A percent of sales by two full percentage points in FY '06.

Advertisement, sales promotion expenses were $20.1 million in FY '06 compared to $17.9 million last year, and as a percent of sales increase to 7% from 6.8% in the previous fiscal year.

In the current fiscal year, increased investment began in the second quarter and continued through the rest of the fiscal year as the Company aligned its advertising and sales promotion activities with the distribution of its current and new products.

Operating income for the year was $46 million compared to $47.4 million last year.

Amortization expense for the year was related to the 1001 acquisition.

Net interest expense was $3.5 million, down $1.6 million versus the previous fiscal year reflected the continue reduction of our debt.

And the provision for income taxes was 34.4% for the current year down from 35.1% last year and the decrease as stated before is due to foreign tax credit, the tax benefit of municipal bond interest and year-to-date benefit of IRC-199.

Net income for the fiscal year was $28.1 million up 1.1% from the previous fiscal year and on a diluted per share basis earnings were $1.66 compared to $1.65 last year.

For the year, diluted shares outstanding have increased to 16.9 million shares compared to 16.8 million shares for the prior fiscal year period.

Regarding the dividend on October 6th, the board of directors declared a regular quarterly dividend of $0.22 per share payable on October 31, 2006 to shareholders of record on October 17, 2006 and based on today's closing price of $35.58.

The annual live dividend yield would be 2.5%.

Moving on to our balance sheet at August 31, 2006, cash and equivalents along with short term investments were $45.2 million up from $37.1 million at the end of the fiscal year.

Inventories rose to 15.3 million.

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

And 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 following a $10.7 million principal payment we made in Q1 FY '06, the next principal payment is due this month.

That's it for the financial update.

More information again is available in our 10K to be filed on October 25th.

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

Thanks, Mike.

Despite the significant headwinds in our cost of goods, we are pleased with our overall fiscal year performance.

In addition, we are satisfied that the results were in line with our guidance for sales, net income, EPS, and A&P investment.

As you know, we don't give quarterly guidance, and in fact, the result this year was $0.01 above the high end of our annual guidance that we issued at this time last year.

Looking ahead to next year then for fiscal 2007, we expect to--our sales to grow between 7 and 13% to $324 million and that will be driven by the continued geographic expansion and market penetration and the continued efforts of our new product innovation team tomorrow.

We expect our advertising and promotional investment to range between 6.5 and 8.5% of sales, and as we announced on August 9, we are moving forward with opening a direct operation in Shanghai, China.

In this coming year, we'll invest approximately $1 million after tax or 6/10 cents per share in China.

We expect net profit after that investment to grow between 3.4 and 12.5%, a range from $29.1 million to $31.6 million which would achieve an EPS of between $1.70 and $1.85 cents per share assuming 17.1 shares outstanding.

Our brand WD-40 has been sold in China for some years.

We see this as an important growth market.

We believe that the fastest way to achieve our potential there is through a direct operation.

We will continue to look for the right acquisition that meets our guidelines.

In the past year, however, we found that prices were simply too high.

We feel that the investment we are making in China now is similar to an acquisition but it impacts the P&L more so than the balance sheet.

Thank you and we would be pleased to answer your questions.

[OPERATOR INSTRUCTIONS]

We'll take the first question from Jeffrey Zekauskas with JP Morgan.

Hi, good afternoon.

Hello.

I guess maybe the place to start is with the inventory level.

The inventories went from 8 million to 15.3.

Can you explain in a little bit more detail what happened?

What you expect your ongoing level of inventories to be?

Yes, Jeff, we can talk about that.

Our historic packager model was characterized by direct shipments to customers and that enabled us to carry small levels of inventory.

As part of our initiatives to reduce costs while also supporting our new innovation, we've expanded our sourcing outside of our typical packagers who again manufactured for us and then shipped directly to customers.

So we now source things in China for things like the WD-40 No-Mess Pen, for example, along with our existing supplier base in countries where we have direct operations.

These new suppliers don't necessarily give us the build and ship capability but they do give us lower cost so the trade-off has been for us that as we do that, we've recognized the need to carry higher levels of inventory and this really is the outcome.

In terms of looking ahead, we don't necessarily know where that is likely to land.

Inventory is an important number for us and while we don't think we'll get back to the days of six or seven years ago when we were carrying $2 or $3 million worth of inventory, we intend to focus on inventory and minimize it to the extent possible.

Ok.

Second question is what are you spending the million dollars after tax on in China and why does it pass through the income statement rather than being capitalized?

Well, Jeff, I can cover that.

What we're spending it on is an office that we're renting.

About 30 people that we're going to be employing.

The absolute--it is a little more than a million, the net impact is a million.

This is the biggest expansion we've done outside of when we opened our European headquarters in the United Kingdom some time ago.

So this is not a capitalizing event.

These are all direct expenses that will be incurred in the first year as we ramp up and put our salespeople into the field, we're going to be employing marketing, so the majority of the costs are really shoe leather, and the rest of the costs are the support team to go on that.

We've actually opened a subsidiary in China, that's called the [Wu Di] Shanghai Trading Company.

It will become the business that will stop the squeaks that we've identified over there.

So, are you moving from a distributor model to a direct sales model slowly?

Is that the idea?

Yes, that's correct.

In fact, we will move to the direct--we've already--we transferred the head of our Australian operation in each family to Shanghai three months ago.

He's now resident in Shanghai.

We've just moved into our offices there.

We've started the recruitment process.

And it is our plan that we will start selling on a direct basis in March as we switch over from a distributor to a direct model.

Ok.

I know that you don't give quarterly guidance but there is a certain amount of volatility in your quarterly earnings depending on promotional activity.

So, when you look at your promotional activity, all things being equal, which should be the stronger quarters and which should be the weaker quarters in '07?

Jeff, I can't tell you and the reason is this.

Here is a typical example, when we went out with our new Spot Shot trigger product, we said that when we achieved a certain level of distribution measured by ACV or commodities volume, we would pull the trigger on our substantial media investment, and we internally had a thought of when that may be.

It didn't happen at that time, and it happened at another time.

So, we pulled the trigger when it happened and Jeff, I can't run--we can't run this business and make good business decisions worrying about quarter to quarter earnings.

It is just--we don't do it and it is paying off.

This year, we gave good annual guidance and we hit it.

In fact, exceeded it on all fronts and it--if we were to worry about it, we would not make good business decisions and we're here to make good business decisions.

Ok.

I'll get back in the queue.

Thank you very much.

We'll move on to Frank Magdlen with The Robins Group

Good afternoon, Garry.

Good afternoon, Frank.

In regards to the earnings going forward, the seasonal pattern of sales has changed a bit.

In the current quarter, are there any new product introductions?

Of size?

No, well, no, but there is expanded distribution of ones that we have.

So that will continue, but there's no huge one hit thing.

Okay, as an example in '04, 29% of sales came in the fourth quarter in '05 almost 29%, and this year it is about 26% of total sales, so the seasonality of the quarter seems to be changing a bit and I think for those of us that are trying to model, I think that's another area where we're trying to get a little bit of guidance if the Company feels comfortable doing that.

Frank, this is Mike.

I think it might be important to put that thing in perspective in terms of the Q4 sales.

If we look back, we achieved overall sales growth for the year of 9%.

We achieved quarter in quarter sales growth for the first three quarters of the fiscal year.

And you're right, we had sales that were a little more evenly weighted through the quarters this year than if we compared to the past three or four years.

In Q4, FY '06, our sales were down a little over a $ 1 million or 1.5% compared to '05.

Our fourth quarter of '05 was our all-time record Q4 sales for us.

This most recent Q4 sales would be the second highest Q4 sales ever for us.

The other thing that also impacts it, too, Frank, is as the rest of the world becomes more important in the total, you'll see that, that is also flattening us out a little bit quarter to quarter.

Europe is a significant input to our business now.

Europe grew 15% this year, it grew similar last year.

It's meaningful, and as that starts to happen, it does tend to flatten us out where before, we used to have traditionally a high tech in the fourth quarter, the second and the fourth because all of that promotion in the U.S. was then.

That promotion still goes on somewhat in those quarters but it is being balanced by a better mix of geographic revenue.

That's fine.

I think we can all live with that.

In regards to--I'll call the start-up of the direct sales in China, when will that really impact SG&A?

It has already started.

Ok.

But as you add --

Oh, okay, I understand the question.

We expect to be fully operational in March so we've had some of the expenses actually some of them are also in last year.

But between now and March, we'll be ramping up.

What we have our offers.

We've employed the leader is in place, and has been in place since July.

We're progressively now hiring people to--in sales positions, that hiring of the majority of the people will happen in the January/February time frame.

So, it will be sort of a little more in December and then more in January, more in February and by March, we'll be fully operational.

Okay, and just a review of (inaudible), what did they spend in '06?

$3.9 million, I believe, and they didn't spend it.

They invested it, Frank.

Excuse me, invested.

What are they going to invest in '07?

About the same.

About the same, and then stock option expense for '07?

We haven't detailed that out yet.

All right.

I think it was $1.8 million pre-tax and stock options expense in '06.

Okay, is it fair to say you'll do about 35% tax rate going forward?

We haven't given guidance on the tax rate.

I noticed.

All right.

Thanks a lot.

Thanks, Frank.

Thanks, Frank.

We'll move on to Alan Robinson of RBC.

Good afternoon.

Good afternoon.

Could I just talk a little bit again about the advertising and promotional spend in the year.

I recall you enunciated in the third quarter call you expected a range of I believe between 7 and 8% of revenue for an A&P spend during the year and you obviously came in at the low end of that for the year.

Was there anything that changed during the fourth quarter perhaps you spoke about this a little earlier, but I would just like to get a better hold on this.

What specifically changed during the fourth quarter to cause you to spend towards the low end of that range, and is there likely to be a push of that going into the first quarter of this year?

Well, in fact, we actually spent in the quarter to the high end of the range which brought us into the low end of the range for the year because up until the end of the third quarter, we were down in the low end of--well, actually under the bottom end of the range.

So, Q4 was actually a higher marketing spend that brought us in.

Yes, but clearly, you reiterated that range of 7 to 8% for the year at the end of the third quarter.

Right.

So, I'm trying to get an idea for whether you were planning to spend more than you actually did at that juncture?

Well, the range--the 7 to 8% was the range we gave then and no, we didn't plan--we didn't make a decision to sell--to spend less or more.

We spent what we needed to do with the schedules we had in place.

Okay, and then the SG&A cost in the fourth quarter, you mentioned the elements of the increase there.

Which of those elements would you say were one off costs for the quarter?

Well, I think--this is Mike, by the way, in terms of the year on year comparison, there was a swing there related to bonus accrual.

In fiscal 2005, we were in a situation where a fair amount of regions, in our world didn't achieve our targets.

So, as a result, we reduced our bonus expense or expected bonus expense to those regions.

This year, we had more progress towards achieving those goals and so the bonus costs were higher.

So as a single element of it, that was a significant part of the swing because we're comparing against a year when we didn't achieve our targets to one where we did.

So, by implication if things going according to plan in the current fiscal year, we should expect a similar percentage of revenue in terms of SG&A spend?

No, if things go better than we planned, then you would see it.

Yeah, but I think it's important that we don't give guidance on SG&A as a percent of sales or the breakout in the income statement so we can't comment on that.

Yep, and finally, in the current quarter, are you seeing any impact of lower petroleum costs in your costs of goods?

Not yet.

There is a lot of talk about it.

And we're certainly very inquisitive about it, but I get perplexed, they seem to go up at a rate that's extremely more steep than when--than come down, but we're very inquisitive about it.

We are maniacs as far as margin is concerned.

We need to get our gross margin back above 50%.

That's the way this business model is built and we're going to work our butts off to do that.

Okay, very goo.

And final question, just regarding the direct sales--excuse me, operation in Shanghai, will this direct sales operation cover the whole of China, or just the northeast?

And secondly, what kind of margin profile can we expect from this operation compared to say, for example, the direct operations in Europe?

I presume gross margins will be lower and operating costs will be lower or how should I look at that particular side of the model?

Thanks, Allen.

Good question.

Yes, this operation in Shanghai will cover the whole of China although all of our people will not be based in the whole of China.

Our salespeople will be based in regions where they're needed to be based.

So, it is just Shanghai is the spot we picked as the best place to lead the business.

As far as the business model is concerned, once we're up and fully operational, and that will be into the latter part of this year and the early part of next year, I would anticipate that the return--the margins out of that operation will be similar to, if not very similar to any other direct operation that we have.

In terms of gross margin.

What we experience over time though is that when we start up as a direct operation, typically, we have a fair investment of people and that investment of people--in people really pays off over time as our sales grow.

So, with China, we do expect that sales will grow over time and we would expect in the operating margins to improve in the years ahead compared to what it would look like in '07.

That's exactly what's happened in some 40 countries I guess or however many it is that we're direct in now.

It is exactly what happened in Europe.

So, we're really just blowing the dust off the old WD-40 marketing book and taking it to China and bringing some good people in and doing what we know how to do very well which is stop squeaks.

Ok.

Very good.

Thank you.

Thanks, Allen.

We'll next take a question from [Robert Felice] with Gabelli and Company.

Hi, gentlemen, just a quick question.

If I take the midpoint of your revenue and EPS guidance, it would appear relative to the growth of each that you expect minimal if any margin expansion in 2007, actually probably a bit of margin deterioration.

And I know that you're expecting your advertising spend to fall in the 6.5 to 6.8% range which will be up a bit, and an additional million after tax in China, but I was hoping you could shed some color as to what other line items in the P&L you're expecting to offset the leverage to the bottom line.

It is all about gross margin.

That's really where it is, Robert.

We have to get our gross margin back up.

For every 1 percentage point in gross margin, we generate $0.17 before tax in earnings per share or $0.13 after tax in earnings per share, and three years ago, our gross margin was 51%.

So, we've had our leverage stolen from us because of this deterioration in gross margin due to the increase in cost and I'm really, really not happy about that.

And we have to fix it.

So, just to get a look into your thinking, Gary, as you look out to '07, given your guidance, are you anticipating further erosion at the gross profit margin line?

If you could shed some color on that.

We don't really give guidance on that, on gross margin.

What we are saying is that we're looking ahead, we'll address our higher costs through a combination of supply chain rigger, product innovation and higher margins and price increases.

We're encouraged by our cost containment initiatives and our goal is to grow gross margin over time and expect to be able to do that.

Ok.

That's fair.

Thank you.

We'll now take a question from Jeffrey Zekauskas with JP Morgan.

Just a few more questions.

If I remember correctly, WD-40 uses a cut of jet fuel, is that right?

What's the cut that it uses?

Well, it is a--the solvent, if you will--not the solvent, the white spirit that goes into it, the refining process is best described as the one that's closest to jet fuel.

So, that's really where it comes in because there is a lot of refining cost because our product is so clean.

When you look at--if you recall, in past years, Jeff, we've said when we were getting small fluctuations in petroleum, we never really saw a big impact on our cost because most of the overhead was in the refining cost, not in the raw feed.

It has only been in the past few years where we've seen some massive increases in oil, has it really come on upon us at all.

But our biggest cost increase, Jeff, has been steel.

The cost of our steel cans has increased 65% since the year 2000 and of that 65%, 30%--more than 30% of that increase has been in the last two years.

So, is there a way to just, in a ballpark way, quantify how much your raw materials have gone up this year in dollar terms?

No.

Okay.

In response to a previous question about your tax rate, you said that you didn't provide guidance.

Were you trying to imply something?

Is there something subtle about the tax rate next year?

No, we were implying nothing.

We just don't guide specifically on tax rate.

In sales targets that you've got next year, the 7 to 12% or 7 to 13%, in general, which product lines or areas do you think are the faster growing ones and which ones do you think are the slower growing ones and sort of where are the key strategic issues for you in terms of being able to hit the high end of the range or the low end of the range?

Good questions, Jeff.

Happy to answer those.

Our role is to--number one mission in this business is to build the WD-40 brand globally.

We've now seen European business which is around about $80 million in size now.

Virtually double in size over the past few years and Europe has a lot of runway to go.

So, there is no reason why geographically, we don't have a high degree of confidence that we're going to continue to grow our European business based around the WD-40 and 3-In-One brands and around the 1001 brand specifically in the U.K.

This is the fourth consecutive year that we've had 8% or better growth in our lubricant business and is fueled by that geographic expansion and by the introduction of new products such as the WD-40 No-Mess Pen and the WD-40 Smart Straw.

In the United States, we've seen a number of years now of growth as we've--last year, every one of our household products grew.

Spot Shot I think I mentioned grew 11%, our X-14 business grew substantially.

That's the result of us getting our arms around the household business, getting new distribution and new trade channels that we said before we would do.

And also, of course, the significant impact that's come from our team, tomorrow team in product innovation such as things like Spot Shot trigger, new variants of our Carpet Fresh product.

So, we believe now we've got a solid base in that area and we would expect that to continue to grow, and then on the other side of geographic expansion, we've had a good growth in Asia this year.

We've got a high degree of optimism of the job we're going to be able to do in China.

China is going to be a great market for us long-term just as we said Europe would be some time ago.

And Jeff, we're pretty good at international business, I'm proud of that.

We've got a great team of people on our international team and we're really excited about the opportunities over there.

So, we've got a pretty good picture of our vision.

We know what mountains we want to climb.

We've got some good mountain climbers and we're going to go out and do it.

That's very helpful.

In some of the other companies that I follow that provide products similar to yours to the big box retailers, there was a large inventory reduction by Lowe's and Depot and Wal-Mart.

Is that something that you felt and in general, was the sales level of the fourth quarter a little lower than you expected?

I can't answer the second part, but I'll answer the first part.

The answer to the first part is no, we weren't affected.

There was nothing unusual that happened.

Jeff, as you know, we--we're fortunate that our brands are brands that have a reasonable velocity.

We don't stuff any trade channel anywhere.

We're not into overstocking our customers.

We're into supplying--we've got an on-time (inaudible) measurement of 98%, we deliver 98% of our product on time in full to our retailers.

So, the inventory is there.

So, no, the fourth quarter kind of came out where we thought it would.

That's why we came in a $0.01 over our annual guidance.

Sure.

Just last question is--I was reading through the legal footnotes in your queue and I was hoping that you would shed some light on these Benzene lawsuits.

And there are some commentary about should they continue, it's reasonably possible that cost of defense, might be material.

I was just hoping that you would just shed more light around these issues.

What are they, how many suits are they?

Ok.

How worried about you?

Is it small, is it large?

I can't tell.

Ok, Jeff, Maria Mitchell is here.

She's our Vice President of Legal and Corporate so I'm going to ask her to try to give you what she can share on that.

Ok, thank you.

Jeff, this is Maria.

I can't really tell you how many cases, we don't disclose that information.

However, we can tell you that they are definitely frivolous lawsuits.

The industry right now is going through a transition here where many companies are targeted in terms of Benzene and accusations that certain products contain Benzene.

Obviously we are one of those targets because we have products in every household, basically and so we are the target of attorneys mostly.

So, we disclosed this in the queue last quarter because we wanted to make sure that you're always aware of what we're doing.

Right.

But we do not believe, and we know for certain that we do not have any Benzene in our product.

That has been demonstrated and that is the statement and the fact.

So, we just have to go through, at this point, and just go through our--these series of lawsuits and just fight the legal industry and educate them also which is our objective at this point.

Ok, fine.

Thank you very much.

Thank you, Maria.

We'll go back to Robert Felice with Gabelli and Company.

Hi, just another quick question.

Looking at the end of the year, you're finishing off with $64 million of debt.

You'll have an additional $10.5, $11 million come due in a couple of weeks.

I was just curious to get your opinion or get some color on how comfortable you feel with your capital structure.

It would appear that you could take on a considerably larger amount of debt.

Just wanted to get your thoughts on that.

Yeah, this is Mike just in response to your question, Robert.

We do believe that the Company could handle a higher level of debt and if you look at our history, at one point we did have a debt ratio of somewhere around two times EBITDA, and that's a level that we're not uncomfortable with.

However, to our way of thinking, the capital structure should be used really to support the operation of the business as opposed to used for financial engineering and things like that, and so, our interest in levering up would be predicated on a compelling use of the cash.

And as we look at what are the various alternatives that are available to us, if we look back over the past couple of years, we've used cash for an acquisition, namely the 1001 brand in the U.K.

We've used it for a share repurchase program that we implemented toward the tail end of fiscal '04.

We've used it for dividends and that's why today we sit at 2.5%, and in fact, about a year ago, we increased--about a year and a half ago, we increased our dividend.

We have some capital expenditures, and the like.

So, as we--the other part of it though is we continue to look for acquisitions that meet our criteria that we believe will deliver value to shareholders over the long-term and quite honestly, as we've looked around since the 1001 acquisition, we've found that there's a lot of money out there primarily from private equity players who are willing to pay much higher multiples than we are.

And so, we are unwilling to overpay for an acquisition and for that reason, we have sort of ended up on the sideline, not because of lack of looking but because of lack of interest on our part at the evaluations that are out there.

And so, we exercise a great deal of discipline in the choices that we make and how we invest and that's primarily where we've landed as a result.

Okay, so, then I guess you're saying that absent the right acquisition at the right price, you'll either continue to pay down the debt as it comes due or build cash.

Well, I think that the board will always evaluate capital structure on a regular basis and the dividend is always considered as part of that.

But what we are looking for is we're looking for an acquisition and again, if we look at the current climate, we believe that there is a potential that there will be some wreckage of deals that were put together at incredibly high multiples with extremely high levels of debt and that some of those may be unsustainable and we'll be in a position with a lot of dry powder to come to bear and get something at the right price and the right circumstances.

Ok.

Thanks.

[OPERATOR INSTRUCTIONS]

And there appear to be no further questions at this point.

I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you very much, and we're always here and always willing to be able to give you the best information we can.

Wish you a pleasant afternoon and we'll see you at the end of the first quarter and go buy some WD-40.

Thanks, bye.

That does conclude this conference call.

Thank you all for joining us and have a wonderful day.