WD-40 Co (WDFC) 2007 Q1 法說會逐字稿

Good day, and welcome, to this WD-40 Company first quarter 2007 earnings release conference call.

Today's call is being recorded.

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

Please go ahead, ma'am.

Good afternoon, and thank you for joining us for our first quarter earnings call for fiscal 2007.

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

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

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

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward-looking statements, including impact of marketing investments, the impact of new product innovation, foreign exchange rates, impact of cost of goods, the timing 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 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 second quarter fiscal 2007 earnings conference call is scheduled to take place on Thursday, April 5, 2007, at 2 p.m.

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

Thanks, Maria, and thanks for being with us.

Today we reported net sales of 72 million for the first quarter of fiscal 2007, an increase of 7.1% over last year.

Net income for the first quarter was 5.7 million, down 24% compared to the first quarter last year.

Earnings per share for the quarter were $0.33 compared to $0.45 last year, and the change in foreign currency exchange rates during the period had a positive impact of 0.2 million in the first quarter 2007 net income.

Looking at our product segments, our lubricant sales for the first quarter were 48.9 million.

That's a 15.3% increase.

Our hand cleaners were 1.7 million.

They were off 8%, and our household products were 21.3 million, down 6.9%.

Lubricant sales were up in all trading blocks assisted by continued geographic expansion along with the addition of the WD-40 Smart Straw and WD-40 No-Mess Pen which we introduced in the third quarter and fourth quarter of fiscal 2005.

Household product sales declines were due to lower sales in the U.S. compared to the Q1 last year.

The reduced sales were a result of several factors including temporarily lost or decreased distribution, timing of promotions and the effect of the normal competitive activity.

We are pleased to see the growth of our household products in Europe and Asia Pacific business segments during the quarter.

We will continue on innovation and renovation of our brands through product, packaging, and promotional strategies and to address the challenges and the opportunities that exist within the competitive environments of the household products categories.

During the first quarter we launched a major renovation of the X-14 brand.

The brand underwent a complete packaging and positioning upgrade, the brand's positioning has been enhanced as the bathroom expert product in the new format will be seen in stores starting in January.

Innovation was delivered in the 3-in-One brand with a new product, a garage door lube.

This is a specific use garage door lube that incorporates the Smart Straw delivery system.

Looking at our regions, the Americas sales for the quarter were 45.1 million, down 2.4%.

The Americas region is a -- is the largest segment covering 63% of our total sales.

In the U.S. our sales were down 6%, U.S., Latin America, and Canada all had sales growth in Q1 in the WD-40 brand.

We continue to see good acceptance of the Smart Straw and No-Mess Pen in many trade channels and markets.

In the first quarter the WD-40 sales were up 34% in Canada, 22% in Latin America, and 2% in the United States.

U.S. sales decrease in Q1 was due to household products, the decline was the result of several factors including temporarily lost or decreased distribution due to a seasonal product rotation in certain customers.

Our Latin American business was up 19.3%, and that's primarily based on sales of WD-40 3-in-One where as I said WD-40 sales were up 22%.

Canada was up 19.5%.

In Canada we sell lubricant, hand cleaners, and household products.

Canadian sales growth was driven by the impact of the Smart Straw, 2000 Flushes and promotional activities with key customers.

Looking over the pond to Europe, sales in Europe were 21.9 million.

That was up 29.1% in the quarter.

Our European business includes primarily lubricants and some household products in the United Kingdom.

We sell to Europe through a combination of direct operations in certain countries as well as through a distribution network in other countries.

Changes in foreign currency exchange rates compared to the same period last fiscal year positively impacted current year sales by approximately 1.3 million or 6%.

In our European direct markets, our sales were up 25%.

We have direct sales forces in the U.K., Spain, Italy, France, Germany, Portugal, Austria, Denmark, and the Netherland.

Sales in U.S. dollars grew as follows--in the U.K., 8%, France, 28%, Germany, Austria, Denmark, and the Netherlands, 68%, Spain and Portugal, 14%, and Italy 16%.

The U.K. market benefit from the growth in the 3-in-One and 1001 brands.

The sales growth in the Germanics markets which includes Germany, the Netherlands, Denmark, Austria, was the result of increased awareness and penetration of the WD-40 brand and the introduction of 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.

The No-Mess Pen, as you know was launched under the 3-in-One brand.

Sales in France and Italy were due to increased awareness of the WD-40 brand as well as the introduction of the Smart Straw.

In our Europe distributor markets sales were up 37.7% in the quarter.

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

Sales growth in distributor markets was the result of the continued growth in eastern and northern European regions.

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

In the Asia Pacific region our sales were 4.9 million.

They were up 22.8%.

In Australia sales were up 14.5%.

Sales in Australia were up for the quarter primarily due to the sales growth of the No Vac brand which had a new brand innovation.

The WD-40 and 3-in-One brands also continued its sales growth.

In the balance of Asia, sales were up 28.4%.

Sales in the Asia were up in the current fiscal year due to the increased WD-40 sales to customers across the Asian region including China, Taiwan, Thailand, Japan, Philippines, Indonesia, and Singapore as the Company continues to expand in the region.

We are also on track to commence our direct sales and marketing activities in China, and we should be open just after Chinese new year.

In the first quarter we invested approximately $200,000 in building that business infrastructure.

I will now pass over to Mike Irwin who will give us some deeper details into the numbers.

Thank you, Garry.

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

As Garry has already covered the sales in detail, we'll continue with the rest of the financials.

Gross profit was 47.9% of sales in the first quarter compared to 48.1% of sales in Q1 last year.

The 0.2% decrease in gross margin percentage was attributable to the increase in cost of products sold.

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

The increase in cost of products sold was partially offset by a decrease in advertising and promotional discounts and other discounts which positively impacted gross margin by 0.6%.

The decrease resulted from both timing and reductions in certain traditional advertising and promotional activities that have experienced declines in consumer response.

The timing of these promotional activities as well as shifts in product mix may cause fluctuations in gross margin percentage from period to period.

Selling, general, and administrative expenses for the first quarter increased by 16.5% to $19.1 million.

The growth in SG&A is largely driven by our investment in infrastructure to support global sourcing, inventory management, product development, and our China operation.

The breakdown in SG&A expense growth is as follows--higher employee related expenses of $0.9 million for salary increases, benefits, and additional staffing which includes China, freight costs were up $0.3 million due to higher sales and freight surcharges, bad debt expense was up $0.3 million as the prior year expense reflected a benefit of bad debt recoveries.

Higher R&D investment of $0.2 million reflecting the Company's commitment to innovation, and miscellaneous expenses of travel, meeting expense, professional services, and insurance costs were up $0.6 million. $0.4 million of the SG&A expense increase was due to increased foreign exchange rates.

Advertising and sales promotion expenses increased to $5.6 million in the quarter from $3.3 million in Q1 last year, and as a percent of sales increased to 7.8% from 5% in the first quarter last year.

The increase in the current year period is related to the timing of investments in television media and print media to support new products.

Investment in global A&P for 2007 is expected to be in the range of 6.5% to 8.5% of net sales.

Operating income for the quarter was $9.6 million compared to 12.5 million in Q1 last year.

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

Net interest expense in the quarter was $0.7 million, down $300,000 versus Q1 last year reflecting the continued reduction in debt.

We made our annual $10.7 million principle payment in October of 2006.

The provision for income taxes was 35.8% for the current year quarter, up from 35.3% in Q1 last year.

The increase in rate is due to the impact of reduced low income housing and tax credits and the phase out of the extra territorial income, ETI deduction.

Net income in the quarter was $5.7 million down 24% from Q1 last year, and on a diluted per share basis earnings were $0.33 compared to $0.45 in Q1 last year.

Diluted shares outstanding have increased to 17.2 million shares compared to 16.8 million for the prior year quarter.

Regarding the dividend on December 12, 2006, the Board of Directors declared a regular quarterly dividend of $0.25 per share payable on January 31, 2007, to shareholders of record on January 8.

This is an increase of 13.6% from the previous dividend of $0.22 per share.

You may recall that the Board had also increased the dividend by 10% in March 2005.

Based on today's closing price of $33.55, the annualized dividend yield would be 3%.

About our balance sheet, at November 30, 2006, cash and equivalents were $46.4 million, up from 445.2 million at the end of the fiscal year.

Accounts receivable declined due to a lower level of first quarter 2007 sales compared to the fourth quarter of fiscal 2006.

Inventories rose to $15.7 million, up by 0.4 million versus the end of year level.

Long-term debt declined to $42.9 million following a 10.7 million principle payment we made in Q2.

The next principle payment is due on October 2007.

That's it for the financial update.

Again, more information is available on the 10-Q filed this afternoon.

I appreciate your time, and we'll turn it back over to Garry Ridge.

Thank you, Mike.

Despite significant head winds in our cost of goods, we believe we're on track with our guidance for sales, net income, earnings per share, and advertising and promotional investment.

We will continue to focus on improving our gross margins from both cost reductions and innovations and renovation activities amongst our brands.

Looking ahead, here is a recap of our original guidance for fiscal 2007.

We expect our sales to grow between 7 to 13% to between 307 and 324 million, driven by continued geographic expansion, market penetration, and new products.

We expect our advertising and promotional investment to range between 6.5 to 8.5% of sales.

As we announced on August 9, we are moving forward with the opening of a direct operation in China after investing approximately $1 million after tax or $0.06 per share.

We expect our net income to grow from between 3.4 and 12.5% to between 29.1 and 31.6 million which would achieve an EPS in the range of $1.70 to $1.85 assuming 17.1 million shares outstanding.

Our brand WD-40 has seen solid -- has been solid in China for many years, and we see this is an important growth market.

We believe that the fastest way to achieve our potential is through this direct operation in China.

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 in China we are making is now similar to an acquisition, but its impact is on the P&L more than the balance sheet.

Also today we posted an update of our -- on our website of our FY '06 through FY '10 goals.

In summary our compounded annual growth rates are in the following ranges by product segment.

We expect lubricants to grow between 7.6 and 9.7%.

Household products to grow between 5.9 and 8.1%, hand cleaners to grow somewhere between 0 and 6.5% which would mean a total annual compounded growth rate over that period of between 6.9 and 9.1%.

Our compounded annual growth rate in net income over the period ranges between 9.2 and 11.5%.

Our previous goal through to '09 was 9.8 to 12.1.

The new goals reflect the impact of the pressure we continue to see on our cost of goods, on our current view of the performance of our brands, and the markets in which we operate.

These goals do not include any assumptions for added growth through acquisitions.

That's the end of our summary for today.

As usual we'd be delighted to entertain any questions.

[OPERATOR INSTRUCTIONS] We'll take our first question from Liam Burke.

Thank you.

Garry, could you give us a little more detail on the household products?

Was it one particular brand that was weaker than the other, or did one perform particularly well this quarter?

Good day, Liam.

Thanks for the question.

Our household products we had growth in the U.K. and in Australia.

In the U.S. they were down across the board primarily due to a seasonal rotation that we had in a couple of major customers, but, for example, Spot Shot was off 13%, Carpet Fresh was off 16% in Americas, X-14 was down 23, and automatic toilet bowl cleaners were down 7.

That's something that you think that over the next three quarters you can play catch-up with and be comfortable within your range of internal goals?

Yes.

If you total that up, it is about just over a couple of million -- well, net about $1.6 million worth of sales in the quarter, so it is not a huge number.

Right.

And most of it was due to a couple of factors that we identified, so we as you've heard restated our goals for the year, and we're driving forward, we're expecting some nice distribution increases in the first quarter, particularly with Spot Shot in a number of chains and operations, so, yes, I think it was just something that we guided with.

It is within -- our total sales growth is within our range of guidance, so, yes, we think we're okay.

Great.

Thanks, Garry.

Thank you, Liam.

We'll take our next question from Jeff Zekauskas.

Good day.

Good day.

Hello.

I guess the first thing is you spoke of raw material cost pressure, and from a distance it would seem that your raw materials should be coming down in that oil has gone from the high 70's to the high 50's, and polyethylene has come down sharply over the past three to four months, so are you beginning to see raw material price relief or why haven't you seen it yet or will you see it in the coming quarters?

Jeff, we agree with you totally, and we're going to play your comments back to some of our raw material suppliers.

Yes, we are seeing the pressure off a little.

That has yet to be quantified, but we like you, would expect to see some relief.

However, we have come to learn that things go up faster than they come down, and you can be assured that we are doing and making as much noise as we believe is right and proper to remind our raw material suppliers, that we should be seeing some of that relief.

Okay.

So all things being equal, it is not that you need to increase your product prices from here, it is just a matter of being a little tougher on your suppliers?

It is a matter of them doing what's right and proper, and we will always continue to look at pricing.

Also, we'll always continue to look at increasing our gross margins through innovation and renovation.

So our gross margin efforts are not just related to the inflow of raw material prices which in reality caused us the issue that we have today, but it is balanced between raising prices where we can, getting relief where it is due to us, and innovation and renovation of brands that allow us to deliver our value to a customer at a higher margin.

I guess lastly before I get back in the queue, you have a phrase in your press release that the temporary loss of distribution due to seasonal product rotation in certain customers.

I was hoping that you could explain that at some greater length.

Yes.

And also in your four-year projections the household cleaner growth of 5.9 to 8.1 feels to me lower than the growth that you've been projecting in the past.

I may be incorrect about that.

Is that a lower projected growth and what's the meaning of that phrase?

Let me start with the first one.

In our projection for usual you will see that we have increased the growth rate of our lubricant products, and we've decreased a little the growth rate of our household cleaning products, and that's really the true reflection of how we see the business today.

Secondly, the rotation, there are a number of customers particularly in the big box area like clubs that on a seasonal basis rotate standard SKUs out of their product line and replace it with product that is more of a treasure hunt type product that's very seasonal.

The stores don't have extra space to put in Barbie dolls and barbecue sets, and we haven't normally been rotated out with a lot of products, but this holiday merchandise, holiday focused merchandise was rotated out, so we did lose some distribution in the quarter as the holiday product came in.

We were saddened by that.

However, that's the game that is played in those trade channels.

It was temporary, and we would be rotated back in again.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] We'll take our next question from Alan Robinson.

Good afternoon.

Good afternoon, Alan.

I would just like to ask a little bit in more detail regarding the temporary loss in distribution referred to in the previous question.

Firstly, did you see that distribution change across all product segments or was it solely household products, and secondly, is this a phenomenon that you also saw at the same time last year or not?

The second question, no, we weren't rotated out last year, and the first question was it was primarily in the household product segments, although there was some impact, a small impact on our lubricant business in one channel in the U.S., but primarily it was in the household products area.

And do you attribute the decline or the temporary loss rather in household products to competitive changes or to structural changes with the distribution channels that you sell through?

The temporary loss was really a decision they make to rotate out some products to put holiday merchandise in the stores.

This is not a unique thing to us.

It happens to a lot of vendors.

We just hadn't seen it happen to us before, and there was an added focus on holiday merchandise this year I guess to drive seasonal sales.

Okay.

Fair enough.

Just expand upon distribution again.

One of the key high points of your story I guess is the breadth of your distribution channels.

Now, to what extent have you seen that you're able to sort of leverage your strength in lubricants to your household product segments, for example?

Is that an issue or are they very, very different distribution channels between the product segments?

It depends.

If you look at distribution such as big box and hardware, we've been able to take our household products into those distribution channels because we have the relationships with those stores, so I would say that anywhere that WD-40 was that household wasn't gave us the opportunity to take some of those household products into those trade channels.

Example, when we bought the Spot Shot brand, it wasn't distributed in most of the major big box hardware stores.

It is now.

I think if there are opportunities where WD-40 is and the brands fit in that trade channel, it does.

The other area is some of our innovation.

Example, the No-Mess Pen got us into the big box office supply area.

If you go into big box office supply now you will find Spot Shot and Carpet Fresh that wasn't there before.

It gives us the opportunity to be able to take those products into new areas.

Okay.

That's very helpful.

And just finally, with respect to your intentions as far as acquisitions or broadening of products go further down the line, are you specifically -- or are you more inclined to look towards the lubricant segments or are you just looking for any opportunities out there?

It seems to me that you've done particularly well in lubricants and that might be more of a fertile ground to you.

We're in the squeak, smell, and dirt business.

We have products that get rid of squeaks, git rid of smells, and get rid of dirt.

Really our lubricant business, it hasn't really been because of acquisition.

We've only made one acquisition there, and that's 3-in-One.

The lubricant business is growing because of the infrastructure and investment we made over time in building our business outside of the United States.

Right now we sell 56% of the WD-40 we sell is not in the United States.

It is outside of the United States.

As far as the acquisitions are concerned, there is nothing like the freedom of a tightly defined brief, and we have a very tight brief on what we're looking for.

It has got to be the squeak, smell, and dirt business. it has to live under a sink, in a garage, in a toolbox, and it has to be a product that delivers above expectation, performance, and extremely good value to consumers.

Our portfolio of brands is no different to the portfolio of stocks that many of our investors hold.

Some brands perform better than others at different times, and that's why we're in the business, so we look long and hard for acquisitions that make sense, that can deliver, that we can add value to.

Unfortunately the prices have been too high, and we're not going to overpay.

All right.

Thank you.

We'll take our next question from [Robert Felice].

Hi, guys, just a couple of quick questions.

Looking at your operating income breakdown by region, Asia Pacific was flat, Europe was up quite a bit, and really the hiccup for the quarter was in the Americas, 5 million in operating income down 45%, and I would imagine a good portion that far is the distribution issue that you have spoken about, but it seems off quite a bit, and I was hoping you could shed some color.

Was there anything else during the quarter that affected it?

Yes, Robert, this is Mike.

We invested substantially higher amount in advertising and promotions to support product introductions, and so as we look at what we've done, we've made a big step up in investment and A&P compared to the first quarter last year where we invested only 5% of sales.

This year it was 7.8%.

Robert, the other thing, too, is we're not a weak kneed, short-term leadership group here.

We don't make decisions quarter to quarter.

We never have.

We never will.

We've always shared that.

I think the important thing is we affirmed our annual guidance, and that's the way we run our business.

Traders will trade, investors will invest, but we're here to run our business over the longer haul, so I really find it difficult when we're asked about why is this quarter different to last.

We don't run our business in 90-day intervals.

Okay.

That's fair.

Just want to make sure that three months doesn't add to six doesn't add to nine, and, one quarter is fine as long as it is not a pattern that's emerging.

And I guess leading into my next question, looking at your SG&A, as I look over the last seven or eight years or so, maybe with the exception of two or three quarters, your first quarter SG&A has always been your lowest, and it is up quite a bit this quarter, and I was wondering if this is just a one-off event or if this is kind of a new base amount we're working with for the year?

As we mentioned in the release as well as in our commentary, we have done some things to support our business, and we talked about the investment in China which -- where we invested a couple hundred thousand dollars this quarter.

We also had some higher costs to support global sourcing.

What's been happening to us over time is we've seen our supply chain expand outside of the U.S., for instance, where -- and outside of local market production where, for instance, the WD-40 No-Mess Pen is made primarily in China and shipped all over the world from there.

We also have products that are made in the U.S. and shipped to Europe, and we have a lot more things crossing over, and so our sourcing network is getting bigger than it ever has been.

We've also made -- taken some initiatives to bring in more expertise and supply chain management and in sales and marketing and things like that, and so we're continuing to invest in infrastructure with an eye towards the long-term, but the biggest step, single step-up this year is the one that we talked about with respect to China.

Okay.

So I guess it sounds like, then, that that is kind of a new base level that you're working with and it's somewhere around a run rate?

Is that correct?

We don't guide specifically on that element of our income statement, so what we've done is, as you know our fiscal year guidance gives us sales range, and net income range, and a EPS.

Well, I guess what I am trying to figure out here is, A&S is going to be up quite a bit for the year, it looks like SG&A if this is a new run rate will be up quite a bit for the year, and then in order to get to your guidance I guess that would assume some kind of a decent gross margin expansion, so I am just trying to back out whereon your P&L you're expecting to get the benefit to offset these two additional line items if it will be up significantly for the year.

Well, if you look at it we said we had the sales range of seven to 13, or thereabouts.

We're at the bottom end of that in the first quarter.

If you were to look at that then look at our I&P, back those out, that gives you a number of our SG&A that then does back back into our net income guidance, so it is early days, and we -- I think if you look at the way we've cut out the guidance, it does show that we're expecting that there are some areas that -- of costs that are going to be higher due to investment like China, like some extra people, and we're going to have -- we have $2.5 million worth of extra real gross contribution this quarter due to the 7% sales increase.

That was offset by $2.3 million extra investment in marketing which was a 65% increase which we talked about, still within our guidance range, and $2.7 million increase in SG&A which -- of which 900,000 was people, 300,000 was freight, 300,000 was bad debt, and the balance was little bits and pieces.

Those still backed out, still get us to our range of guidance for the year, so again it is early days.

Okay.

So I guess what you're saying in short is that as the sales pick up in the back half of the year, the additional gross margin dollars will be more than enough to offset the SG&A and A&S expense.

If we didn't think that at this time, we would have revised our annual guidance.

Okay.

Well, appreciate you taking the tame.

You're very welcome.

Thank you.

We'll take our next question from Frank Magdlen.

Good afternoon.

Good afternoon, Frank.

Could you go over two things for me and maybe review the price increases that you have taken over the last several years.

I think you have done it on the WD-40 brand primarily in the U.S., and then review for me, Garry, the repositioning of the X-14 brand again, and when that hits the shelves.

Yes, thanks, I will do the X-14 one while Mike tries to find his notes as far as some things we can share.

The X-14 brand is basically having a complete remodel.

It is moving into a completely new trade dress.

It is called the bathroom expert, and what you'll start seeing now is a uniform packaging that actually groups the product into a unique family, so the whole renovation of the brand is really a positioning of it, and that will start to feed into stores in January.

It is the result of some pretty firm research we did about positioning the product, and we just -- we came out that there was no brand that actually taken the position out the bathroom expert, and it is backed up by al lot of PR and it will have its own website in a short period of time, and we think it will really enhance the whole offering to the consumer, so--.

Garry, what does that consist of, then?

The toilet bowl cleaner and then the--.

X-14 mildew, sorry, mold and mildew, X-14 daily shower, X-14 bathroom cleaner, X-14 foaming bathroom cleaner, X-14 automatic toilet bowl cleaner, and there will be a couple of other added on products to that as the product -- as it moves out later in the year.

So we're talking four to six products, then?

You're talking one, two, three, four, five, six, seven in the current range.

Is that a -- that's a real expansion for you?

It is a renovation of the current brand.

What it is, it is a repositioning and a renovation of taking those products that were exporting before and positioning them now under one canopy as the bathroom expert.

Okay.

And then, Frank, you had also asked about the impact of price increases.

Just to recap for everyone's benefit, we took two price increases over the past couple years.

Each was in the third quarter.

One of them was during the third quarter of fiscal 2005.

One was during the third quarter of fiscal 2006, and they were on selective products in certain countries.

In this particular quarter, so for Q1 FY '07, the price increase helped gross margin by approximately 1.9% during the quarter compared to the first quarter of fiscal 2006, so it was again that one price increase in between time that had that effect because we're comparing with the new pricing in this first quarter compared to old pricing last year.

All right.

Thank you.

Thanks, Frank.

We'll take our next question from [Joe Pirapotto].

Hello, Joe.

How are you doing?

I wanted to maybe get a a little bit of a clear sense of your longer-term outlook on household products because if I take the midpoint of the CAGR from the last time I got the slide, it was 11%, and now it is 7.

Is there something there with the competitive dynamics maybe that you have a different appreciation for now or is it just the product itself?

I mean obviously you bought most of these products five years ago, so it has sort of been under your control now for a long time.

Just a little bit more color on your view on that.

I think that firstly each year we take a serious look at the brands, where they are in the market and now, what the competitive landscape looks like, what are the innovation opportunities that we see versus what we had before, what innovations did we have in the pipeline that we believe were real, and then we restaged them over time.

I think that organic growth in that category in a range, a mid-point range of 7 to 8% is pretty impressive anyhow given that there is not any if at all any pricing in it, so what you're seeing there is our honest reflection now.

The reverse could be said for our lubricant business where we see some things in other areas are growing faster, so again, we take a step back, have a good look at where we think things are, and then we share those out as being the goals that we set going forward given that also these goals do not reflect any acquisition whatsoever.

This is all organic growth.

We're not ashamed of it in any way.

Has it changed?

Yes.

Why has it changed?

When you look at across the brand, it is a small piece of movement within each of them that add up to this total number.

Yes.

Okay.

Thank you.

Thank you.

We'll take a follow-up question from Jeff Zekauskas.

Just a couple of small things.

The first is I think that there is a reestablishment of the R&D tax credit and so your tax rate should come down in the coming quarters.

Can you talk about the magnitude of the tax rate decrease or your tax rate expectation for the year?

No.

We haven't guided on tax rate expectation.

That should begin to affect us I think it starts in the next quarter, but we haven't guided on exactly what the impact of that would be.

Well, you do say in the Q that it would be lower than -- your consolidated tax rate will be lower than the previous year.

Yes.

How much lower?

We haven't guided on tax rate.

But it is lower?

Yes.

Second, can you remind me as to what your previous growth expectations were for the WD-40 sales over longer period of time?

That is you're now 7.6 to 13.

What was it before?

It was -- through '09 the lubricant segment was 6.6 to 7.8.

It is now 7.6 to 9.7.

I am sorry. 7.6 to 9.7.

Is what it is now.

Up until the last guidance we gave, of course not guidance, goal we had which was through '09 was 6.6 to 7.8.

Yes.

And I think the previous caller wanted to know how the mid-point of the household products guidance had come down.

You're knocking it down by about 4 percentage points annually.

Is that across the board for your various products or is there one product line that you think is particularly problematic?

It does seem a shift in your long-term goals, so what are the underlying assumptions?

The underlying assumptions basically, Jeff, is as I described.

We take a look at the brands as we see them today.

We look at the competitive landscape.

We look at innovation that we have or may have or may have had in our pipeline.

We look at the changing category dynamics that are happening, so we take in a number of data points, and then we then take a hard look at our business and say where do we expect the changes will be.

It is not one brand within that that has taken a major portion.

It is just that we feel that overall this is more of how we see the business looking today.

It will probably change when we revisit it again this time next year depending on whatever innovation comes in, how much momentum comes from that innovation, how the market shifts.

I think it is a pretty responsible way of just taking a look at our business as we see it today given the environment and the landscape and the activities that are going on around us.

One of the areas that you don't speak so much about now is Lava.

Yes.

Do you think that Lava will stay part of your product portfolio over a longer period of time?

Lava is a harvest brand for us now, and if Lava was to be sold out from under our assets, it would be for a good reason, but right now we have no reason to do that.

We're continuing to harvest it.

It is a low maintenance brand for us, so we have really no -- if we sold it, it wouldn't reduce our variable costs by any measurable amount at all, so really it is what we get, we get to the bottom line.

So it is still a very good free cash flow generator?

For the sales it is very good.

And lastly, can you -- can you talk about how much more that you need to spend this year to bulk up your Chinese operation, and can you just go over what you're attempting to do in China?

Sure.

We estimated our start-up costs would be about $1 million, and that's really to build the infrastructure.

And what are we doing?

We are setting up an operation exactly the way we set it up in Europe 20 years ago.

We're putting in -- we've opened a subsidiary in mainland China called Wu di Shanghai Trading Company.

We've moved our managing director from Australia and his family and embedded them in Shanghai.

We've opened an office, we're setting up distribution.

We're currently in the recruitment of our sales and marketing people.

We'll have a number of sales people on the ground.

We've completed market mapping which is determining what markets, what cities, what areas we want to go after first, and we will be going out there to turn up the volume on making primarily the WD-40 brand more famous and making it easier for the Chinese to buy.

Okay.

Thank you very much, Garry.

Thank you, Jeff.

[OPERATOR INSTRUCTIONS] It appears we have no further questions.

Okay.

Well, thank you, everybody, for joining us today, and we will be back here about 90 days from now with some more updates.

Good evening.

That does conclude today's conference call.

Thank you very much for your participation.

Have a wonderful day.