WD-40 Co (WDFC) 2007 Q3 法說會逐字稿

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

Today's call is being recorded.

At this time, I'd like to turn the call over to the 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 earnings call for fiscal 2007.

Today we are pleased to have Garry Ridge, President and CEO, and Mike 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 risk and uncertainties which may cause actual results to differ materially from forward-looking statements including the impact of new product innovations and renovations, foreign currency exchange rates, impact of cost of goods, the timing of advertising and sales promotion activities.

The Company's expectations, beliefs, and projections are expressed in good faith and believed by the Company to have a reasonable basis that there can be no assurance that the Company's expectation, 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 stay up to date with our most recent company developments provided in the Investor Relations section of our Web site at wd40.com.

Our fourth quarter fiscal 2007 earnings conference call is scheduled to take place on Wednesday, October 17, 2007 at 2:00 p.m.

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

Thank you, Maria.

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

Our shareholders letter last year opened with, "We only see one market and it's global" and we continue to see the benefits from our growing, global operations.

Today, we reported net sales of $77.6 million for the third quarter of fiscal year 2007, an increase of 6.2% over last year.

Year-to-date net sales of $228.9 million, an increase of 8.1% over the same period last year.

Net income for the third quarter was $7.6 million, up 8.5% compared to the third quarter last year.

Year-to-date net income is $22.3 million, up 2.2% from the same period last year.

And earnings per share for the quarter were $0.44 compared to $0.42 last year.

Year-to-date earnings per share are $1.29, even with last year.

About product segments.

In the third quarter, our lubricant sales were $56.5 million, a 15.9% increase and year-to-date they are running at $162.2 million, a 15.6% increase.

Hand cleaners were $1.7 million, an increase of 12.4% for the quarter, year-to-date are running of $4.6 million, down 2.8%.

And our household products were $19.4 million, down 14.9%.

Year-to-date, they're at $62.1 million, down 7%.

Lubricant sales were up in all trading box, assisted by the continued geographic expansion along with the addition of WD-40 Smart Straw, which was introduced in the third and fourth quarters of 2005.

It's encouraging to see that our core lubricant business continues to be a growth opportunity.

From 2003 to 2006 our lubricant sales grew at a compounded annual growth rate of 9.5%.

Household product sales decreases for the quarter were due to sales declines primarily in the United States compared to Q3 last year, offset by sales growth of the (inaudible) brand in Australia.

The sales decline for the year-to-date were due to the U.S.

and were a result of several factors including lost or temporary decreases in distribution, timing of promotions and some category declines.

We continue to see the year-to-date sales growth of our household products in our Europe and Asian-Pacific business segments.

We continue to focus on innovation and renovation through product, packaging, and promotional strategies and to address the challenges and opportunities that exist in the competitive environments and the dynamic nature of the household products categories.

Looking at the region, our Americas trading block for the quarter had sales of $46 million, down 2.5% year-to-date at $140.1 million, up eight-tenths of 1%.

The Americas region is our largest segment covering 61% of our total sales in the current fiscal year.

Breaking it down into the U.S., our sales in the U.S.

for the quarter were up 1.3% and are up seven-tenths of a percent for the year-to-date.

The U.S.

had sales increases in Q3 in the WD-40, 3-IN-ONE and Lava brands.

The significant growth from these brands was offset by declines in the household products brands, which compete in a highly competitive market and are currently facing some diminishing product categories or shifts within these categories, as well as the continued significant competitive activity.

In Latin America our sales were down 10.7% in the quarter, are up 1.8% in the year.

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

The WD-40 brand sales were down 12.2% in the quarter, primarily due to a decreased promotional activity.

Year-to-date, sales were up 1.8% over last year.

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

Sales for the quarter were up 8.2%, are up 1.9% for the year.

Third quarter sales declines were a result of decreased promotional activity.

Year-to-date Canadian sales growth has been driven by the impact of WD-40 Smart Straw, 2000 Flushes and a new 3-IN-ONE product introduction.

Turning to Europe.

Our European block had sales of $25.4 million in the quarter, up 23.3% and year-to-date are a $71.6 million, up 23.5%.

Our European business includes lubricants and household products.

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

Changes in foreign currency exchange rates compared to the same nine-month fiscal year positively impacted current year-to-date sales in the region by approximately $6.6 million, or 10%.

For the third quarter exchange rate positively impacted sales by $2.7 million, or 12%.

By region, our European direct markets were up 24.9% for the quarter and are up 21.4% for the year.

We have our own direct sales forces in the U.K., Spain, Italy, France, Germany, Portugal, Austria, Denmark, and The Netherlands.

Sales in U.S.

dollars for the third quarter grew as follows: In the U.K., up 8%, France, up 32%, Germany, Switzerland, Austria, Denmark, and The Netherlands, up 38%, Spain and Portugal, up 57%, and Italy up 14%.

Sales from these countries accounted for 69% of the region's sales in the first nine months of the current fiscal year, down from 71% in the previous fiscal year.

In the distributor regions, sales were up.

In Europe sales were up 19.6% for the quarter and are up 28.7% for the year.

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

We had double-digit sales growth in all of our distributor market segment for both the quarter and the year-to-date periods.

The distributor markets account for approximately 31% of the total European segment sales in the first nine months of the current fiscal year, up from 29% in the same period of last year.

Turning to our Asia-Pacific trading block which includes Australia, New Zealand, and Asia, sales were $6.2 million for the third quarter, up 17.3%, and year-to-date sales are at $17.2 million, up 15.5%.

Asia-Pacific sales are approximately 8% of the total company sales compared to 7% of the total company sales in the prior year.

Asia-Pacific benefit primarily from the increased sales in both Asia and Australia and increased Novac sales in Australia.

In Asia, sales were up 9.4% for the quarter and are up 11.9% for the year.

Sales in Asia were up 9% in the third quarter primarily due to the increase WD-40 sales in China and increased promotional activity.

Sales across other regions in Asia were also up including the Philippines, Taiwan, Thailand, and Singapore.

Year-to-date sales have increased by 12% over the previous period last year.

The region represents a long-term growth potential for the Company.

While the Company has historically sold to Asian countries through third party marketing distributors to help accelerate the growth in the region, the Company has begun direct operations in mainland China this fiscal year.

We are pleased that our China subsidiary opened for business in the second quarter and is now actively selling and developing that market.

In Australia, sales in the quarter were up 31.4% and year-to-date are up 22.3%.

Sales in Australia were up for the quarter due to sales growth primarily in the Novac brand as a result of continued and new product introductions, increased distribution, and a television media campaign in the current fiscal year.

Novac continues to gain market share in Australia and is a great example of how we can take innovation from one continent to another.

Lubricant sales also contributed to the growth in Australia as a result of the increased promotional activity and the continued launch of WD-40 Smart Straw.

That's it for the sales update.

Now over to Mike Irwin who will continue the review of the financials.

Thank you, Garry.

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

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

Gross profit was 47.5% of sales in third quarter compared to 48.5% of sales in Q3 last year.

The increase in gross margin percentage was attributable to the increase in cost of products sold and a change in product mix.

Higher costs continued to negatively affect gross margins in all of the Company's regions.

The increase in cost of goods sold is a result of the continuing rise in costs of raw materials and components, including aerosol cans and petroleum-based products.

The mix of products sold during the current period included an increased amount of higher cost promotional offerings.

Partially offsetting these higher costs were price increases on some of the Company's products as well as a reduction in certain advertising and promotional costs which are treated as a reduction in sales.

The price increases, which were implemented during the third quarter of fiscal 2006, added approximately 1.0 percentage points to gross margin percentage in the current third quarter.

The reduced advertising promotional discounts positively impacted gross margin by 0.8 percentage points.

Certain A&P costs such as coupons and slotting are treated as a reduction in sales.

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 third quarter increased 10.1% to $20.2 million.

The increase in SG&A stems in part from higher employee-related costs of $0.8 million for salary increases, benefits, and additional staffing to support China operations, partially offset by $0.5 million of decreased bonus expense.

Miscellaneous expenses including increased commissions, legal expenses, freight, meeting and travel costs were up $0.8 million, and $0.7 million of SG&A expense increase was due to changes in foreign exchange rates.

The higher cost lowered our operating leverage in the quarter as SG&A expense increased to 26.1% of sales in the third quarter compared to 25.1% in the same period last year.

Advertising and sales promotion expenses decreased to $5.2 million in the third quarter from $5.9 million in Q3 last year, and as a percent of sales decreased to 6.7% from 8.1% in the third quarter last year.

The decrease in the current year period is related to the timing and investment in advertising activities in the current quarter compared to the same period last year.

In the prior fiscal year, media was concentrated during the second half of the fiscal year, while this fiscal year the Company concentrated its consumer broadcast and print media advertising to support new products during the first half.

Operating income in the quarter was $11.3 million, or 14.6% of sales compared to $11 million, or 15.1% of sales in Q3 last year.

Net interest expense for the quarter was $0.4 million, down from $1 million in Q3 last year reflecting the continued reduction in debt as well as increased interest income resulting from higher cash balances versus the prior year's fiscal third quarter.

Our next annual $10.7 million principal payment will be due in October 2007.

The provision for income taxes is 32.1% for the current year quarter, an increase from 31.2% in Q3 last year.

Both the current year and prior year tax provision reflect the impact of one-time tax benefits in the current quarter, the Company recognized benefits related to the exploration of statute of limitations.

Net income in the quarter was $7.6 million, up 8.5% from Q3 last year, and on a diluted per share basis earnings were $0.44 compared to $0.42 in Q3 last year.

Diluted shares outstanding have increased to 17.3 million shares compared to 17 million for the prior year quarter.

Now for a review of financial results for the first nine months.

Gross profit was $110.4 million, or 48.2% of sales in the first nine months last year compared to $102 million, or 48.2% in the same period last year.

Although gross margin percentage was flat, the Company continued to experience increases in cost of products which have negatively affected gross margins in all of the Company's regions.

And as we said before, the rise in cost is due to the significant increase for costs for components and raw materials.

Price increases for some of the Company's products implemented last year helped to offset these cost increases and the impact of these pricing changes added approximately 1.6 percentage points to the gross margin percentage in the current year.

A decrease in advertising promotional discounts also positively impacted gross margin.

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

SG&A expenses in the first nine months increased 13.5% to $59 million.

And that increase stems in part from higher employee-related expenses of $2.6 million for salary increases, benefits, relocation expenses, and additional staffing to manage our China business and inventory control, partially offset by $0.3 million of decreased bonus expense.

Freight costs were up $0.5 million due to sales growth and fuel surcharges.

Bad debt increased $0.3 million versus last year's as the same period last year reflected the recovery of bad debt.

Miscellaneous expenses, including increased commissions, legal expenses, meeting and travel costs, were up $2.2 million on a year-to-date basis, and $1.7 million of the SG&A expense increase was due to change in the foreign exchange rates.

The higher costs lowered our operating leverage in the first three quarters as SG&A increased to 25.8% of sales in the first nine months compared to 24.5% in the same period last year.

A&P expense increased to $15.9 million in the first nine months from $14.1 million in the same period last year and as a percent of sales increased to 6.9% from 6.7% in the prior year.

The increase in the current year period is related to the timing of our advertising investment in the first nine months of the fiscal year compared to the prior year period.

This fiscal year, the Company increased its consumer broadcast and print media advertising to support new products compared to the same period last year.

Investment in global A&P for fiscal 2007 is expected to be in the range of 6.5% to 7.5% of net sales and operating income for the nine months was $35.1 million compared to $35.5 million in the same period last year.

Net interest expense for the year-to-date was $1.7 million compared to $2.8 million during the first nine months of last year and again, we made our annual $10.7 million principal payment during Q1.

The provision for income taxes was 33.5% for the first nine months of this year, a decrease from 34.2% in the prior year.

The decrease in tax rate was primarily due to favorable rulings on foreign tax matters and the impact of statute of limitations.

These two items create a one-time nonrecurring benefit that total about $0.7 million in tax benefit and the Company does not anticipate benefits of this nature to be ongoing.

Net income in the first nine months was $22.3 million, up 2.2% compared to last year and on a diluted per share basis, EPS was $1.29 flat with last year.

Diluted shares outstanding have increased to 17.3 million in shares compared to 16.9 million for the year-to-date period last year.

And regarding the dividend on June 26th, the Board of Directors declared a regular quarterly dividend of $0.25 per share compared to $0.22 in the quarter last year, and based on today's closing price of $36.97 the annualized dividend yield would be 2.7%.

About our balance sheet.

On May 31st, cash was $66 million, up from $45.2 million at the end of the fiscal year.

Accounts receivable increased to $45.5 million, up $1 million from the end of last year as a result of timing of sales.

Inventories decreased to $15.1 million, down $0.2 million versus the end of the fiscal year.

And although we don't -- sorry, backing up then.

Our inventory level's grown in recent years as you may recall, as we have a broader sourcing of our products outside of our traditional build and ship supply chain.

And although we don't currently envision dramatic increases in inventory, we are willing to invest in inventory to the extent that those levels help us grow sales and/or achieve lower cost.

Current liabilities were $51.4 million, up from $43.7 million at August 31st.

Accounts payable and accrued liabilities increased by $10.3 million due to the timing of payments and higher sales levels in the third quarter of fiscal 2007 compared to the fourth quarter of fiscal 2006.

And as you may remember, on March 27th of this year, the Company's Board of Directors approved a share buyback plan.

Under the plan, which is in effect for up to 12 months, the Company is authorized to acquire up to $35 million of the Company's outstanding shares.

That's it on the financial update.

More information, again, is available on the 10-Q to be filed tomorrow.

Thanks very much and back to Garry Ridge.

Thanks, Mike.

Given we're three parts through the year now, here's a recap of how we see the year coming to an end and an update on our guidance.

We now expect our sales to grow between 7 and 9% to between 307 and $313 million driven by continued geographic expansion, market penetration, and the continued development of new products.

We expect our advertising and promotional investment to range between 6.5 and 7.5% of sales.

We expect net income of between 29.1 and $30.2 million, which would achieve EPS in the range of $1.70 to $1.75 per share assuming that 17.3 million shares were outstanding.

This includes the impact of our first year results in China, which at the end of the year would have reduced our net income by approximately $0.6 million, or $600,000, or $0.04 a share.

We are continuing to look for the right acquisitions that meet our guidelines.

Specifically, we are looking for niche brands with demonstrable performance that can completely, be completely integrated into our business.

That's our update and we'd be really happy now to take any questions.

Thank you.

The question-and-answer session will be conducted electronically.

(OPERATOR INSTRUCTIONS).

The first question comes from Jeff Zekauskas with JPMorgan.

Hello, this is Ben Richardson, JPMorgan for Jeff.

Hi, Ben.

Hello.

So I noted a decline in household product and I was wondering if you might elaborate on that a little and perhaps speak to a turnaround in that segment, the time frame over which you might expect that?

Sure.

Let me talk about the whole household product segment.

We grew our household products 6% in fiscal year '05, 9% in fiscal year '06, and current year-to-date sales are below our period of last year by 7%.

This is a category that is dynamic in many ways and it relies heavily on promotion, on innovation, and is impacted by the category shifts that are caused by either competitive activity or not.

So, yes, it's an interesting and dynamic business in the U.S.

We have not brought any significant innovation to it in the U.S.

this year, which we would have liked to have done, but it is a meaningful part of our business, it's a $90 million piece of our business.

It's a business that supports a lot of the innovation that we do.

So a turnaround, yes, we'd like it -- we'd like to see it grow and unfortunately, we don't see it grow in a manner that's as predictable as our lubricant business.

All right.

And in terms of a seasonal rotation that you've spoken of in that segment previously, do you expect that will have any effect in the coming quarter or two here?

Well, the seasonal rotation that we spoke about was particularly linked to the first quarter of this year impacting the Christmas season where a number of retailers, particularly in the big box area, rotate out what you consider to be staple products and put in seasonal or treasure hunt-type products for that period.

So I wouldn't think that we would see that in the fourth quarter.

I'm not sure of what's going to happen in the first quarter of the next year.

All right.

Well, thank you very much.

I'll get back in the queue.

Thank you, Ben.

The next question comes from Alan Robinson with RBC.

Good afternoon.

Hello, Alan.

Just, you mentioned in a couple of the segments you discussed earlier that one of the reasons for the sales decline was due to decreased promotional activity, perhaps lower advertising spending.

Given that perhaps this is one of the main levers that you have over sales, can you give us an idea of what caused the sort of lower spend?

Whether it was really lower spend compared to what you set out, what you planned for at the start of the year and perhaps were there any specific geography, geographical locations where the spending was impacted by any particular factors?

Well, if we take it overall, you know, if we look at our global business, we had increased advertising and marketing investment in Australia to grow the Novac brand.

We've also had that in the U.K.

market against the 1001 brand.

In the -- and overall, our marketing investment is up over last year cumulatively for the year.

What we have seen in some of the household product segments here in the U.S.

is a lot more noise than we saw last year.

For example, when we went into some of our advertising and promotional programs, the uplift that we expected to get from an increased activity that we had this year didn't come to fruition as thought because of the increased activity in the competitive environment.

This business, again, is a very dynamic business.

It's not one that fazes us but we need -- we know that it performs differently.

It is not as predictable as we've said before but it is an important part of our business and it's one that over time we continue to grow it, we continue to innovate in it.

And we continue to have brands in the household segment that are either number one or number two in their category like Spot Shot and 2000 Flushes and Carpet Fresh, aerosol, et cetera.

Again, I would like to be able to be a little more predictable in the household products area, but it's not as -- it's a more dynamic business.

Okay.

And just to clarify it, I think a comment that Mike made earlier, did you say that your second half of the year sales and marketing spending was likely to be lower in absolute terms in the first half?

Did I hear that correctly?

I think what we're talking about is the relative weight in comparison to the prior year.

As a percent of sales.

Okay.

And you'll see now that we've now firmed up that we expect our advertising and promotional investment for the full-year to range between 6.5 and 7.5% of sales and it's tracking at the moment, Mike, at about 6.9.

Got you.

Okay.

Now, you talked in the past about aiming to get your gross margins back up to the 50% level.

It seems with the headwinds you're experiencing in terms of cost of goods, material costs, that might be a little bit tricky in the short-term.

Do you sort of aim your sales and marketing budgets to try and aim towards a sort of operate, a target operating margin or are the two elements separate there?

They're separate.

We would like to continue to see growth in our operating margins and our EBITDA as a percentage of sales, in our brand contribution.

These are all internal goals that we have.

But on the side of gross margin, as we've shared before, Alan, we're not going to sit around here and wait for a birthday present from our raw materials suppliers.

That's not going to happen.

We're going to have to increase gross margin by some, by innovation and we did -- we've started to do that internally except it's been offset by increases.

We are myopically focused on getting our gross margin back over time and I'm confident we will.

We've got some strategies heading into 2008 that we feel will continue to help us that in renovation and innovation of product.

So it's not an easy game and it's all about supply chain.

There's a whole lot of factors that we have to work on that are not an overnight fix.

It's much easier to be impacted by the increase that comes over the ten (inaudible) real quick but it's hard to put the other things in play.

But we're working hard on it, and we've got to get there and we won't rest until we are.

Okay.

And just to confirm, the decline in the target rate for sales and advertising expenses for this year is not so much a reflection or is not so much to mitigate the gross margin decline, it's an independent factor, is that correct?

That is correct.

Okay.

All right.

Thank you.

I'll step back in line.

Thanks, Alan.

Moving on to Liam Burke with Ferris, Baker Watts.

Mike, Garry, how are you today?

Good.

Garry, can I ask you a specific question on households?

Were there any brands that did particularly well this quarter?

As we've said, our Novac brand did well.

I'm sorry, domestic household, forgive me.

Oh.

Mike's going to look to see what we've got in the Q.

Did you have another question?

Yes, I did.

The other question I had is, you mentioned product mix having an adverse affect on gross margin.

If I looked at the revenue, there's obviously a heavier weighting on lubricant.

Are you seeing more pressure on -- from the raw materials than usual?

Because the way the quarter shook out in product or revenue weighting, it was more heavily weighted toward the lubricant side.

What that refers to is, we've got a number of promotional items that are running in our lubricant business at the moment.

One of them is evidenced in one of the retailers, which is our Smart Straw with the free no mess pen.

That's a program that was put in place to do a number of things, firstly, it's a great sampling opportunity for no mess pens.

Secondly, it's a great way of getting noise on our Smart Straw.

So as we've developed more of those products in this quarter and they've actually started to sell through the system, the mix was affected.

But they're kind of short-term promotional events that are impacting gross margin in a way that's not usual for us instead of hitting the direct investment in A&P or in discounts and allowances.

Okay.

Thank you.

And, sorry, Mike, what was the?

Yes, if we look on a year-to-date basis, and what we said earlier on the Novac in Australia was particularly strong for us and we've talked before about the success that we've had in growing the 1001 brand.

There was nothing, really, that was remarkably different in the U.S.

It was kind of across all brands.

Across all brands.

Great.

Thank you very much.

Thanks.

The next question will come from Frank Magdlen with The Robins Group.

Good afternoon, Garry.

Hello, Frank.

A couple of questions.

One is the China, the expense for China or the impact on the income statement is less this quarter, at least to your guidance.

Can you explain what's going on?

Is it just a smaller investment?

When we started off planning for China, we thought that we had a plan that the investment overall would have about $1 million impact.

Our people have done a great job.

We were able to get a lot of things done and our investment didn't need, or didn't end up for a run rate for the year.

We had put in there some thoughts that if we didn't get off on time, our expenses may be a little higher.

And that was hard to predict given that you don't know the outcome of some of the things you need to put in place, particularly on from the regulatory side of China.

But the good news is, we were up and going and ready to go on time, in fact, before time.

So we were able to reduce some of the costs that we that may have happened if we were a little bit late in our delivery.

All right.

And did I hear that you have some new products or innovations planned for '08?

Absolutely.

Are they both innovation and new products?

Yes.

You have two things going on there?

Well, we have innovation and renovation.

Right.

Innovation for us is basically new product under certain brands and renovation is a bit like the X-14 restaging, which is taking a current brand and basically giving it a new look.

Okay.

And then another observation only is that you didn't have any, you didn't buy any stock back this quarter.

Any plans -- is that something that is going to be in place?

I mean you authorized it, but what's the trigger that actuates it?

Well, Frank, you're right that we do have a trigger that activates it.

We have internal targets that we set and so we will be active as we see those targets.

Okay.

And then, Garry, one question on the strategy.

In, say, the late 90s or early 2000, you spent more money supporting brand.

And do you think that's still viable with what you're seeing happening in the household products area?

I'm not quite sure what you meant by that question.

Well, I think you used to spend closer to 9%, maybe?

I think we've oscillated up and down.

Also, Frank, as the WD-40 brand, or our lubricants brands, have become and been growing, our investment in that area is a different type of investment than in our household products.

So we didn't go out and over invest and we don't over invest in WD-40 unless there's a specific reason.

But nobody has really asked the question today about our growth globally.

And really, we, back in 2000 said we were going to make this a stronger, more viable long-term product innovation business by diversification by brand, by diversification by geography, and by diversification by trade channel.

And our business in Europe now is heading for a run rate, really, of nearly $100 million, which is not that much smaller than the whole company was back in '99 or '98.

So this is not a one-trick pony strategy.

It's three things that will work together to reduce our risk and to give us the ability to grow to bring innovation into the Company.

And we wanted to put three legs on the stool where once before we only had one leg.

All right.

I agree with you've done -- you're doing an excellent job of taking the brands globally.

I think the question that's in the back of most people's minds, I believe, is the relative softness of the household products and we're just trying to get a little more color on that.

Well, household products is a viable, profitable part of our business and we see ways of growing that through innovation.

But if you took $90 million out of our sales revenue, we wouldn't have the strength of business that we have now.

We've been able to take some of those products globally.

It is a different dynamic and certainly less predictable business, but I don't think we're in any way ashamed of it.

And we are, you know, we're good competitors in the niches that we compete in.

And like any strategy or portfolio, we would love everything to be growing all at one time.

One of the disadvantages we have, too, is that if you look at the big consumer products company, they can, well, I won't say hide, a lot of, they report and they have so much more in each of their brands that they're not seen as naked in the shower as we are in household products.

So I sometimes think we get a bit of an unfair rap because they say look at your household products business, what is it doing?

It's because we're very visible.

And I'm not -- we're not ashamed of it.

We're going to be aggressive competitors in it.

We'll stay in it until we believe there's something better for us to do or a better way to invest our time, talent and treasure.

Meanwhile, it adds profitability, it helps us drive innovation, it helps us understand new markets, and it brings a new dynamic to our business.

All right.

Aside from that, you're right.

I think that it's a big part of your business and it's not going to go away.

I think if people had their druthers they'd like to see a little more performance out of it but it's a good cash flow et cetera.

Correct.

Anyway, thank you very much.

Thanks, Frank.

Moving on, a question comes from Robert Felice with Gabelli & Company.

Hi, guys.

Just a couple of quick questions.

Wanted to focus a second on the gross margin compression during the quarter, not to beat a dead horse, but I was hoping that you could parse through the relative effect of increased costs versus a negative shift in product mix.

And then on the product mix side, just wondering what are the gross margins of household products relative to the remaining businesses and wondering if the softness there weighed on the margins?

We'll try to give as much information as we can in answering your question.

If we, first off with respect to the relative margins of the products, they're fairly comparable across.

Where household products are a little bit different is that a higher proportion of the marketing investments that we make in household products are subject to classification as a reduction in sales.

So a coupon gets classified as a reduction in sales and therefore influences gross margin.

But if we take that same money and we invest it in a TV spot, for instance, it has no affect on gross margin.

And so there is a variability depending upon how you define gross margin, whether it's gross margin as a percentage of overall gross sales or as a percentage of net sales, which is what we report.

So there is that variable in there.

And clearly, the household products because the purchase cycle is shorter require a different degree of investment than the rest of our business and so we typically invest more in household products than we do, say, in the lubricant business as an example.

With respect to changes, we've had -- I don't think that we've spelled out the impact of actual shifts in mix and the actual impact of the rising costs, but what we do say, though, is that we had an impact in pricing, which influenced gross margin by 1 percentage point.

So that added, so had we not had the increase in pricing, we would have had a gross margin 1 percentage point less.

The advertising promotional discount that we talked about had a favorable impact on gross margin of 0.8 percentage points.

And those are the two things that we have spoken to specifically in reference to gross margin.

And the positive impact that you had from promotion at the gross margin level, was that attributed to household?

It's primarily attributable to household because the tactics that are traditionally used to support household are the ones that are classified as a reduction in sales.

As an example, we typically don't run coupons for things like WD-40 and 3-IN-ONE.

We typically don't pay slotting for those things either.

And those are two just examples of the kinds of things that get reclassified as a reduction in our sales.

So it doesn't sound like household really weighed on the margin during the quarter.

So in terms of the negative mix effect, what was that attributable to (inaudible)?

Well, the negative effect on mix was primarily because of higher cost promotional offerings that we did.

Garry had spoken earlier, as an example, about one of the promotions that we've been running at a major retailer where we offered a can of the WD-40 Smart Straw with an attached free offering of the WD-40 no mess pen as a way to do mass sampling of that item.

As a result of offering something like that for free that we would typically sell, we're selling that particular promotion at a lower gross margin than those two would be separately.

Okay.

And then, also, if I step back, you lowered your expectations for the full-year A&S as a percent of sales.

In the same token, China is not going to be as much of a detriment this year as you originally expected.

You've narrowed the range on your guidance EPS to the low end and if I back all that out, it suggests to me, or implies, that you expect continued gross margin compression in the fourth quarter.

I guess, first, is that correct?

And then, second, you'd mentioned earlier that as we look into 2008, there's some plans in place to recoup some of the margins.

I was hoping you could comment on that, as well.

We would expect our gross margin to be stable as it's been through the year.

Really, it hasn't fluctuated immensely this year so no, we don't see a compression.

And we really are looking at, and we'll talk more in the fourth quarter about some of the initiatives that we have on our plan for the following year.

We don't give gross margin guidance.

We do try and describe the impacts on it and how we feel that would help but it's really a dangerous ground because of the volatility.

Gross margin and costs are bouncing around more than Roger Federer's tennis balls.

We really need to make sure we grab all those balls and do what we can with them.

Just to clarify that, as we head into the fourth quarter, you don't expect sequential compression or you don't expect year-over-year compression?

I don't --

On a gross margin level.

Yes.

We don't give quarterly guidance but on the full-year we would see that margins are about stable where they are.

So far.

So far.

Okay.

Fair enough.

And the next question will come from the line of Jeff Zekauskas of JPMorgan.

Yes, good afternoon.

This is Silke Kueck-Valdes, part of Jeff's team.

How are you?

Good.

I've got a couple of questions.

You spoke about the household products business being very dynamic and that it grew 6% in '05, 9% in '06 and then year-to-date it's down 7%.

So could that swing around and grow at a 5% clip in '08 or would that be unreasonable?

We'll update our full-year guidance when we come out in November as we normally do so you should be able to see how we see it at that time.

But do you generally expect that business to grow in '08 (inaudible)?

I would generally expect and hope that all of our businesses would grow in every year, but the reality is it's a dynamic market and it depends on not only our activity but competitor activity.

He who goes by the crystal ball learns to eat glass.

And I really believe what we can do is be as honest and as forthright as possible knowing what we know at the time, and in November we'll come back and refresh that.

Can you talk about where you achieved the pricing so there was 1% helped with the gross margin based on pricing?

Was that mostly in lubricants?

We had announced price increases during the third quarter of fiscal 2006.

And we announced them on a variety of our products in a variety of countries.

Given that the lubricant business is the largest portion of our business, we had price increases on lubricants.

But we don't speak to what proportion of that price increase came from lubricants as opposed to other things.

Good.

And then, lastly, the Cap Ex run rate for the year has been closer to like $2 million versus $3 million last year.

So is that sort of like $2 million for the year like a going run rate?

We have seen our Cap Ex over the past few years, actually, growing largely driven by innovation.

And we have chosen at times in the past when we have an opportunity to have plastic parts made on our behalf, we've chosen at times to buy the molds for that so that we have mobility with suppliers if we choose to do so.

And so we've seen that grow over time.

But, our overall strategy is really an asset-life strategy.

So as our, as Mike said, as our business changes we, and in November, we will update you what we think our Cap Ex needs are for the following year once all our plans are all screwed down and we're ready to roll.

Again, as a proportion, it's still a significantly small amount given that our strategy is an asset-life strategy.

Okay.

Thanks very much.

Thank you.

We have a question from the line of Alan Robinson with RBC.

Hi.

Just a follow-up on one of Frank's questions earlier regarding your share repurchase authorization.

Am I right that your buybacks are triggered by a certain target stock price that you monitor from time to time?

We have a plan in place that's targeted based on accretion targets that we have and so as we, if we hit those targets, then we buy.

Okay.

Okay.

So the fact that you didn't buy or you haven't bought since March 27th doesn't necessarily imply that the share prices since then have been too high for you to repurchase?

Not sure I understand that question.

I'm trying to get a feel for why you kept your powder dry during the quarter and I guess what I'm trying to get at is, is the trigger price for your buybacks below the price that we've seen over the past three months or so?

Well --

I guess what you're saying then, if you're talking about --

The answer to your question would be, I guess that would be right.

But again, we have triggers that, and we do the math on what's accretive and what's not.

Okay.

No, that's fine.

And just finally, what's a good go-forward tax rate for the next couple of quarters?

34% or are you going to stay at this relatively low level?

We don't guide on tax rate.

What we did say in our discussion a few minutes ago is that we felt that this tax rate was one that was lower than we would expect going forward because it was a result of some one-time tax benefits.

Okay.

I've got you.

All right.

Thank you.

Thanks.

And the final question comes from the line of Cheryl Cortez with SFG.

Hi, there.

How you doing?

Good, Cheryl.

Most of my questions were answered.

I guess I was just wondering if you could possibly give us more color on progress in the trade channels you wish to grow into like the janitorial, hobby, crafts, office supplies sector?

Also if you could share any additional information or color on your relationship with your distributors.

With our relationship with our distributors.

Let me back into that one first.

In distributors where and what portion of our relationship?

Oh, mostly just U.S.

for the flagship product.

I'm just kind of curious how that's --

Well, we don't, okay, I'm guessing you mean our customers in the U.S.

because we don't really have distributors in the U.S.

Yes.

I would hope that our relationship is as good as it can be.

We want to deliver above expectation performance at extremely good value to the consumer and if we continue to do that, I think it's positive.

So we want to -- one of our values is creating positive lasting memories and we want to do that.

But then our customers have their music that they're marching to, as well.

We certainly don't wake up every morning with an objective of upsetting our customers so I would hope that it's positive.

We certainly work at it being positive.

The first question you had was then, how was the expansion in the new distribution channels.

It continues, and we are excited about the opportunities that we see there.

Some of the new places that we've got into, you would have seen product in stores like the Container Store and places like that that you've never seen before.

We're comfortable that with the new product offering we've got, that brings us new opportunities for distribution.

But also the other side of our distribution is our global business.

This is a phenomenal global business.

And to see that the investment that we've made over time in infrastructure, in people, and in product is starting to really gain momentum in Europe and then followed on by China and other places we'll go, I'm really, really happy that I'm not sitting here as the CEO of a company right now that is totally dependent on the U.S.

market.

There's not many consumer products companies that are of our size that can say that.

But we're certainly benefiting from the expanded growth of our businesses in Europe and into Asia as we really leverage that competency of people and of knowledge we have.

Thank you very much.

That does conclude the question-and-answer session.

I'll now turn the conference back over to you for any additional or closing remarks.

Okay.

That's it for today.

Thank you very much.

We look forward to you joining us in about 90 days or so from now.

And keep spraying and stopping squeaks and getting rid of dirt and using our products.

Thanks a lot.

Have a great afternoon.

That does conclude today's conference call.

Thank you for your participation.