WD-40 Co (WDFC) 2007 Q4 法說會逐字稿

Good day, and welcome to the WD-40 fourth quarter earnings conference release conference call.

Today's call is being recorded.

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

Please go ahead.

Good afternoon, thank you for joining us for our fourth quarter earnings call.

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

Also with us are Mike Freeman, division President of the America's trading block, Jeff Holesworth, managing director of the Asia-Pacific trading block and William Noble, managing director of the Europe trading block.

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

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

The forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward-looking statements.

Including the impact of changes and advertising and promotion expenditures, changes in products format, foreign currency exchange rate and the uncertainty of market conditions, both in the United States and internationally.

The Company's expectations, beliefs, and projects are expressed in good faith and believed by the Company to have a reasonable basis, but there can be no assurance the Company's expectations, beliefs, or projections will be achieved or accomplished.

The risks and uncertainties are detailed from time to time in the reports filed by WD-40 Company with the SEC, including Forms 8-K, 10-K, 10-Q and readers are encouraged to read these and other documents and stay up-to-date with the recent company developments provided in the Investor Relations section of our website at WD-40.com.

Our first quarter fiscal 2008 conference call is scheduled to take place on Wednesday, January 9, 2008 at 2 p.m.

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

Thanks.

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

As shareholders later last year opened with, we only see one market in its global.

We continue to see the benefits of our growing global operation.

Today we reported net sales of 78.9 million for the fourth quarter of fiscal year 2007, an increase of 5% over last year.

Changes in foreign currency exchange rates positively impacted net sales for the quarter by 2.2 million or 3%.

Year-to-date, net sales are 307.8 million, an increase of 7.3% over the same period, same as last year.

Changes in foreign currency rates, positively impacted net sales for the year by 9.4 million, or 3%.

Net income for the fourth quarter was 9.3 million, up 46.4% compared to the fourth quarter last year.

For fiscal year 2007, net income is 31.5 million, up 12.2% from last year.

Earnings per share for the quarter were $0.54 compared to $0.37 last year.

Fiscal year earnings per share are $1.83 up 9.8% from $1.66 last year.

Taking a look at our product segments.

Our lubricant business sales in Q4 were 54.1 million, up 7.8% and for the year, 216.3 million, up 13.6%.

Now, hand cleaner sales in the quarter were 1.8 million, up -- down 4.4% and 6.4 million for the year down 3.3%.

Now household product sales for the quarter were 23 million, down 3 basis points and for the year, 85.1 million, down 5.3%.

Lubricant sales were up in all trading box for both the fourth quarter and the fiscal year.

Continued geographic expansion, along with the edition of Smart Straw which was introduced in the second half of 2005, were big drivers of this growth.

Our core lubricant business continues to be a growth opportunity due to the success of the WD-40 Smart Straw in the market.

We plan to convert many of our can sizes to that format exclusively in the United States in late 2008.

From 2002 to 2007, our lubricant sales grow at a compounded annual growth rate of 10%.

The long-term trend stems from the success of our geographic expansion and brand development, as well as the new delivery systems for the WD-40 brand.

Household products sales decreased for the fourth quarter and the fiscal year due to sales declines primarily in the United States compared to last year offset by sales growth in the Novak brand in Australia and the 1001 brand in the United Kingdom.

Sales declines in the U.S.

were a result in several factors, including lost or temporary distribution decreases in promotional timing, competitive activity and category decline.

While sales were down from last year, our household products portfolio is cyclical but sustainable.

For fiscal 2007, our household products are showing growth in both our European and Asia-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 within the competitive environment of the household products category.

Now, taking a look at our regions.

In the Americas trading block, sales in the fourth quarter were 47.1 million, down 1.7% and for the year were 187.1 million, up 200 basis points.

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

Last year, the Americas segment accounted for 65% of our total company sales.

In the United States, in the quarter, sales were down 3.5% and off 400 basis points for the year.

For the year, the WD-40 brand showed growth in the U.S., due to increased promotional activity and the growth of Smart Straw.

The increase from the WD-40 brand was offset by declines in all other brands in the region.

The household brands compete in a highly competitive market and are currently facing diminished product categories or shifts in the categories.

By nature, the household products categories have a high degree of competitive activity.

In Latin America, our sales in the fourth quarter were up 30.5% and up 6.5% for the year.

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

The WD-40 sales were up 33% in the quarter due to increased distribution and promotional activity.

Year-to-date sales were up 7% over the last year in Latin-America.

In Canada, our Q4 sales were up 4.9% and in the year, were up 2.5%.

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

Year-to-date, Canadian sales growth was driven by the impact of WD-40 Smart Straw, 2000 flushes and's new 3-IN-ONE product introduction.

Overall growth was offset by Spot Shot due to changes in distribution with the key customer.

Now, crossing the pond to Europe and European trading block, sales in Q4 were $24.9 million, up 17.8% and for the year, $96.5 million, up 22%.

Now European business includes lubricants and household products, we sell into Europe through a combination of direct operations in certain countries, as well as distributors in other countries.

The European region accounts of 31% of our total Company sales.

Our long-standing investment in Europe is paying off as the European sales have grown at a compounded annual growth rate of 19.9% since 2002.

Changes in foreign currency exchange rates compared to the last fiscal year positively impacted current year-to-date sales in the region by approximately $8.4 million or 10%.

For the fourth quarter exchange rate positively impacted sales by approximately $1.8 million or 8%.

Breaking the region's down in Europe a little, in our European direct markets, we're up 22.4% for the quarter and up 21.6% for the year.

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

Sales in U.S dollars for the fiscal year grew as the following.

United Kingdom up 15%, France up 23%, Germany, Switzerland, Austria, Denmark and Netherlands up 30%, Spain and Portugal up 28% and Italy up 26%.

Sales from these countries accounted for 70% of the region's sales in the current fiscal year, down from 71% in the previous year.

Our distributor market in Europe, sales in the quarter were up 7% and year-to-date up 22.8%.

We sell through independent local distributors in Eastern and Northern Europe, the Middle East and Africa.

The Middle East had a strong fourth quarter with 29% sales growth over the fourth quarter of last year.

For the fiscal year, we had double-digit sales growth in all of our distributor market segments.

The distributor markets account for approximately 30% of the total European segment sales in the current fiscal year, up from 29% in the same period last year.

Now, turning our sights down to the Asia Pacific trading block, Q4 sales were 7 million, up 13.4% and year-to-date, 22.4 million, up 19.4%.

Asia Pacific sales are approximately 8% of the Company's total sales, compared to 7% of total sales in the prior year.

Asia Pacific sales benefited from the increased lubricant sales both in Asia and Australia, as well as an increase in the Novak sales in Australia.

In the Asian region, sales in the quarter were up 700 basis points, but up 8% for the year.

This region represents long-term growth potential for the Company.

While the Company is historically sold to Asia through third-party marketing distributors to help the accelerated growth of the region, the Company began direct operations in China in 2007.

In fact, we told you about it on this call last year.

We're pleased with our sales in China.

They grew 50.3% in the first part year of our operation.

Sales in Asia, other areas of Asia were flat to slightly down in the quarter primarily due to Indonesian customers slowing imports through August.

For the year, the Asian distributor regions growth included the Philippines, India, Indonesia, Thailand and Singapore.

Sales in Asia were up 8% over the previous fiscal year primarily due to the increase sales in China and increased promotional activity.

Sales in Australia for the quarter, due to -- were up 48.5% and up 29% for the year-to-date.

Sales were up for the quarter due to double digit sales growth across all brands.

The fiscal year growth for Australia is 29% over last year.

The Novak continues to gain market share in Australia, due to new product introductions, increased distribution and a television media campaign.

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

That's it for the sales update.

Now, over to Michael Irwin who will continue the review of our financials.

Thank you, Garry.

In addition to the information presented on this call, we suggest you review our 10-K that will be filed on October 25.

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

First, we'll start with our fourth quarter results.

Gross profit was 48.7% of sales in the fourth quarter, compared to 48% of sales in Q4 last year.

The slight increase in gross margin was partly due to favorable sales mix, which helped offset cost of goods and raw material costs.

Timing of promotional activity as well as shifts in promotional mix may cause fluctuations in gross margin percentage from period-to-period.

Selling and general administrative expenses for the fourth quarter decreased 1.4% to $19.5 million.

The lower costs and higher Q4 sales improved our operating leverage in the quarter to 24.7% of sales compared to 26.3% in the same period of the last year.

Advertising sales promotion expense decreased from 4.9 million in the fourth quarter from $6 million in Q4 last year and as a percent of sales, decreased to 6.2% from 8% in the fourth quarter last year.

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

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

Operating income on the quarter was $14 million or 17.7% of sales, compared to $10.5 million or 13.9% of sales in Q4 last year.

Net interest expense for the quarter was 0.3 million, down from 0.7 million in Q4 last year, reflecting the continued reduction of debt, as well as increased income resulting from higher cash balances versus the prior fiscal year fourth quarter.

Our next annual $10.7 million principle payment will be actually tomorrow.

The provision for income taxes was 32.2% for the current year quarter.

A decrease from 35% in Q4 last year.

The decrease in tax rate is mostly due to municipal bond interest stemming from higher cash balances and higher interest rates, along with a one-time benefit related to the extra territorial or ETI deduction.

Net income in the quarter was $9.3 million was up 46.4% versus last year and on a diluted per share basis, earnings were $.05 compared to $0.37 in Q4 last year.

Diluted shares outstanding increased to 17.3 million shares, compared to 17.1 million shares for the prior-year quarter.

Now, we'll move on to our financial results for the fiscal year period.

Gross profit was $148.9 million or 48.4% of sales for the fiscal year, compared to $138.4 million and 48.2% of sales in the same period last year.

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

The rise in cost is due to the significant increase and cost for components, as well as product mix, price increases for some of the Company's products implemented last year helped offset the cost increases.

The impact of the pricing changes added approximately 1.3 percentage points to the gross margin percentage in the current year.

The rising cost of products is also partially offset by decrease in advertising, promotional, and other discounts, which are recorded as a reduction to sales.

The decrease in A&P and other discounts positively impacted the gross margin percentage by 0.5%.

This decrease results from both timing and reductions in discounts offered during the fiscal year.

Selling general and administrative expenses for the fiscal year increased 9.4% to $78.5 million.

The increase in SG&A stems in part from higher employee-related expenses of $3 million for salary, fringe, and additional staffing, partially offset by $0.8 million of decreased bonus expense, higher professional services expense of $0.9 million, primarily in legal services.

Miscellaneous expenses, including commission leading travel costs and office overhead were up $1.4 million.

And $2.4 million of the SG&A expense increase was due to changes in foreign exchange rates.

Also recall that the opening of our direct operation in China added $1.4 million to our SG&A costs.

To put the SG&A increase in perspective, our FY'07 SG&A costs excluding foreign exchange rate impact in China would have risen by 4.1% from the prior year.

The higher costs lowered our operating leverage for the fiscal year as SG&A expense increased to 25.5% of sales compared to 25% last year.

Advertising and sales promotion expenses increased to $20.7 million in the fiscal 2007, up from $20.1 million in fiscal 2006, and as a percent of sales, decreased to 6.7% from 7% in the prior year.

The dollar increase was related to increase consumer broadcasts, print media and other advertising activities in the U.S., Europe and Australia.

Operating income for the fiscal 2007 was $49 million, compared to 46 million in fiscal 2006.

Net interest expense for the year was $2 million compared to 3.5 million in fiscal 2006.

The change in net interest expense was due to the reduced principle balance on the long-term borrowings and increased interest income resulting from higher cash balances.

The provision for income taxes was 33.2% for fiscal 2007, a decrease from 34.4% in the prior fiscal year.

The decrease in tax rate was primarily due to favorable rulings on foreign tax matters, the one-time benefit from the ETI deduction and the impact of the expiration of federal statutes of limitations.

These items created one-time benefits that totalled approximately $0.9 million in tax benefits.

Had it not been for these non-recurring items, our fiscal 2007 tax rate would have been 35.0%.

The Company does not anticipate these benefits of this nature to be ongoing and the tax benefit from higher municipal interest income also contributed to the decrease in fiscal 2007 tax rate.

Net income was $31.5 million, up $3.4 million, or 12.2% from fiscal 2006, on a diluted per share basis, earnings were $1.83 compared to $1.86 in the prior year.

The change in foreign currency exchange rates had a positive impact of $1.1 million in fiscal 2007 net income.

Fiscal 2007 results translated at last fiscal year's foreign exchange rate would have produced net income of $30.4 million.

The diluted shares outstanding again increased to 17.3 million shares for the full-year compared to 16.9 million shares last year.

Regarding the dividend on October 4, the Board of Directors declared a regular quarterly dividend of $0.25 per share payable on October 31 to shareholders of record on October 18 and based on today's closing price of $36.47, the annualized dividend rate will be 2.7%.

You may recall the Company raised its dividend by 13.6% in the second quarter of fiscal 2007.

Our balance sheet on August 31 showed cash balance of $61.1 million up from 45.2 million at the end of the fiscal year.

Accounts receivable increased to 47.2 million up 2.7 million from the end of last year as a result of the timing of sales.

Inventory decreased to $13.2 million down by $2.1 million versus last year also due to timing.

Current liabilities were 53.9 million, up from 43.9 million on August 31, 2006, accounts payable and accrued liabilities increased by 12.7 million due to the timing of payment and higher sales in the fourth quarter of fiscal 2007, compared to the fourth quarter of fiscal 2006.

Income taxes payable was down $9.1 million due to the timing of payments for federal income taxes.

Return on invested capital is a financial metric we believe is important in assessing our business performance.

WD-40 Company's ROIC for the fiscal year 2007 was 20.1%, up from 17.1% in the last fiscal year.

Our method of calculating ROIC is included in our earnings release today.

As you may remember on March 27, 2007 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's authorized to acquire $35 million of the Company's outstanding shares, and as of August 31, 2007, the Company has acquired 500,000 shares at a total cost of $17.3 million.

That is a financial update.

More information, again s available on our 10-K to be filed on October 25.

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

Thanks, Mike.

I would now like to address our guidance for fiscal 2008.

We expect our sales to grow between 7 and 10% it 329 to 339 million, driven by continued geographic expansion, market penetration and new products.

We expect our advertising and promotional investment to range between 6.5 and 8 .5% of sales.

We expect net income of between 31.1 and 32.8 million, which would achieve EPS of between $1.83 and $1.93 assuming 70 million shares outstanding.

We continue to look for the right acquisitions that meet our guidelines, specifically we're looking for niche brands with demonstrable performance that can be completely integrated into our business.

That's it for the updates, and we would now be pleased to answer your questions.

(OPERATOR INSTRUCTIONS) We'll hear-from-first from Jeff Zekauskas.

Hi, good day.

Hello.

Hi.

Your Asia-Pacific operations performed very well both for the quarter and for the year.

Do you expect an acceleration of growth organically in that area and have you gotten past the startup costs that you have had in opening your office in China?

Thank you, Jeff.

Yes, our sales in China for a half year grew 50% with the opening of our operation in mainland China.

The reason that we opened that operation was to take advantage of what we saw a potential growth markets and we would expect that we would see growth in those regions over time.

Not dissimilar to the sort of growth we have seen in Europe as we have opened direct markets there.

So, the Asia Pacific region is now a focus region of growth due to direct operations.

On the cost side, we have imbedded in our organization now the cost of the operation in China.

Those costs started to come into our trading statements at this time last year and ramped up over time until we were fully open in last year.

Those costs last year were about $1.4 million.

Secondly, over the past three months, crude has moved up from about $70 to $88 and may be over the past 10 days from the high 70s to the high 80s.

Do you care about that?

Does that make a difference to you in the short-term or does it not?

Number one, do we care about it, absolutely.

As you may recall, about 25% of the cost of the WD-40 product or lubricant product is impacted by the cost of our solvents and lubricant ingredients.

We do care about it.

We have been battling that in rising costs over time for the last many years.

I can recall not long ago when oil was $40 a barrel.

Yes, we're concerned about it and we continue to monitor it and we do intent to continue to work on having innovation help us offset that.

Mike, do you have something to add to that?

I think there was a couple of things.

Keep in mind the price of petroleum, though our underlining the cost-of-goods maybe don't move in direct promotion to the shifts of the cost of a barrel of oil, we're certainly influenced by it and as Garry pointed out in the example of WD-40.

But it also hits us in other areas.

Many of our products are sold in plastic bottles which are affected by the price of petroleum.

Many of our cans have plastic parts that are in there that are affected.

It affects us in freight as well.

So, we, long ago realized that there was a potential for oil to continue to fluctuate and if it went up, there was not a lot we could do about it.

What we could do is attack the threat of rising cost of goods in three different ways.

Garry mentioned the impact of innovation and most recently, today, we intend to switch over, convert most of our cans sold in the U.S.

market to the WD-40 Smart Straw.

This is one example where we're using innovation to address the potential for higher cost of goods.

Number two, we have had in the past and will continue to evaluate our price position in various markets around the world and determine whether or not the price increases need to continue to play a role in helping us address the costs that are in there.

And number three, we are continuing to address our supply chain in a very rigorous fashion to determine what ways we can work at reducing the costs of the things that are in there to at least mitigate some of the rising costs that come our way.

So those are the main ways that we expect to address it but we certainly do care about the direction and underlying costs.

I appreciate your answer.

Lastly, in your press release, you talked about household products as a cyclical business.

Were you trying to imply that you had reached some kind of cyclical low point and that 2008 might be cyclically stronger or were you saying something different?

What I was saying, Jeff, it's a business that is hard to predict.

It oscillates up and down.

The impact on the business is both external and internal.

External impact is categories that are shifting, competitors that are entering and exiting, the behavior of our retail customer, and the internal impacts is the impact of the product innovation, product launch.

So, what we have there is a sustainable but a business we have learned over time is a little cycular.

It goes up and down.

We're up some 10% in the household products business last year and down this year.

We're offsetting that by taking the innovations we have to new countries.

What we have come to determine, it's a solid piece of business that contributes good margin to our overall business to help us in our activities of product development and growth.

Yet, it's not as predictable as we would like it to be.

That is the beast it is.

Okay.

Thank you very much.

Next we'll hear from Liam Burke.

Mike, Garry, good afternoon.

Good afternoon, Leam.

Garry, there is a lot of talk about private equity being less involved in buying businesses.

How does the acquisition front look for you?

Is it getting any better?

Well, we heard about it.

[ Laughter ] We're waiting to see.

What we do know is we have a very disciplined approach to what we want to buy.

We won't overpay and that is why we haven't moved on anything in the past couple of years.

We do have capacity, we have cash, we have dry powder and we're inquisitive.

Mike?

Yes, Liam, I think in terms of valuations, it's probably early day.

To us the change and maybe valuations invest the dampening of private equity came with a subprime crisis that surfaced in August and so maybe a bit early, but we do feel like if in fact private equity firms are maybe getting hampered a little bit in their enthusiasm for deals, particularly because of a lack of availability of capital, that that does create opportunities for us as a potential strategic buyer to get in at prices that we're more comfortable with.

Irregardless of that, we continue to look around for things that fit our criteria and our price.

And both domestically and both in the U.S.

and our other global markets.

Garry, do you have any brand extensions planned for fiscal 2008?

We continue to bring in new product or new SKUs within our product range here and globally.

Yes, we do have opportunities and we do have products planned.

One already that we have announced is the new pet clean product, the environmentally biodegradable -- and Michael Freeman's here from the Americas.

I might ask him to talk about those products we have.

We're really excited about the Spot Shot pet product we have coming out.

It's not only helping us get into a new trade channel, which is one of the goals we have for innovation, but it's also helping us, is more of a entry into products that are non-toxic, biodegradable and into the green marketplace.

We're excited we're able to use innovation to accomplish those two new beachheads for our business in the United States.

Thanks, Mike.

Thank you, Garry.

Thanks.

Thanks, Liam.

Next we'll hear from Frank Magdlen with The Robins Group.

Good afternoon.

Good afternoon.

Hi, Frank.

A couple of smaller items but the tax rate, Mike, going forward is going to be about 35% including what you might get from municipal bond portfolio?

We don't guide on tax rates, Frank, but we expect upward pressure in our tax rate from what it actually landed at and in fiscal '07.

Okay.

And then could you review a little bit of the history of the price increases?

You have taken some in the past and had they all been slowly implemented, the last one that you took?

Yes, we had price increases that were taken over the past two fiscal years.

We took them, I think they were both implemented during the Q3 time period and they were taken in places like the U.S., but also at various times through other markets.

And what we do with that, Frank is we evaluate first off what is our underlying cost position and secondly, what is the opportunity that we have to change our prices, and what likely influence that would have on the market and so in some cases, we do price elasticity studies if it's appropriate.

Again, if we look back over the past two or three fiscal years, we have had two price increases.

We're open to that and keep in mind, too, our orientation as a company is kind of naturally against price increases in general, and we wouldn't want to use a price increase to mask our inefficiency, but at the same time, there is no denying that there has been a huge pressure, upward pressure in underlying cost of goods not just for us but for most companies that either make something or ship something.

No, no, you have been very consistent in say diligent or from an investors standpoint, stingy, in taking on some of the price increases and you're trying to preserve your market shelf space and a few other things there, but you haven't had a lot, let's put it that way.

That you talked about.

Can sizes in the U.S., are you reducing the number of can sizes or just converting everything to a Smart Straw?

Let me, Mike Freeman is the President of our Americas division.

He's here and heading out the conversion of Smart Straw.

I'm going to ask Mike to give you some information on that.

Thanks, Garry.

What we're trying to do with the Smart Straw conversion in the United States has several goals.

One is to take the number of SKU's we have in the WD-40 brand and try and use this as an opportunity to consolidate them, so that we can take them the cost-of-goods pressure away and having a more efficient operations, putting out fewer SKU's but more of them.

All right.

Is that going to be a large number?

I couldn't tell you exactly how many different SKU's you have, since you go through so many different trade channels and different sizes and configurations.

Relative to most companies, we have a small number of SKU's and I would say we may see a reduction somewhere in the neighborhood of a third.

Okay.

Overall.

All right.

We're looking at sizes and display configurations and a number of other decision criterias that are reducing the SKU count for WD-40.

Okay.

And looking at the '08, should the advertising and promotion expenses, are they going to be like they were last year, a little heavier in the first half of the year and not so in the second?

Frank, we don't guide on a quarter-to-quarter basis and so the only thing that we have commented on is that we expect it to range between 6.5 and 8.5% of sales for the full year.

Okay.

And Garry, with the guidance you have given, are you inclined to reduce your longer-term earnings and growth rate, your goals that you put out?

We'll be sharing those on our December call.

We haven't addressed that yet.

So, sorry, in our January call.

We'll share that then and at that time, we'll have a more rigorous update.

All right, thank you.

Thank you.

Next we'll hear from Robert Felice with Gabelli and Company.

Hi, guys, congrats on a nice quarter.

A couple of quick questions.

First, gross margins really expanded quite a bit during the quarter on a sequential basis.

I was hoping you could delve into, I guess, what drove the improvement.

I would imagine it was not a decline in cost and, Mike, you mentioned that you saw a mix improvement on a year-over-year basis.

Perhaps you could just shed a little color on that.

You know, I guess there is a couple of things.

The mix was, you know, certainly a year on, year one, we also have kind of a -- we had some benefit of supply chain efficiencies that we have been put in place.

You may remember that we talked about addressing our supply chain in a rigorous fashion and we continue to do that and evaluate how we do things, how we ship things, where we do it, when we do it, and we have seen some benefit of that.

Nonetheless, we remain concerned about the underlying direction in the raw materials that make up our cost-of-goods.

Okay.

Now, if I look at your guidance for 2008, it doesn't seem like you expect very much gross margin expansion on a year-over-year basis.

Is that just caution or concern with oil at $85 a barrel?

That is a lot of things.

You know, what we have learned is that the fate of raw materials into all of our products are hard to gauge.

We have a goal and I have said many times that our goal is to get our gross margin back over to the 50% and it's tough work but we're not going to give up until we get there and we're not going to get there primarily from fighting the cost-of-goods side.

If we think that we're going to get a present from suppliers that it's going to result in a reduction in an increase in our gross margins, we're hoping for a holiday.

The way we're going to do it is to continue to innovate products, bring better value to consumers that will allow us to drive our gross margins back where we want it to be.

We have suffered substantially from gross margins deterioration over the past few years and we have to get that back, but it's not one single thing that is going to get it back.

And Robert, there are a couple of other things along with that cost-of-goods pressure that we do feel.

As you may understand, we did give guidance on our A&P range from the year 6.5 to 8.5%.

As our fiscal year '07 results stood at 6.7%, we feel that A&P is an opportunity for us to invest in our brands, and particularly things like WD-40 Smart Straw conversion coming.

The other thing, along with A&P and cost of goods pressure, again is our tax rate.

We do expect upward pressure in our tax rate.

Fair enough.

You mentioned innovation as a means to drive margins and I guess just moving on to the decision to expand the Smart Straw in the U.S., I guess first, what is the incremental cost, if any, you will incur from that in fiscal year 2008 and as you reduce your SKU's and you start to push that product, what kind of benefit do you expect?

You know, we don't -- we do expect to receive benefits, too, but we don't give information that is that specific about that transition.

Suffice it to say a product that has been tested in the hands of consumers and in the marketplace because it's been out there for nearly two years, is one that we think has stood the test of the consumer and the consumer's like it, number one.

Number two, the product sits on the retail shelves at a roughly 30% premium, 20 to 30% premium over a similar-size can of WD-40.

Not only do people like it but they're willing to pay more over it.

We like those two characteristics of a brand that people know so well and those are two of the things that helped drive or interest in making the conversion, and our belief that it will help us long-term as far as addressing our gross margins.

The other thing is, also, as you have seen in the press release, I did say that we're going to complete the conversion in the third quarter of 2008 and we're not going to get the full benefit of the conversion in the full year of 2008, so we will see the real impact as we get into the fiscal year of 2009, when we'll have a full year of sales of Smart Straw across the U.S.

for most of the sizes.

Okay and do you expect any incremental costs associated with the conversion this year?

Of course the can costs more.

Because the increase actuator.

The product costs more.

Would you feel comfortable pinning that down at all?

I mean are we talking several million dollars?

We wouldn't feel comfortable pinning that down.

Okay, fair enough and lastly, if I look at your operating income margin knows by geography, it appears that Europe and the Asia-Pacific are considerably more profitable than America.

I was hoping that you could delve into, I guess why that is.

You know, is it a mix effect, is it just that you're selling more lubricant in those areas and perhaps can you shed color on that.

Yes, essentially what we do when we break out the segments in our K filings and our Qs, we have to allocate the corporate overhead to a sector and we do that all in the Americas primarily because that is where our corporate office is based.

What you see when you look at that, that sector that you're looking at kind of the all-in cost of being a company, being a public company and in the report in the Americas takes that.

And what was that cost for 2007?

We haven't disclosed it.

Okay.

Thanks for taking my questions.

Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS) We'll move next to Alan Robinson with RBC.

Good afternoon.

Hi, Robinson.

A quick question.

It's been a month now since the fed rate cut here.

Are you seeing any impact in terms of changes in inventory pull-through in the domestic channels for your products?

At this point, we haven't seen evidence of that but tame, I don't know that a change of that magnitude would result in the change of the behaviors strictly related to a fed rate change.

And given your largest geographical product segments is lubricants in the Americas, do you have a quarterly growth rate for that that you have broke up out at all?

Well, the biggest area of our lube, we sell 56% of our lubricants outside of the U.S.

Oh, sure.

Yes, but of the product, the geographical product segments, if you see, the lubricants in the Americans is the largest chunk of the, what, eight or so geographical product segments that you have.

We -- just reflecting back on some of the comments Garry made in his presentation today, if you look at the U.S.

market specifically, we did have a sales increase in the WD-40 brand in a year.

So, we have more of the WD-40 sold outside of the U.S.

than inside, number one, number two, we had a sales increase during the year in the U.S., and we have a five-year track record of our lubricant business growing at a compound annual rate of 10%.

Okay.

I'll let someone else take a try.

We have no further questions in the queue.

We'll turn the conference back to our speakers for additional or closing remarks.

That ends our call for today, thank you for joining us and we look forward to joining us again in January through our first end of the quarter call.

Have a nice afternoon.

Good day.

That does conclude today's conference.

We do thank you for your participation.