WD-40 Co (WDFC) 2008 Q3 法說會逐字稿

Good day and welcome to the WD-40 Company third quarter 2008 earnings release conference call.

Today's call is being recorded.

At this time, I would like to 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 third quarter earnings call for fiscal 2008.

Today we're pleased to have Garry Ridge, President and CEO, and Jay Rembolt, Vice President and Chief Financial Officer.

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 the impact from cost of goods, the impact from new product innovations, the timing of advertising and sales promotion activities, and the uncertainty in economic 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 fourth quarter fiscal 2008 earnings conference call is scheduled to take place on Wednesday, October 15, 2008 at 2 PM.

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

Thank you Maria.

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

This afternoon we reported net sales of $82.1 million for the third quarter of fiscal 2008, an increase of nearly 6% versus the third quarter last year.

Year-to-date net sales were $240.2 million, an increase of 5% over the same period last year.

Net income for the third quarter was $8.1 million, up nearly 6% compared to the third quarter last year.

Year-to-date net income was $23 million, up 3% from the same period last year.

Earnings per share for the third quarter were $0.49 compared to $0.44 for the same period last year.

Year-to-date earnings per share were $1.36, up from $1.29 last year.

Our results by product line were as follows.

Lubricant sales were up 8% globally in the third quarter.

The growth was driven by the Smart Straw conversion in the US, increased distribution in Latin America, and the increased promotional activity and distribution across the Asia-Pacific region.

Both WD-40 and 3-IN-ONE brands experienced sales growth in Q3.

Household product sales were up 1% globally for the third quarter.

Sales growth of the 1001 brand in Europe and Carpet Fresh brand in the Americas was offset by a sales decline in the X-14 hard surface cleaners in the US.

Household product sales were also impacted by small declines in Spot Shot and our 2000 Flushes and X-14 automatic toilet bowl cleaning products.

Sales of heavy-duty hand cleaners were up 5% globally in the third quarter, driven by the growth of Lava in the US and Solvol in Australia.

The productline continues to be a small, stable and profitable line in the business for the Company, accounting for about 2% of global sales for this quarter.

We also recently launched from our innovation program.

Included in those were an eco-friendly carpet stain remover under the Spot Shot brand.

The reformulated Spot Shot trigger product, and new PetClean products are non-toxic, certified biodegradable and environmentally friendly, containing no volatile organic compounds or phosphates, while still delivering the superior efficacy that consumers have come to expect from Spot Shot.

These new Spot Shot products are expected to offset the declines in the aerosol category, and address the shift of consumers' shelf space to nonaerosol spot stain and stain removers.

Also from our innovation program is the new 3-IN-ONE No-Rust Shield, a new product launching in the fourth quarter that protects tools, sporting goods, and other items from rust and corrosion.

Taking a look at our results by trading block, the Americas grew net sales by 6% into Q3 and maintained 58% of global sales in the third quarter, consistent with the third quarter last year.

Growth in the US and Latin America offset sales decline in Canada.

Changes in foreign currency exchange rates compared to Q3 last year positively impacted the current quarter sales in the region by approximately $400,000, or less than 1%.

US sales were up 5% in the third quarter, driven by the Smart Straw conversion.

We converted many of our can sizes exclusively to Smart Straw format in the US in April 2008.

The WD-40 Smart Straw format is an enhanced product with a higher selling price than the traditional WD-40 can.

The gains in the WD-40 sales more than offset declines in sales in household products, particularly X-14 hard surface cleaners.

US sales of X-14 surface cleaners decreased 40% in Q3, primarily due to lost distribution as a result of competitive activity and temporary manufacturing disruptions during the first half of this current fiscal year.

We have focused on building new distribution channels to offset these losses and generate growth of the X-14 brand.

Our Latin American business is primarily based on lubricants.

WD-40 brand sales were up 35% in Q3, while 3-IN-ONE sales were up 37% in the quarter.

The sales gains were a result of increased distribution and the timing of customer purchases.

We sell lubricants and household products in Canada.

Canada sales were down 6% in Q3, or approximately $200,000, due to the timing of promotions versus last year, and the loss of distribution -- some distribution of Spot Shot and 2000 Flushes.

Turning to Europe, Europe sales grew by 3% in Q3 and accounted for 32% of the total Company's sales in the period.

Our European business includes lubricants, and household products are sold in the UK.

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

Changes in foreign currency exchange rates compared to Q3 of last fiscal year positively impacted the current sales quarter in the region by approximately $200,000, or less than 1%.

We have direct sales force operations in the UK, Italy, and France, as well as in the Iberia market which includes Spain and Portugal, and in the Germanic market which includes Germany, Austria, Denmark, and the Netherlands.

Q3 sales in all direct markets combined grew 6% in US dollars.

Sales increased 8% in the UK, 27% in France, and 46% in Italy, which more than offset a small decline of 6% in the Germanic market and 14% in the Iberia market.

The decline in the Germanic market was primarily due to the timing of customer purchases, key customers reducing inventories.

And in-store promotional activities in response to slower economies caused the decline in the Iberia market.

Sales from the total direct markets accounted for 72% of the total sales of the European operation in the current fiscal third quarter, up slightly from 71% in Q3 last year.

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

These distributor markets combined decreased 3% in Q3 compared to the same period last year, driven by the timing of promotional activities and offering in the Eastern European distribution markets.

The distributor market in total shifted slightly to account for 28% of the total European segment sales in Q3 from 29% in the same period last year.

Now, looking to Asia, the Asia-Pacific region generated a sales increase of 16% in Q3 compared to the same quarter last year, and accounted for 9% of the total Company's sales in the period.

The region continues to represent a long-term growth potential for the Company.

Asia-Pacific benefited from increased lubricants sales in both Asia and Australia, as well as increased Solvol sales in Australia.

Changes in foreign currency rates compared to Q3 of last fiscal year positively impacted the current quarter sales in the region by approximately $400,000, or 6%.

Sales in Asia increased 20% in Q3, primarily due to the increase of WD-40 sales to customers across the entire region.

The Company began direct operations in China during fiscal 2007, and we are pleased that our sales in China grew by 81% in Q3 over the third quarter of last year.

We sell products through distributors in all of the other Asian markets, with sales up in the quarter in several countries including Indonesia, Korea -- that would be South Korea, Malaysia, Japan, Taiwan, and Singapore.

The increase in total Asian sales was the result of both increased promotional activity and continued growth in awareness and penetration of the WD-40 brand.

Sales in Australia were up 11% over the third quarter of last fiscal year, primarily due to the sales growth of lubricants and Solvol.

Australia benefited from the continued broad distribution across all trade channels and account specific promotional activities with key customers.

That's it for the sales update.

Now I would like to introduce you to Jay Rembolt, our new Chief Financial Officer.

Per our announcement on April 30, our previous CFO, Mike Irwin, has become Executive Vice President of Strategic Development, a new position to focus on growing our business through potential acquisitions and joint ventures.

We are pleased that Jay Rembolt has been appointed CFO, having been with the WD-40 Company since 1997, and serving as Controller and Vice President of Finance since 2002.

So, on his debut, here is Jay, who will continue with the financials.

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

And before I dive into the details of the financials, I would like to note a couple of recurring themes that you will see both in the Q3 and year-to-date results.

First off, we continue to experience challenges in our gross margin due to the cost of our raw materials and other components in our cost of goods.

Secondly, we have seen a general rise in cost of doing business, and we've been experiencing higher legal fees, higher fuel costs, etc.

So we've been actively managing and addressing these margin and G&A costs; however, we continue to experience them and they continue to be a challenge.

But in spite of these challenges, both sales and net income are up nearly 6% in Q3 versus the same quarter last year, and year-to-date, sales are up 5% and net income is up 3%.

As Gary covered sales in detail, let's continue with the rest of the financials.

First, our third quarter results.

Gross margin was 46.5% of sales in the third quarter compared to 47.5% of sales in the Q3 of last year.

The 1% decrease in margin percentage was primarily attributable to increases in cost of products stemming from escalating components and raw material costs, including aerosol cans and petroleum-based products.

To combat these rising costs, the Company has implemented price increases on certain products worldwide.

These price increases added approximately 1.1% to our gross margin percentage in the third quarter of the fiscal year compared to the third quarter of the prior year.

In addition to the price increases, shifts in products and customer mix throughout Europe helped mitigate the rise in costs during the third quarter compared to the same period last year.

Another factor in the decrease in gross margin percentage was the increase in our advertising and promotional and other discounts, which had a negative impact on gross margin by 1.5 percentage points.

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

The timing of these activities, as well as shifts in product and customer mix can cause fluctuations in margin percentage period to period.

A greater percentage of sales were subject to promotional allowances this quarter due to the increase in promotional activity this year versus last year.

Selling, general, and administrative expenses for the third quarter increased from $20.2 million to $21.4 million, yet we kept SG&A as a percent of sales flat to the same period last year at 26.1% of sales.

The increase in SG&A expenditure stems in part from professional service costs, which increased by $500,000, primarily as a result of higher legal and IT-related costs, freight costs which increased by $500,000 due to higher sales and higher fuel surcharges.

In addition we had changes in foreign exchange rates which contributed an additional $2 million of additional costs in Q3 compared to SG&A expense last year.

These increased expenses were partially offset by a $0.2 million decrease in research and development costs due to the timing of new product development activity.

Advertising and sales promotion expenses decreased to $4.3 million in the third quarter from $5.2 million in the third quarter last year.

As a percent of sales -- and they decreased to 5.3% from 6.7% in the third quarter from last year.

The lower level of investment is due to customer -- consumer broadcast advertising and print media for the Spot Shot brand in the US in Q3 last year that wasn't repeated in Q3 this year.

In the third quarter, total promotional costs recorded as reductions to sales were $5.1 million versus $4.8 million in the same period last year.

Therefore, the Company's total investment in advertising and sales promotional activities totaled $9.4 million in Q3 versus $10 million in the prior fiscal third quarter.

Amortization expense of $100,000 in the third quarter is a result of the 1001 acquisition, and was equal to last year's third quarter.

A portion of the purchase price of that acquisition had been allocated to the customer relationships, and they were being -- that which being amortized over the expected life of those relationships.

Operating income in the quarter was $12.3 million compared to $11.3 million in Q3 last year.

Net interest expense for the quarter was $400,000, virtually flat to Q3 last year.

The net interest expense remained unchanged due to both lower interest expense and lower interest income in the current period.

Interest expense was lower due to the continued reduction in debt as we made our [$10.7] million annual principal payment in October.

And lower interest income really resulted from lower cash balances during the year, as well as lower interest rates compared to the same period last year.

Other income was $200,000 in Q3 compared to $300,000 in the prior year third quarter.

The net decrease was primarily due to reduced foreign currency exchange gains.

Provisions for income taxes was 32.9% in the third quarter, an increase from the 32.1% in Q3 last year.

The increase in rate is primarily due to onetime benefits recognized in the prior year third quarter.

However, the current year did reflect a decrease in foreign tax rates and increased benefits related to qualify production activities.

Net income for the quarter was $8.1 million, up 5.6% from Q3 last year.

On a diluted per share basis, earnings were $0.49 compared to $0.44 in Q3 last year.

Diluted shares outstanding have decreased to 16.6 million shares compared with the 17.3 million for the prior year.

Now, for a review of our financial results in the first nine months ended May 31, and you will notice that the themes in some of our drivers remain the same and consistent with those in Q3.

Gross margin was 47.4% of sales in the first nine months compared to 48.2% of sales in the same period last year.

The decrease in gross margin percentage was primarily attributed to increases in costs stemming from the component and raw material increases.

To combat the rise in cost, the Company implemented price increases on products worldwide.

These price increases added 0.9 percentage points to the gross margins in the first nine months of the fiscal year compared to that in the prior year.

In addition to price increases, shift in products and customer mix period versus prior period helped to mitigate the rise in costs.

The Company continues to address the rising costs through innovation and cost-containment strategies.

Another factor in the decrease in gross margin percentage -- the increase in advertising and promotional and other discounts, which negatively impact the margin by 0.6 percentage points.

Certain -- again, certain A&P costs such as coupons, customer rebates and slotting are treated as a reduction in sales.

Selling, general, and administrative expenses for the first nine months increased 6.8% to $63.0 million, increasing SG&A to 26.2% of sales compared to the 25.8% in the same period last year.

The increase in SG&A stems in part from employee-related expenses which increased by $900,000 due to salary increases and additional staffing to support global sourcing, inventory management, as well as our Chinese -- our new operations in China.

These increases were partially offset by lower bonus accruals.

Professional service costs increased by $900,000, primarily as a result of increased legal and IT costs.

Freight expenses were up by $500,000 due to higher sales and fuel costs in the year.

Stock-based compensation increased by $400,000.

We had changes in foreign exchange rates, which contributed another $1.1 million to SG&A expense for the nine-month period.

Advertising and sales promotional expenses decreased to $15.2 million in the first nine months from $15.9 million in the same period last year.

As a percent of sales, advertising and sales promotional expense decreased to 6.3% from 6.9% in the prior period.

Although the Company invested in consumer broadcast and print media advertising to support the 1001 brand in the UK in the first nine months, that investment was lower than that made in the same period last year for Spot Shot and the WD-40 No-Mess Pen.

We expect to increase our media investment during the third quarter of fiscal 2008 and into fiscal 2009 as we align advertising and sales promotional activities with the distribution of our new and existing product.

Amortization expense was $400,000 in the first nine months of the current fiscal year as a result of the 1001 acquisition.

Operating income for the first nine months was $35.1 million, and essentially unchanged from that same period last year.

Net interest expense for the year-to-date period was $1.2 million compared to $1.7 million in the first nine months of fiscal 2007.

We made our annual principal payment of $10.7 million on Q1, and we will have our next payment due in October of 2008.

Other income was $800,000 in the first nine months of the fiscal 2008 compared to $100,000 in the prior fiscal year period.

The increase was primarily due to foreign exchange gains in Europe for the year.

The provisions from income taxes for the nine months was 33.7%, a slight increase from the 33.5% rate in the prior year period.

The slight change in rates was primarily due to the onetime benefits from favorable rulings on foreign tax matters that we achieved in the prior fiscal year.

But this was also offset by some increased benefits -- and related to the qualify production activities and decrease in foreign tax rates for the current year.

Net income for the first nine months was $23 million, up 3.1% from the same period last year.

And on a diluted per share basis, earnings were $1.36 compared to $1.29 in the prior year.

Diluted shares outstanding have decreased to 16.9 million shares compared to 17.3 million for the prior period.

Regarding the dividend, on June 24, the Board of Directors declared a quarterly cash dividend of $0.25 per share, payable July 31, 2008 to shareholders of record on July 17.

Based on today's closing price of $27.09, the annualized dividend yield would be 3.7%.

About our balance sheet at May 31, cash and cash equivalents were $37.5 million, down from the $61.1 million at the end of the prior fiscal year.

Net cash used included $10.7 million principal payment on debts, another $12.5 million of dividend payments, and $17.7 million for purchases of shares of the stock -- our common stock that's now held in the Treasury.

These were partially offset by $3.3 million in proceeds from the exercise of stock options.

And an additional $4.4 million of cash was used for capital expenditures, primarily in machinery equipment related to new product development.

Accounts receivable increased to $52.1 million, up $4.9 million from last fiscal year as a result of the timing of sales.

Inventory increased to $17.3 million, up by $4.1 million versus the end of the prior fiscal year.

The increase in inventory was due to the buildup of inventory for new product introductions, as well as the acquisition of inventory from VML, a contract manufacturer and a warehouse distributor for the Company.

Certain finished goods had been owned and warehoused by VML under the Company's historical model, but as the Company has transitioned to direct management of finished goods, it has acquired this inventory from VML into its distribution centers.

The purchase of VML manufactured goods will continue as we go forward.

Our current liabilities were $51.1 million, down from the $53.9 million at August 31, 2007.

Accounts payable and accrued liabilities decreased by $3.3 million due to the timing of payments.

And our accrued payroll and related expenses were down $2.3 million, primarily due to decreased bonus accruals and profit-sharing.

The accrual balance at May 31 included only nine months of accrual compared to 12 months at 8/31/07.

And our accrued profit-sharing, which is based on the calendar year, had a balance that only included five months of accrual compared to the eight months at 8/31/07.

Income taxes payable increased $2.9 million due to the timing of payments for federal income taxes.

That is the financial update.

More information, again, will be available in the 10-Q.

Thanks a lot and back to Garry Ridge.

The 10-Q will be filed next week after the holiday.

Before we wrap up with our guidance, I would like to take a few moments to address the elephant in the room; that is, rising and unstable prices for oil and other components.

As Jay noted, we are experiencing heavy pressures on our cost of goods, and in fact have done so for a number of years.

Frankly, we are in a tough environment, and it will be a challenge to maintain or grow our gross margins until we see stabilization in the oil market and the general economy.

However, it is not all about doom and gloom here at WD-40.

That said, we have taken measures to mitigate the impact of these pressures through our CRACK team, or cost reduction and containment team.

And I would like to share some of those measures of success with you today.

The CRACK team, which was established in 2005, is a cross functional team that reviews, analyzes, and challenges increase in our cost of goods and brainstorms ideas to reduce our cost of goods and improve margins.

The team includes myself, Jay, the CEO, and a number of other senior leaders within the Company.

While we view our suppliers as partners and negotiate fairly, we do demand full justification for cost increases, all of which are reviewed by the CRACK team on a monthly basis.

This due diligence and high visibility has enabled us to delay and mitigate many of our cost increases that were proposed.

Some successes include increased efficiencies in the distribution network, which have yielded us freight savings to help us offset escalating fuel prices and surcharges.

Manufacturing partnerships for our flagship WD-40 created savings that have offset much of the year-to-date increases in the underlying oil-based raw materials.

The Smart Straw conversion has helped us offset rising costs of components and generate growth for the WD-40 brand in the US market and around the world.

And while we cannot control the price of oil in the global marketplace, we will continue to look for opportunities to become more efficient and drive margin stability and growth in our business.

We expect these efforts, along with our new product introductions, product innovations, price increases, strategic business opportunities, and increased direct market operations to provide a positive long-term growth and stability to our top and bottom line.

On that note, our guidance for fiscal 2008 has changed slightly from last quarter, primarily due to the uncertainty of cost of goods pressures.

The following figures do not include any acquisition activity.

Our sales guidance remains unchanged.

We expect our sales to grow 4% to 8% to somewhere in the range of $320 million to $332 million, driven by continued geographic expansion, market penetration, the introduction of Smart Straw and other new products.

We expect our advertising and promotion investment to stay within the prior range of 6% to 8%.

Due to cost of goods pressures we may see a slightly lower net income in the range of $30 million to $31.2 million, which would achieve an EPS of somewhere in the range of $1.78 to $1.85, assuming 16.0 million(Sic - See press release) shares outstanding.

Under our previous guidance we expect net income in the range of $30.3 million to $31.9, with an EPS in the range of $1.80 to $1.90, assuming 16 million -- 16.8 million shares outstanding.

Thank you very much for joining us today.

And we would be more than delighted to have a conversation with you now about any subject that is of interest to you in the business.

We will open for questions.

(Operator Instructions).

Liam Burke, Janney Montgomery Scott.

The X-14 decline was pretty precipitous, but your overall household income was down 1%.

Are there any products that are doing particularly well that you see some good follow through on?

What we're seeing is, we've had continued growth of the 1001 brand in the UK market.

We continue to do well with our Novak product down in Australia.

We are hopeful that the flow through from the launch of our environmentally friendly, VOC-free Pet and Spot Shot product that's now being extended over into the other trade channels will pay off in the fourth quarter.

Certainly, the challenges we had in household were really in the hard surface cleaner area of the X-14 brand.

And that's a very competitive piece of business being impacted by a number of new entries.

Fortunately, it's not a huge part of our business, but we see that there are opportunities in these other areas.

And we also had a reasonably good quarter on the Carpet Fresh brand in the US, which also showed growth.

On X-14, is there anything you can do with it?

Is there an orange formula or some environmentally safe alternative you could due to differentiate it?

I think what we need to do is expand distribution basically and take the brand out of the spotlight of the ever-dynamic grocery trade channels.

So we're looking at opportunities in that area where we can use the brand to move into other areas.

But we would not be wanting to go up face-to-face or nose-to-nose with any of the big brands like 409, etc.

in that multipurpose cleaner area.

It's very crowded.

And I think we can use our treasure in other ways to invest in product development that may be better.

For example, we've started to even focus more on product development in things like our 3-IN-ONE No-Rust Shield, which is being launched this quarter.

There is a link to that on the website through the press release.

And if you haven't had a look at it, it's worth a look at.

It's a great product.

Jay, on -- you mentioned timing being primarily why working capital was -- the heavy use of working capital year-to-date.

Do you expect your accounts receivables and inventory ratios in terms of DSO and turns to be similar to what your normal levels are?

That is our expectation.

We see a little bit of a blip in the current quarter, but nothing that causes us any alarm.

Jeff Zekauskas, JPMorgan Chase.

This is Ben Richardson sitting in for Jeff Zekauskas.

So, when we are to look at your new guidance you have issued here, the upper end of that is $1.85.

If we are to consider the fourth quarter, that's a step down from $0.54 in the year ago to roughly $0.49 in the fourth quarter.

Can you speak to the role of raw materials in that shift?

Yes, we both can.

But basically our uncertainty is, we don't know what the price of oil is going to be six months from now, nor do we know actually what it's going to be next Monday.

And when we sat together here 90 days ago, it wasn't at $140 a barrel.

The major shift in our earnings guidance is really all around uncertainty in the price of oil and the impact of that, both through cost of goods and freight and whatever charges are around that.

So, we thought it was prudent to make everyone aware of that.

We do have price rises scheduled for later on in the year to try and pass some of those through.

But that's really the elephant in the room is, what is oil prices?

And we hope we've been able to get our arms around the impact of those for the fourth quarter.

In terms of ad and sales promotion, you're trending now toward the lower end of that 6% to 8% guidance you've given.

Is this something we would expect step up in the fourth quarter related to the introduction of Smart Straw or will this be toward the lower and?

Yes, I think that we've seen, or we are planning on additional increases in the A&P spending in the fourth quarter as well as into 2009.

So, we've got Smart Straw introduction activities.

Gary talked about our other new products that we are introducing.

So we're really focusing on our advertising dollar behind the support of this new products.

You would have -- the 3-IN-ONE No-Rust Shield that I just mentioned, already in the market, you'll see full-page advertising for that in specific targeted magazines.

There are -- it will be -- it's running on VRTV at the moment.

And then also, as I said, we have moved out of the introduction stage into Smart Straw and into the promotional stage.

So, the full promotional activity behind Smart Straw will happen through the months of July and August.

Alan Robinson, RBC.

Garry, could you characterize in terms of your price increases, how successful you were across product groups in getting price increases to stick?

Obviously, we know you did well with the Smart Straw because the innovation there.

But can you give us some idea of price increases across the other groups?

Basically, our price increases have been focused on the WD-40 3-IN-ONE brands that are lubricant-driven, and we've been able to carry those through to the market at this time.

There was a small price increase on Spot Shot with the introduction of our environmentally friendly product, and that has carried through.

So, at this time we are tracking okay.

And then, in terms of the growth you saw in the Americas, 5% due to the Smart Straw, are you seeing those kind of trends continue so far in June?

That's something I wouldn't normally comment on.

You would have to wait until the end of the quarter for us to comment on that.

But, suffice to say, we are busily out there stocking the shelves, and so far we've been up -- until the end of the quarter we were happy with where we were with Smart Straw.

In terms of new products that you brought out historically in the lubricant line, how has that compared this rollout of the Smart Straw?

I'm trying to get a feel for -- to what extent there is a sort of onetime inventory build when you have a new product like this coming out, and to what extent it is sort of a long-term increase in demand?

Well, there are two things.

There is unit demand and then there is dollar sales growth.

The Smart Straw product itself has a higher wholesale and retail price.

But what we really did here is, this is not an introduction, this was a swapout.

So, we took what we now call WD-40 Classic and swapped it out predominantly with the new Smart Straw SKUs.

So, this is not a new product introduction.

It's a change in the value equation.

It's a new delivery system that has converted the Classic can into a can that consumers will now no longer be telling us that they are disappointed that they lose that little red straw, and happy to pay a little more not to lose it.

And are your sort of background checks indicating that consumers are now have two cans in their garage, the old form and the new form as well?

Maybe yes, maybe no.

I would like to think we're restocking America, if they want to buy a second can.

But certainly as they go through the repurchase cycle, the thing that will be available to them now will be the Smart Straw can.

That's useful.

Thank you.

Then you mentioned that price increases added 1.1% to gross margins.

Could you characterize to what extent cost reductions added to gross margins during the quarter?

We did not comment on that.

Was it's a sizable amount or is it still work in progress there?

I think what it is, the cost reductions tend to offset some of the price increases.

We would've liked to have had a bigger impact of the strategies we took on cost reduction, but to be honest with you, the increases come at a faster rate.

So, I think it's worth saying this.

We've been under these cost pressures now for nearly 3.5 years, and we've talked about them, with the rising price of oil, initially steel cans, and we've been able, through our efforts to basically keep our gross margins flat.

So, we haven't really seen a significant decline.

We've just -- we had an initial decline when we were hit with the steel oil price increases that were very significant back in 2003 and 4.

But we've been able to keep it flat.

And it was our hope that as we came through the Smart Straw conversion and through other strategies that we would be able to grow our gross margin again.

What has in fact happened, it has just stayed flat because the increases have been coming at a faster rate than the impact of everything else we've been doing.

Fair enough.

And then one of the things we have difficulty modeling obviously is the extent to which coupons reduce the top line each quarter.

Do you anticipate in the fourth quarter a similar kind of coupon promotional run rate that we saw in the third quarter?

The number that you have was not just coupons, it was all kind of trade driven spend.

So it wasn't strictly coupons.

And we don't have any comment on the fourth quarter activities.

But, what you'll see is that -- what actually happened is that we switched out some of our activity.

We took it out of what would normally be seen as A&P deeper in the P&L, and it went towards trade activity which was more to drive display promotion and consumer pull.

If you put the two together -- and that actually had an impact on margin as it does -- but if you put the two together, our advertising and promotional expense for the whole quarter was about $500,000 less than last year.

It's just the mix changes around a little bit.

So, those rebates and -- it is not rebates -- those promotional activities that are a reduction of sales can sometimes give you a jaundiced picture of the margin, because of the timing of those activities.

Okay.

And again, with the sort of -- with the concentration on, or rather a larger proportion of coupons during the quarter compared to your standard, if you like, advertising and sales promotion costs, are we going to see that balance switch around a little bit in the fourth quarter generally?

Probably.

Okay, good.

And then lastly, just on the X-14 channel distribution changes, you have mentioned that you're going to perhaps take it out of the grocery distribution channel.

Are the channels that you are aiming for, the new distribution channels, are they going to be as large in volume as the grocery distribution channel that you are probably going to be losing?

I don't think I said we were taking it out.

I said that we were going to -- the core to the X-14 product is the mildew stain removal, which is a premium mildew stain remover that performs better than any other product there is on the market.

I don't see that will be losing distribution.

The products that are more competitive are the me-too type general shower cleaners or soap scum cleaners.

So, what we need to do is look at ways of taking the X-14 brand with a different product and replacing those sales that maybe in grocery or whatever in other trade channels.

But, I didn't say that you're going to see us out of the grocery trade channel.

I think we have a good position for the premium product of the mildew stain remover that is a niche positioning in the grocery chain trade channel.

Joe Altobello, Oppenheimer.

First question I guess is sort of a 30,000 foot question here.

If we assume the current environment that we are in is not going to go away, and I understand there are a number of variables here, but could you guys grow earnings meaningfully next year with oil at $144 a barrel, with steel at $1,100 a ton?

I'm not sure if I took meaningful to the bank, what would I get?

Mid to high single digits, let's call it.

I think that given the strategies that we have, which are increased distribution, and apart from the economy of the world going in the tank completely, I think that our growth strategies of direct market activities in China, the introduction of Smart Straw, some of the new product that we have, we have every chance in the world of having a year next year that is better than this year.

And then it's kind of what we projected out.

What we're doing at the moment is going through a little cost correction as these prices of oil and steel -- well, steel is not so much of a surprise really.

We kind of anticipated it.

It's the oil one that had such a ramp up in the period of time that caught us a little on our back foot.

But we are about growing the business and that's what we're going to try and work our plan to do.

So if nothing changed, earnings are up next year?

That's why we're here.

Okay, and then in terms of the gross margin, did you guys call out the commodity hit in the quarter?

No, we didn't.

I don't know that we can identify it.

One of the things that happened is that we have a lot of trouble actually finding where the commodity hit comes in, because it's the flow through over time.

But certainly it was significantly hit by the -- by some of the changes in oil prices which affected our mineral spirit, our WD-40 concentrate manufacturer, which has base oil in it, and then the diesel increases that increased costs of transportation of those things around the world.

Okay, because I thought last quarter you mentioned that was about 150 basis points.

I don't recall.

I imagine it's bigger than that this quarter though.

I don't recall whether we brought out.

Okay.

And in terms of the price increases that helped offset some of that this quarter, those are simply what you anniversaried last year, plus the improved mix from the Smart Straw introduction and other new products, right?

Mostly from the last year's lag, as well as some additional price increases that have taken place.

The smart straw calculation or Smart Straw benefit isn't included in that price increase number.

So the benefit from that is kind of mixed in with the mix piece.

Okay.

And so, the price increases that you're going to take later on this year and in the 2009, are they going to offset half of the commodity cost increase, one-quarter of it?

It depends what the commodity cost increase is.

We have staged some of them.

We've made some assumptions, and we will see how that comes through.

But certainly to round it up, our goal is to maintain and hopefully grow our gross margin.

So the actions we are taking -- the lag we have is what the commodity increase actually ends up being versus what everybody predicts it to be.

So we we have got to put a line in the sand and say, this is where we think it's going to be.

And I guess now we're being a little more conservative than before because we've been wrong all along.

I don't know where it's going to go.

I'm hoping that we're seeing some sort of stability -- we can handle risk.

We just have trouble -- like Wall Street can handle risk, it can't handle uncertainty.

And what we're trying to see is where is the stability here that gives us a platform to stand on.

And what we've seen in the past few months is just no stability.

It has just been a continual roller coaster, with particular oil prices.

Is there a way to hedge that away at all?

No.

It comes -- it's from too many different sources and too many different pieces to be able to meaningfully hedge it.

And then, on the Accounts Receivables side, I think you guys mentioned that the increase year-over-year was due to timing.

This is a quarter where you typically see a sequential decline in receivables.

You've seen in the last few years, and this year you just didn't see it.

I would've thought you would've seen since a lot of the sales growth came from the Smart Straw conversion which happened in March and April.

So why did a larger proportion of the sales this quarter happen later in the quarter?

Actually, March was the -- we have not transitioned to the Smart Straw in March.

That was -- that didn't happen until the end of March, so it was really April and May were -- it's really where our sales were weighted.

So, that's -- in some ways it's the weighting of sales at the back into the quarter versus what we would've seen in prior periods.

From Smart Straw?

From Smart Straw.

Then lastly, this is just a modeling question.

The tax rate was lower than I anticipated, and I think what you guided to.

What should we look for for the fourth quarter and for 2009?

We will talk about the tax rate in 2009 in 2009, and the fourth quarter in the fourth quarter.

We don't guide to the tax rate.

Okay, but I thought you did that in the past.

No.

No.

34.5 was not your guidance?

We've never guided to the tax rate.

Okay, thank you.

(Operator Instructions).

Robert Felice, Gabelli & Company.

Most of my questions have been answered.

I have just got one or two more.

Given the pricing that you have in place heading into the fourth quarter, if we were to assume that raw materials were to stay flat at the current level, do you feel comfortable that you have enough pricing to stay on top of the cost curve?

That's an interesting question in that we're not sure whether we've got all the flow through yet from the way that pricing has moved.

So there is a lag period of time.

Again, let me just restate where our goal is to stabilize and grow our gross margin.

And that is what we'll be working towards.

And we're hopeful that the pricing that we've got in place will allow us to do that.

Okay, so let me -- maybe I'll ask it a little differently.

Once the pricing has fully worked its way in, is there enough pricing in place, given the current level of raw material costs, to recoup the lost margin?

It depends where you say recoup to.

But certainly we would want to get back over our run rate of 48.5 or whatever it was.

I don't know whether we can get north of that.

Is there enough pricing in place to get there at that 48.5% level?

If things remain as they are today.

Okay, and then I guess separately could you remind me what percentage of your COGs your raw materials make up?

Well, it depends on the product, but if you look at the can of WD-40, about 25% of the cost is oil-based.

The balance is steel and plastic and cardboard and freight.

So, that's about the split.

We don't break it out for the other products; it's too hard to do.

Okay, I guess what I'm trying to get a sense of, if your raw materials go up 10%, what magnitude of pricing you would need to offset that?

We haven't really discussed that.

Frank Magdlen, the Robins Group.

One more question on pricing, and I'm sure you've heard enough of it, but have most of the price increases -- were they effective for all of the quarter or only part of the quarter, like 60% or some number like that?

The price increase on Smart Straw was really only effective for two months out of the three, because we didn't start shipping it in total until really April.

So, whatever we got in May and in June -- in April and May, I'm sorry, would be impacted in that area.

And that would be the majority of it.

All right.

I think in the past you've almost talked about annual price increases, and that's unfortunate you're in the environment you are.

Would it be reasonable to assume you're going to take them on a more regular basis if you need them and can get them?

If it doesn't alienate us with our consumer, certainly we would look -- we're looking at that.

And in fact we've had one on Smart Straw this year, another planned for October, so it will be two this year.

So we certainly -- these are happening all around the world for different amounts in different markets.

All right.

Is there -- a different question on the packaging.

Are you seeing any particular change in the volume of cans versus, say, plastic trigger product that you might be selling?

Is that mix going to change much?

No, I think the majority of what we sell is in cans.

But do you see that slowly declining, or is that pretty well fixed?

It depends on the SKU, I guess.

We're bringing we're bringing out the new Spot Shot environmentally friendly product, and we would expect some more trigger sales there.

But I don't see there's going to be a big shift.

All right.

And then just one question on the balance sheet, and there we finished with the marketable securities that you used to hold?

Yes, I did not address that.

But those were auctioned off in the quarter, and we no longer have those.

There appear to be no further questions at this time.

I will turn the conference back over to our presenters for any additional or closing remarks.

That's it for us.

Thank you very much and we'll talk to you again in 90 days or so.

Have a great Fourth of July.

Good afternoon.

That does conclude today's conference call.

We thank you all for your participation.

And you may now disconnect.