WD-40 Co (WDFC) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the WD-40 Company first quarter 2009 earnings release conference.

Today's call is being recorded.

At this time, I would like to turn the doll over to the Vice President of Corporate & Investor Relations for WD-40, Ms.

Maria Mitchell.

Please go ahead.

Good afternoon.

Thank you for joining us for our first quarter earning call for fiscal 2009.

Today we are 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 the forward-looking statements, including the impact of changes in foreign exchange rates, the impact of cost of goods, and the fluctuating market conditions both in the United States and internationally.

The Company's expectations, beliefs and projections are expressed in good faith, and believed by the Company to have a reasonable basis.

But there can with no assurances 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 and 10-K, and readers are urged to 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 www.wd40company.com.

Our second quarter fiscal 2009 earnings conference call is scheduled to take place on Wednesday, April 8th at 2:00 p.m.

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

Good day, Happy New Year to you all, and thanks for joining us for today's conference call.

Today we reported net sales of $83.6 million for the first quarter of fiscal 2009, an increase of 5.6% over Q1 last year.

Net income for the first quarter was $7.7 million, up 23.4% compared to Q1 last year.

Diluted earnings per share for the quarter were $0.46, up from $0.36 in Q1 last year.

We are pleased with these results and the continued growth of our international markets, but they did not come without challenges.

The reality this quarter continues to be volatility and uncertainty in economies, raw materials and foreign exchange rates, all of which significantly impacted our business.

Deteriorating economic conditions across the globe challenged our top line; volatility in raw materials and the timing of the flow of those into the cost of goods impacted our margins.

Changes in foreign currency exchange rates impacted the Company in two ways.

In international markets where we sell in US dollars, it made our goods effectively more expensive where local currencies have fallen against the dollar.

More significantly, falling exchange rates reduced the sales and profits from our growing international segments.

Q1 FY09 results, translated at last year's first quarter exchange rates, would have produced net sales of $89.1 million and net income of $8.6 million.

Thus, excluding the impact of the change in foreign currency exchange rates, quarter-over-quarter net sales and net income would have increased by 13% and 39% respectively.

So let's dig into the details.

Our results by product line were as follows.

Multipurpose maintenance products sales were up 15% globally in the first quarter, with sales gains in all three trading blocks versus Q1 of last year.

The increase was driven by the continued growth and penetration of both multipurpose brands, WD-40 and 3-IN-ONE, which grew 14% and 22% respectively in Q1 over last year.

Home care and cleaning products were down 18.8% globally in the first quarter, primarily due to a sales decline in the United States.

Sales of our home care and cleaning products in the Americas were down 24% in Q1 versus prior-year periods, as a result of overall category declines.

The decrease in the Americas was partially offset by a 15% increase in sales of home care and cleaning products in Europe in the first quarter versus the first quarter last year.

Our home care and cleaning products include Spot Shot, 2000 Flushes, Carpet Fresh, 1001, X-14, and Lava and Solvol brands.

Spot Shot sales declined 19% in Q1, due to lost distribution and overall declines in the aerosol spot and stain category.

The declines in the aerosol category are due to retailers reducing shelf space for aerosol spot and stain removers.

In an effort to provide consumers with an environmentally-friendly solution, and to offset some of the Spot Shot sales declines, we developed and launched environmentally-friendly products which are nontoxic and biodegradable.

We are currently using the new nontoxic and biodegradable product offerings to both replace existing Spot Shot trigger product distribution and to obtain additional and new distribution where possible.

2000 Flushes and X-14 automatic toilet bowl cleaners declined 29% in Q1, due to the decreased distribution with customers as a result of an overall decline in the entire toilet bowl cleaning category.

As part of the category trends, our customers are running less shelf space and consolidating this category.

To respond to these changing trends, we are increasing the use of consumer-orientated marketing tactics that include coupons and in-store promotional activity, as well as focusing on developing and enhancing distribution channels outside the grocery trade channel.

Carpet fresh sales declined 14% in Q1 due to the reduction of distribution and category declines in mass retail and the grocery trade channel in the US.

The 20% decline in the Americas was partially offset by a modest growth of 6% in the Asia Pacific segment.

The category decline in the US is attributed to the relocation of shelf space from traditional rug and room deodorizers to other air care products.

We continue to refine our marketing and promotions and pricing strategies to create new distribution opportunities for the Carpet Fresh brand.

1001 sales fared well in the UK in Q1, with sales growth of 15% in the quarter versus the same period last year.

The increase was due to promotional timing and activity for the products, and a regained distribution of the No Vac-like product with a key customer.

X-14 hard surface cleaner sales declined 41% in Q1, primarily due to lost distribution as a result of competitive activities, but really as well as in line with the recent strategic decision we made to withdraw certain product offerings from the grocery trade channel.

Our two heavy duty hand cleaner brands, which are now categorized under home care and cleaning products, both experienced sales declines in Q1 of about 17% in aggregate as compared to the same period last year.

The decline is attributed to the reduced sales of a key customer as a result of competitive activities, as well as impact from changes in foreign currency exchange rates.

Now let's look a little bit at the state of the geographic segments.

Despite strong gains in local currency, sales from our international segments grew modestly once converted into US dollars.

The impact of the change in foreign currency exchange rates quarter-over-quarter negatively affected global net sales by $5.5 million or 6%.

The Americas continues to be our largest segment, remaining at 54% of total sales.

Despite fantastic growth in Europe and Asia Pacific in local currency, these segments stayed flat in terms of percentage of the total sales, making up 36% and 10% of global sales in the period respectively.

Sales in the Americas increased to $45.5 million in Q1, up $2 million or 5% versus Q1 of fiscal last year.

Changes in foreign currency rates during that period versus the period last year had a minimal unfavorable impact on the Americas sales of approximately $300,000 or 0.7%.

The Americas sales increase in the period was due to higher multipurpose maintenance product sales across the entire segment.

Despite significant sales declines across most of the home care and cleaning brands, the US and Latin American area grew total sales by 5% and 9% respectively in the quarter, and Canada netted out flat in Q1.

The US experienced strong growth of WD-40 and 3-IN-ONE products of 30% and 29%, respectively.

The increase in sales of WD-40 was attributed to price increases and increased promotional activity during the quarter, as well as the conversion of several can sizes to the smart straw format during the third quarter of fiscal 2008.

The WD-40 smart straw format has a higher selling price than the traditional WD-40 cans, and US sales of the 3-IN-ONE brand increased due to price increases on many of the 3-IN-ONE oil products and increased distribution.

Sales of - in multipurpose maintenance products in the US in the first quarter were heavily offset by declines across the following home care products.

[70%] for Spot Shot, 20% for Carpet Fresh, 43% for X-14 liquids, and 31% for 2000 flushes and X-14 automatic toilet bowl cleaner, and 17% for Lava.

As mentioned earlier, these brands continue to suffer from lost or reduced distribution related to the overall category declines, reduced shelf space at the retailers, and shifts in product categories and competitive factors.

We continue to invest in these brands to minimize the impact of these challenges through marketing, promotions and pricing strategies, as well as supportive innovation SKUs, and exploring new distribution channels that are less reliant on the grocery trade channel.

Spot Shot is a great example of these efforts, as we just kicked off our year-long campaign to support our new environmentally friendly trigger product with the movie release of Marley and Me.

Our comprehensive consumer-targeted campaign includes commercial advertising on TV and in movie theaters, discounts and free purchases with promotions with the movie and DVD release, print ads in magazines, and special in-store displays.

This promotion also coincides with the expanding of our distribution into retail trade channels such as the pet specialty retail trade.

As for Canada, sales in multipurpose maintenance products increased 19%, primarily due to the increases - price increases and additional promotion activities.

The sales increases were fully offset by lower Spot Shot and 2000 Flushes and automatic toilet cleaner sales, which declined 33% and 22% respectively in Q1 versus the same period last year.

Sales growth in Latin America of 9% for the quarter was due to price increases, increased distribution with new customers, and increased promotional activity with a key customer.

Latin America has negligible home care and cleaning product sales.

Now over to Europe, which accounted for 36% of global sales in Q1 of both fiscal 2008 and 2009.

Although Europe experienced a large lift in sales in local currencies, changes in foreign exchange rates during the period versus the period last year negatively impacted the growth of sales.

Had foreign exchange rates stayed flat to Q1 last year, Europe sales in Q1 of '09 would have increased by approximately $6.6 million or 23% versus the 6% net growth reported as a result of actual exchange rates.

All brands that are sold in Europe continued the growth, but the sales performance varied across markets.

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

We have our direct sales force in the UK, Italy, France, Spain and Portugal, and in the markets we term the German region, which includes Germany, Austria, Denmark and the Netherlands.

Overall sales from these direct markets were flat in the first quarter.

The UK and France were the only direct markets to experience sales growth in US dollars in Q1 at 17% and 11% respectively.

These gains were offset by some decreases in other direct markets.

Period versus period sales in US dollars in the German region fell 18%, declined 20% in Italy, and Spain and Portugal slipped 5%.

The UK market benefited from sales growth of WD-40 smart straw, 3-IN-ONE and 1001 products, due to increased promotional activity for all products and the regained distribution of 1001 No Vac with a key customer.

The sales growth in France was the result of increased commercial activity and continued growth in sales of the WD-40 brand including WD-40 smart straw and the increased distribution of the 3-IN-ONE professional line of products.

The sales decline in the German region was due to reduced promotional activity during the period and - while the sales decline in Italy Spain and Portugal was due to reduced inventory levels in response to the slowing of their economies.

Italy was further impacted by some increased competitor activity during the period.

We sell through exclusive independent marketing distributors in eastern and northern Europe, and in the Middle East and Africa, with virtually all sales consisting of the WD-40 brand.

These distributor markets combined increased 16% in Q1 versus the same period last year.

Let's move on now to Asia Pacific, which accounted for approximately 10% of global sales in Q1 of fiscal 2009.

Asia Pacific sales increased 10%, with sales gains of 16% in the Asia distributer markets, 30% in China and a net sales decline of 5% in Australia.

Changes in foreign currency exchange rates period versus period negatively impacted the growth of sales.

Had foreign exchange rates stayed flat at Q1 last year fiscal year, Asia Pacific sales for Q1 of '09 would have increased by approximately $1 million or 14%, versus the 10% net growth reported as a result of the actual exchange rates.

Sales in Asia increased 19% in Q1 versus the same quarter of fiscal year last year, primarily due to the increased sales of the WD-40 products to customers across the entire region including China, Indonesia, Malaysia and Thailand.

Sales in China increased 30% due to price increases, increased promotional activity, new distribution channels, and our continued development of our direct sales activity in China.

Sales across the rest of the region increased 16% due to promotional activity.

Despite these gains, we have begun to see a slowdown in certain markets as a result of the overall economic uncertainty across the region, which may impact sales for the remainder of fiscal 2009.

The sales decline in Australia was due entirely to changes in foreign exchange rates.

In local currency, sales increased 10% due to price increases across all product lines, promotional activities, and new distribution across all trade channels.

The devaluation of the Australian dollar against the US dollar reduced total sales by $400,000 upon conversion, or 13% of total sales.

That is it for the sales update for now, and now it is over to Jay Rembolt, who will continue the review of the financials.

Garry, thank you.

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

I will move on to the rest of the financials.

Gross profit for the quarter was 46.3% of sales compared to 47.3% of sales in Q1 last year.

The 1 point decrease in gross margin was primarily due to higher cost of goods, as well as increased promotional allowances.

These were partially offset by our price increases.

In looking at the cost of goods sold impact, costs have risen for components and raw materials during the first quarter of this year compared to last year.

These are products, materials, primarily petroleum-based products as well as aerosol cans.

We have recently started to see relief with declines in the cost of oil-related products, but those decreases are just now starting to make their way into our finished goods.

We expect the benefit of lower oil-based costs to be offset by higher aerosol can costs, starting in the second quarter of the current fiscal year.

Our higher aerosol can costs are being driven by higher costs for tin plate, and despite the softening of steel prices, the cost of tin plate to our can suppliers has risen significantly.

Further impacting Q1 costs were losses associated with VML Company, and the remaining costs associated with product conversions and sourcing changes made in the US during Q4 last year.

Losses from VML, a related party contract manufacturer, negatively impacted gross margin by 0.3 percentage points during the first quarter compared to the first quarter last year.

These losses were the result of manufacturing inefficiencies related to their acquisition of a significant new customer during fiscal 2008.

This investment is accounted for using the equity method of accounting, and our share of earnings or losses in VML is recorded as a component of cost of products sold.

As of November 30th, our remaining carrying value of our equity investment in VML is down to only $200,000.

Costs associated with product conversions and the sourcing changes implemented in FY08 negatively impacted this quarter's gross margin by 0.2 percentage points, and we expect the additional sales and margin improvement from these initiatives to outweigh the short-term costs of these conversions.

To mitigate the impact of the higher component and raw material costs, we implemented price increases across all trade blocks during fiscal 2008 as well as in the first quarter of this year.

The price increases added 3.3 percentage points to our gross margin, but did not fully offset the higher cost of products during the period.

We also had an impact of promotional discounts.

The type, magnitude and timing of our promotional activities that are recorded as a reduction to sales also contributed to the fluctuation in gross margin period to period.

It negatively impacted the gross profit by 0.7 percentage points in Q1.

A greater percentage of sales in Q1 were subject to promotional allowances, due to the shift in promotional activity this quarter versus last year.

That completes the gross margin discussion.

Now on to operating expenses, beginning with our selling, general and administrative expenses.

Our SG&A for the first quarter decreased by $100,000 or less than 1% to a total of $21.1 million.

With higher net sales, SG&A decreased from 26.8% of sales in Q1 last year to 25.3% this year.

The decrease in SG&A was largely attributable to the impact of foreign currency translation and lower freight costs, which offset other increases in costs.

Our foreign currency translation decreased the SG&A expense by $1.3 million for the first quarter.

SG&A expenses for the first quarter of 2009 translated at the exchange rates in effect in Q1 last year would have produced a total SG&A expense of $22.4 million versus the $21.1 million.

Lower freight costs of $800,000 resulted from improved shipping efficiencies, as well as lower fuel costs.

The positive impact from the foreign exchange rates benefit, as well as the freight, were - offset increases in people-related and other costs.

Some of these include employee expenses, which were up $800,000 due to the annual compensation increases, as well as higher staffing levels, primarily to support the growth of our international operations.

We had higher professional services expense of $500,000, primarily in the legal area.

We had higher research and development costs of another $300,000 over the prior period, due to the timing of new product development activity.

And additional miscellaneous expenses, including stock option compensation and bad debt expense, added another $400,000 over the prior year.

Advertising and sales promotion expenses decreased to $5.4 million in the first quarter from $6.6 million in Q1 last year, and as a percentage of sales fell to 6.5% in the first quarter from 8.4% in Q1 last year.

The decrease in the current period is related to the timing of investments in advertising activities, primarily a 1001 TV campaign in Europe, which was not repeated during this fiscal year.

We still expect investment in global advertising and sales promotion expenses for the fiscal year 2009 to be in the range of 6.5% to 8.5% of sales.

Amortization of intangible assets of $100,000 is related to customer lists acquired in the 1001 acquisition completed in fiscal 2004.

Our operating income for the quarter was $12.1 million or 14.4% of sales compared to $9.5 million or 11.9% of sales in Q1 last year.

Our net interest expense for the quarter was [$4.4] million, virtually flat to Q1 last year.

While the expense was nearly same as the prior year, both interest expense and interest income were lower in the current year.

Interest expense was lower due to the reduced principal balance of our long-term debt, while interest income was lower due to lower cash balances and lower interest rates in the current quarter compared to last year.

The provision from income tax was 35.2% in the first quarter of FY09, an increase from 33.4% in the first quarter of last year.

The increase in tax rate is primarily due to a reduction in the tax rate benefits associated with municipal bond interest, as well as an increase in state tax rates.

Net income for the quarter was $7.7 million, up 23.4% from Q1 last year.

Foreign currency exchange rates period over period had a $0.9 million impact on net income, as FY09 results translated at last year's exchange rates would have produced net income of $8.6 million.

On a diluted basis, earnings per share were $0.46 compared to $0.36 in Q1 last year.

Diluted shares outstanding decreased to 16.7 million compared to 17.1 million for the first quarter last year.

This was a result of share repurchases during Q2 of last year of over 0.5 million shares.

On December 9th, the Board of Directors declared a regular quarterly dividend of $0.25 per share payable on January 30th, 2009 to shareholders of record on January 8th, 2009.

And based on today's closing price of $26.79, annualized yield would be 3.5 - would be 3.6%.

Now on to the balance sheet, as of November 30th.

Cash was $26.3 million, down from $42 million at the end of fiscal '08, primarily due to our annual $10.7 million principal payment on our long-term borrowings, which was paid in October of this - of 2008.

We had dividend payments of $4.1 million in October, and we had some capital expenditures of $1.2 million during the period.

Our accounts receivable decreased to $46.4 million, down $2.9 million versus August 31, as a result of the timing of sales.

Our inventory increased from $18.3 million to $20.3 million since the end of last year.

The increase is primarily due to raw material and components to support new sourcing initiatives, as well as the buildup in inventory in Europe ahead of some anticipated future cost increases.

Current liabilities at November 30th, 2008 were $51.6 million, down from $54.6 million at the end of the fiscal year.

Accounts payable on accrued liabilities decreased by $4.3 million, due to the timing of payments.

Our accrued payroll and related expenses were down $1.2 million, primarily due to a payment in the - of the fiscal year 2008 bonuses, which was paid in October of '08.

Income tax payable decreased $2.6 million, primarily due to the timing of income tax payments.

We continue to delever the Company, and in October we made our $10.7 million annual principal payments.

As of November 30th, our outstanding balance under our original $75 million term loan was $32.1 million.

Maintaining liquidity in these uncertain times continues to be a priority for us.

We believe that our existing cash, the liquidity available on our undrawn $10 million line of credit, as well as our anticipated cash flows from operation, will be sufficient to meet projected operating and capital requirements for our current business plans.

In this time of economic turmoil and uncertainty, we are pleased that our Company has such a strong balance sheet and a solid financial foundation.

And that is really it for the financial update.

Again, for more information we will have available our 10-Q, which will be filed later this week.

Thanks, and back to Garry Ridge.

Thank you, Jay.

We continue to operate in turbulent times, with high volatility in raw material costs, the impact which is an impact on our cost of goods, slowing economies that challenge our top line, as well as sharp changes in foreign currency exchange rates, that significantly impact sales and profits from our international segments.

These factors make our job more difficult to anticipate how the business will fare for the fiscal year.

Because of this, we have decided not to issue our annual full-year outlook document normally issued during the first quarter of the reporting period.

Please note that any forward-looking goals we have released in the past on that document are now obsolete.

We are all well aware, however, that our investment community appreciates as much visibility as possible relating to our business, and we want to give you as much visibility as possible.

That is why we are now providing you with our current outlook for Q2, and an updated guidance for the fiscal year.

As you have heard me say often, we do not run our business on a short-term quarter to quarter basis, nor generally guide on a quarterly basis, but feel it is appropriate given the volatility we are seeing and experiencing.

The following guidance does not include any acquisition, although we continue to actively seek opportunities that are the right fit at the right price, and the right business case.

For the second quarter, we expect our net sales to be significantly impacted by changes in foreign currency exchange rates, with results in the range of sales of $69 million to $73 million.

Actual net sales in Q2 of last fiscal year were $78.9 million; however, would have been $70.9 million at the current year foreign exchange rate.

Thus, our expected reduction in net sales in Q2 versus last year is largely due to the foreign currency exchange impact.

We expect our investment in global advertising and promotion in Q2 to be above the annual range of 6.5% and 8.5% of net sales.

We expect our net income to be in the range of $3.8 million to $4.6 million, which would achieve an earnings per share of $0.23 to $0.28, assuming 16.6 million shares outstanding.

Note, the key drivers of the difference of Q2 this year versus last year are mostly higher promotional discounts and advertising investment, an impact of $4.1 million or $0.16 per share on an after-tax basis, and a foreign currency exchange impact of $1.4 million or $0.08 per share.

If foreign currency exchange rates remain at current levels, we will continue to see a significant negative impact on our sales and net income for the balance of the year.

As for the full fiscal year of 2009, we are updating our guidance as follows.

Despite positive sales growth in local currencies, we expect our net sales to be in the range of $305 million to $315 million.

Our forecasted sales at last year's foreign currency exchange rates would have produced net sales of between $338 million and $349 million, or a growth of 6.6% to 10.1% over fiscal year '08.

We expect our advertising and promotional investment to range between 6.5% and 8.5% of net sales for the fiscal year, but to be at or above the high end of that range through Q2 and Q3.

We expect net sales - net income, sorry, of between $26.5 million and $29 million, which would achieve an earnings per share of between $1.60 and $1.75, assuming 16.6 million shares outstanding.

Our forecasted results at last year's foreign exchange rates would have produced net income between $30.9 and $33.8 million.

Thus, the estimate impacted by foreign currency exchange rates is approximately $4.5 million to net income, or a staggering $0.27 per share.

Before we wrap up, I would also like to touch on the continued financial strength of WD-40 Company in these turbulent times.

In light of the recent liquidity issues experienced in global credit and capital markets, we have further evaluated our financial position and have identified steps we have and will take to maintain our strong financial health.

We believe we are well positioned to weather the uncertainty in the global credit and capital markets, due to our strong balance sheet and effective business model, along with our growing and diverse global revenues.

We are managing all aspects of our business, including but not limited to monitoring the financial health of our customers, suppliers, and other third party-relationships; implementing margin enhancement strategies on a continuing basis; and seeking new opportunities for growth.

Despite uncertainty, we feel good about the future outlook for WD-40 Company.

We will also continue our transparency philosophy, keeping our shareholders informed as we weather the challenges ahead of us.

We would be pleased to open for any questions, if the operator would make that happen for us.

Thank you.

(Operator Instructions).

Our first question will come from Jeff Zekauskas with JPMorgan.

Good afternoon.

This is Silke Kueck for Jeff.

How are you?

Hi, Silke.

I have a couple of questions.

You talked about the price impact of 3.3% of the gross margin.

What is the price benefit to the sales line?

We really didn't give that number, but you can back into it.

Okay.

So when you say 3.3% to gross profit, meaning - it means like the margin benefited by 330 basis points due to pricing?

Yes.

Okay.

That makes it clear.

In terms of the WD-40 line, how much of the product line has been converted to a smart straw in the United States at this point, like in very rough terms, is it 1/3, is it 1/2, can you tell at all?

It is about - if you look at the total line, of our total SKUs, there are only about four now that aren't smart straw that won't convert because the smart straw is not appropriate to that.

So I would think that it is - a large percentage of our total SKU count is now in smart straw format.

And because the conversion has largely been completed, would you believe that towards the end of the year going into 2010, maybe some of the beneficial pricing would - would the level of pricing that you have achieved sort of flatten out?

Yes, I think that now that most of - all of the classic product has been flushed through the system, that the majority of our customers in the retail segment and in the areas that are supplying doers and people who use our product on the job, are now supplying smart straw through those trade channels.

So it won't be much longer before most of the volume is in smart straw, and then the volume - or the dollar volume will level out.

But we are very, we are very far through the whole process now.

It is - you will still find the classic product of course on the shelf at retailers, as that continues to be flushed through the system, but in all cases now we are shipping smart straw on the product where it is appropriate.

And then lastly a question on raw materials.

The - how much existing - how much existing raw materials have worked through this period, meaning it seems if I look at your cost of goods sold line, and I look at the raw material cost increases, it seems that there must have been like some higher-cost inventory that still worked its way through income statements, and all things being equal that should really - you know, things should look more favorable for the next two or three quarters, I would think.

With respect to the oil-based products we are - in the oil-based components we are seeing that.

Again, we are going to see a fairly significant increase in the cost of our steel-based or tin plate-based cans, our aerosol cans.

So there will be an offset, but generally we would expect to see an improvement in our margin.

Okay.

So on a net basis, even though aerosol can prices may still go up, you think it would be over - on a net basis, raw material costs should improve going forward?

Well, what we would see is that if oil prices kind of stay down where they are -

Uh-huh.

- and now that we know what our price increase in cans is, which is - it is in the range that we shared at the last call, of around, you know, 48% to 50%.

If oil stays down and we get the conversion, given that and the savings that we anticipate from the improved manufacturing process from the capital equipment we have invested on our package lines to improve line speed from smart straw, all of those things aligned, we should see some sort of at least stabilization and improvement in our gross margin, particularly in the second quarter.

I can't tell you what's going to happen in the third quarter yet because it is just too volatile.

But those things, those stars aligning, then we would see a positive trend in gross margin.

Helpful.

If I can ask a very last question before I get back into queue.

Have you discussed in rough terms how much of an expense aerosol can costs are in terms of cost of goods sold?

No, but in our investor presentation that's on our website we actually - there is a slide in there now where we break out the percentage costs of the major components of an aerosol can.

Okay.

I don't have it in front of me, otherwise I would share it with you, but it is in our investor presentation where it splits out how much is steel, how much is oil, how much is cardboard, how much is filling.

Okay.

That's helpful.

Thanks very much.

I will get back into queue.

Thank you.

We will move on to Alan Robinson with the Royal Bank of Canada.

Hi.

Good afternoon.

Hello.

My question concerns your guidance, no surprise there.

If you back out your second quarter forecast from your full-year guidance, there seems to be a major disconnect between what you are seeing in the current quarter and what you expect in the second half.

It looks like your current EPS guidance is predicated on operating margins in the high single digits, but to get to the full-year projections, that operating margin needs to expand to the high teens for the second half.

So, I guess my question is am I reading that correctly?

And if so, why do you think that the second half is going to be so different from the second quarter?

Absolutely, you are reading correctly.

I don't know whether you were on when I shared it, but the second quarter has a substantially higher marketing spend.

I think it is about equal to - was it $0.17 per share.

We have said that our Q2 and Q3 advertising and sales promotional activities will be above or at least at the high end of our guidance, which is 8.5%.

So, we have strategically executed some high marketing activity to hopefully get some extra promotional space in stores, while other people are going underground.

So that is basically the main reason that you will see that we are - and we also - we gained a little bit extra in the first quarter.

You know we guided 40 to 45, we came in at 46.

So we had a little better in the first quarter.

This is what we see in Q2.

And then Q3, we would expect high sales levels at a slightly reduced advertising spend than Q2, and then we would expect to ride home on - with it in Q4, where obviously you are going to see our advertising and promotional expense drop below those two highs to be able to come in within our range.

Okay.

So - that makes sense.

But also it seems that in the second half you are assuming a significant hike in gross margins as well.

Am I reading that correctly, or is the advertising - is the promotional spend part of that?

The promotional spend is part of that.

We are not - you know, we don't guide on gross margin, but we've said that if we finish the year at or above where we started, we think we will have done a good job.

Okay, fair enough.

And then, with this Spot Shot conversion to the nontoxic product, do you expect any incremental costs due to this conversion, in a similar manner to the costs we saw due to the smart straw conversion?

We have already taken those.

Right, they're on.

Okay.

And then one for Jay, I guess.

If you look at second quarter cash flow, do you have any plans to monetize your working capital to tide you over the slower market conditions this quarter?

We have - I think we monitor that fairly closely, and I think as we look forward we certainly have adequate supplies in our working capital, as well as availability in borrowings if needed.

Do you anticipate being cash flow positive in the current second quarter?

Yes.

Okay.

All right, thank you.

Thanks, Alan.

Joe Altobello from Oppenheimer has our next question.

Thanks.

Good afternoon, guys.

Hello, Joe.

First question, I guess, is going back to the guidance for a second, on the top line in particular, you mentioned the $69 million to $73 million, which is down pretty significantly year-over-year, although most of that sounds like it is foreign exchange.

And so, if I kind of back into what you are assuming in Europe, because I would imagine your foreign exchange impact in the Americas is pretty minimal, so if we assume some growth there and some small decline in Asia Pacific, it seems like it implies a 20% to 30% decline in Europe on a reported basis.

Is that fair to say?

I don't know the exact percentage but certainly your theory is right, Joe.

The majority - we are anticipating continued growth in local currencies in our European business.

We anticipate continued growth in local currencies in our Australia and Canadian businesses.

That's where we get the exchange rate here.

So if you look at a sales line locally, we anticipate we will continue to see some sales growth in the second quarter.

Globally, in local currencies just about everywhere, we will see sales growth in the second quarter and through the year.

The real hit is that, if you will, full-year aggregate impact on sales of about $30 million, if the US dollar stays at where it is now.

We have had - the guidance we have given has a baseline that the US dollar, particularly to the pound, is going to stay where it is now, which is in the $1.45 to $1.50 range, which is down from $2.00 at this time last year.

No, you're right, we had this discussion on the last call, and I recall you guys are much more pound-centric than Euro-centric, I guess it is?

It is all pound.

It is the pound to the dollar is where we are taking it in the shorts.

Got it, okay.

And then in terms of your strategy on the home care side, I mean obviously that's been struggling for a while, and that continues there.

It doesn't seem like there's an easy fix.

Is there a possibility that you guys could divest some of those businesses or shut them down?

I have said publicly that it's our goal to reduce the dependency we have on the volatility of the grocery trade channel.

At this time, and when we enter the future, all of our grocery - all of the products in our household products are contributing handsomely to our EBITDA line, and we will continue to maximize that contribution.

If sales drop, I - we are not that - we certainly are not going to be making significant long-term investments, but we certainly will harvest those as long as we need to, and then through brand extension, other acquisition, innovation, global expansion over time we will be - it is our stated strategic objective to reduce our dependence on the volatile grocery trade channel.

Got it, okay.

And then lastly, if I could, are you guys contemplating any additional price increases beyond I think what you guys took in October on the WD-40 brand, in particular?

No.

As you can imagine, we are getting an interesting piece of feedback from our customer base because they are seeing oil drop from $150 to $50, and now they're asking us for decreases.

Also, the common talk in the market is steel prices are coming down, and we are saying they're going up.

So our credibility is being challenged on a daily basis, and it is an uphill battle to be showing people that this is real.

So we are going to sit tight now, and just see where it settles down.

However, having said that let me say this, that we are much more proactive on our movement of pricing now than we have ever been in the past, given the turbulence that we've been going through.

When you say proactive, you mean you are much quicker to take pricing right now than you were?

We consider it more often now than we ever have before.

Got it, okay.

Thank you.

Thanks, Joe.

We will move on to Liam Burke with Janney Montgomery Scott.

Garry, Jay, how are you today?

Good day, Liam.

Garry, it looks like I mean with the economic headwinds, you have got a lot of push back on your - on your promotional work.

If I am looking at your advertising and promotion budget for the year, how are you allocating it between - I will call it lubricant and household products?

Okay, great.

Thanks for the question.

I was hoping someone would ask it.

Our major pushes are, firstly, WD-40 industrial and consumer print in support of our smart straw alternative.

We've just finished the smart straw tour, and we are turning up the volume on making our core end users and our heavy end users in the industrial and the heavy doers section very, very aware of smart straw, and activities to build promotion and display of smart straw, basically to restock America.

We see that the opportunity now is to restock the homes of America with smart straw, now that we have full production and we are going - going gangbusters at that.

The second major advertising promotion push is on Spot Shot.

Spot Shot, as you know, is a large revenue generator, it is a product with good gross margin, and that is all around the year-long promotion based on Marley and Me.

And the third area is we are having a push with - a one-time push based around the Super Bowl with 2000 Flushes in the second quarter.

So, we are really focusing in three areas.

WD-40, Spot Shot and 2000 Flushes, all good-sized businesses with good margins, and then a lot of our promotional activity also is to generate display, and of course in other parts of the world to generate new distribution, to find new users in new markets, sampling activities in China and Russia, display building activities in Germany, France and Spain, display building activities in the UK.

Okay.

So if I can go back on that, I mean if I go back to households, excuse me for using the old term, it looks like Spot Shot and 2000 Flushes, which had pretty tough first quarters, are two product categories that you are going to invest in throughout the year?

They are the two of the - well, Spot Shot in Q2 and - sorry, 2000 Flushes in Q2.

Right.

Spot Shot through the year with these - with a very, very, very positive promotion that we have linked with Marley and Me.

It is getting a lot of good traction.

Marley and Me, as you know if you've seen the movie, is a dog that makes messes everywhere, and Spot Shot is his friend.

Okay.

And Jay, in the past, I mean if I go back to past performances, your cash flow for the balance of the year will be pretty strong, and your cash balance will be growing as we get through the end of fiscal 2009.

Are acquisitions a priority, or do buybacks fall into the mix anywhere along there?

We evaluate that on a regular basis, depending on the circumstances.

I think as we look forward, you know, I think we do see acquisitions as a way to use our cash.

All right.

Thank you.

(Operator Instructions).

We will now move to Frank Magdlen with The Robins Group.

Good afternoon, Garry.

Hey, Frank.

When you look at the household area, is there a big shift in going away from aerosol cans?

No, not necessarily.

You know, we - the only product we have in aerosol cans is Carpet Fresh, and one SKU of Spot Shot.

There was some movement in some of the Spot Shot are with the aerosol, but no, it's not necessarily a major trend.

We see a little bit of it, but there's not a bias to that.

So it isn't the consumer saying no; they still want the convenience, as opposed to a trigger?

Correct.

There are two very distinct camps.

There is a trigger user, and there is an aerosol user.

But, you know, unilaterally, globally, consumers still see aerosol product - the aerosol delivery system as a convenient, safe, tamper-proof form of product delivery.

Are you willing to give us about what percent of your sales are through aerosol?

No, but thanks for asking.

All right.

Thank you, Gary.

It appears we have no other questions at this time.

Mr.

Ridge, I will turn the conference back to you.

Thank you, everybody, for joining us.

I just want to end with a - a comment on a song that I heard the other day.

There's a country and western song out, and my son actually put it on a DVD for me for Christmas, but there's one line in it that I think really is good for us, and the line says, "I hear there's trouble in the neighborhood, but I think we are doing all right."

Thanks for being with us today, and we look forward to talking to you at the next conference call.

Again, that does conclude our conference.

We do thank you for joining us.