WD-40 Co (WDFC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WD-40 Company third quarter 2009 earnings release conference call.

One note, today's call is being recorded.

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

Maria Mitchell.

Good afternoon, and thank you for joining us for our third quarter earnings 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 assessment of variety of factors, contingencies and uncertainties considered relevant by WD-40 Companies.

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward-looking statements, including the impact of commodity prices, changes in foreign currency exchange rates and the uncertainty and 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 that there can be no assurance that the Company's expectations, beliefs or objectives will be achieved or accomplished.

The risks are detailed from time to time in reports filed by the WD-40 Company in the SEC, including forms 8-K, 10-Q, 10-K, and readers are urged to review these and other documents and stay up-to-date with our most recent Company developments provided in the investor relation section of our website at WD-40 Company.com.

Our fourth quarter fiscal 2009 earnings conference call is scheduled to take place on Wednesday, October 14, 2009 at 2 p.m.

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

Thank you, good day and welcome to our call today.

It's important to put perspective on the business as you review the third quarter results.

An important take away is that our business continues to show signs of growth and continues to be managed well despite a year of turmoil.

For example, we've managed to grow sales in many markets this past quarter compared to the second quarter.

The work our people have done to consolidate our supply chain is helping the Company improve its gross margin and realize savings in these areas.

In the midst of all of this our team is focused on developing future growth by introducing a new product line into the industrial segment in September which I'll talk a little more about later.

We're also anticipating that the U.S.

economy will recover slowly as many international markets experience continued economic slowdown.

Moving to our quarter results discussion, we reported net sales of $68.8 million for the third quarter of fiscal 2009, a decrease of 16% versus the third quarter last year.

Year-to-date net sales were $214.3 million, a decrease of 11% versus the same period last year.

Net income for the third quarter was $6.9 million down 15% compared to the third quarter last year and year-to-date, net income was $18.7 million down 19% from the same period last year.

Earnings per share for the third quarter were $0.41 compared to $0.49 for the same period last year.

Year-to-date earnings per share were $1.12 down from $1.36 last year.

Our third quarter results versus last year reflect the issues that we've experienced during fiscal 2009, primarily the volatility of foreign exchange rates, the uncertainty and weakness experienced in some economies around the globe and the anticipated declines in our home care and cleaning products and the vast changes in raw material costs which had an impact on our gross margin.

Let's cover some of the most significant impacts on our business and Q3 results starting with foreign exchange rates.

We've seen local currencies fall in value relative to the U.S.

dollar across several markets.

The stronger U.S.

dollar impacts us in two ways.

First, in converting sales and profit results from our international segments and second, in causing price fluctuations on products to customers and consumers in some of our international markets.

Local currencies in various markets have fallen in excess of 30% against the U.S.

dollar compared to the same period last year, meaning that our results were reduced by the same level.

Results from Europe, which are converted from pound sterling to U.S.

dollars were impacted in this way.

Each pound sterling equated to approximately $2 U.S.

in Q3 of 2008 fiscal year.

The exchange rate has fallen 27% with each pound sterling equating to $1.44 in Q3 fiscal 2009.

Current Q3 results translated at last fiscal year's third quarter exchange rates or what we term as constant currency basis would have produced net sales of $78.4 million and net income of $7.8 million, thus on a constant currency basis, net sales would have decreased 5% versus 16 and net income would have been down 4% versus Q3 last year rather than 15%.

Constant currency basis is the translation of our current period results from the functional currencies of our subsidiaries to U.S.

dollars utilizing the exchange rates in effect for the prior fiscal year period.

The year-to-date impact of foreign currency fluctuations is significant.

Results on a constant currency basis would have produced net sales of $237.8 million and net income of $22 million compared with the year-to-date last year net sales would have showed a decline of just 1% versus 11% and net income would have decreased 4% rather than 19%.

I feel a 1% decline in sales in constant currency is notable considering the global economic challenges realized in this past year.

In international markets where we sell our goods in U.S.

dollars, the change in foreign currency exchange rates effectively created price increases at the local level.

In some cases, in excess of 20 to 30%.

The fluctuating and higher prices at local level tend to disrupt these markets and in the long term have the potential in to impact our end-users.

We are working on and executing alternative strategies to minimize the impact of fluctuating foreign exchange rates on pricing and end-user consumption of our products in these local markets.

Another significant impact is the global economy.

In the first half of the year we saw customers tighten up on inventory and consequently reduce volume in response to this economic uncertainty.

Some international segments continue to be negatively impacted by both weakening local economies and foreign currency exchange fluctuations.

Due to these factors, Q3 fiscal 2009 sales were $68.8 million representing a 16% decrease versus Q3 fiscal year last year.

Compared to the second quarter, however, Q3 results represented an 11% increase over Q2 fiscal 2009 sales of $61.8 million.

Changes in foreign exchange rate had little impact on the sales quarter to quarter.

The sales trends and performance has varied market to market reflecting the diversity across the markets we sell into.

In U.S.

dollars Q3 compared to Q2 sales grew in the following markets.

The U.S.

increased 16%, Asia 42%, Australia 9%, the UK 20%, France 9% and the European distributor markets 42%.

Markets where sales declined or were relatively flat in the Q3 versus Q2 include Canada, Latin America, China, Germany, Italy and Iberia.

As for our multi-purpose maintenance products groups they grew 12% in the third quarter versus the second quarter.

Home care and cleaning products grew 10% in the third quarter versus the second quarter, partially due to some close out transactions on some slow moving inventory.

Other significant impacts is expected year-over-year in the decline in our home care and cleaning products.

Global sales of this group declined 22% versus the fiscal year in both Q3 and year-to-date as a result of competitive factors, some diminishing and shifting product categories and the volatility in the grocery trade channel.

The strategic decision to divert a portion of R&D investment from home care and cleaning products has affected our profitability in the short-term as we incur a non-cash impairment charge of $2.8 million in the second quarter related to the Carpet Fresh brand.

In the long term we believe this shift in investment of time, talent and treasure to our multi-purpose maintenance products category and adjacencies in that category will reward our shareholders.

We are looking forward to introducing our new line of industrial grade multi-purpose maintenance products under a new brand name of Blue Works in September of this year.

A positive impact on our sales results was the improvement in our gross margin percentage.

Between fiscal years 2003 and 2007, our gross margin averaged at around 49.8% of net sales, then volatility and sharp increases in raw material costs eroded our gross margin percentage down to 46.8% in fiscal 2008.

We addressed the challenge by implementing several strategies to combat these impacts which has helped us improve our gross margin to 50.9% in the current third quarter.

Price increases were needed to cover the sharp rise in raw material costs, yet they were implemented carefully to respect the relationship with our customers and consumers.

We continue to look at our business and launch initiatives to improve quality, service, price and value of our products and to ultimately improve the gross margin.

These initiatives include supply chain improvements and product conversions, many of these stem from the work of our cost reduction and containment team, or as we call them the CRAC team.

Supply chain improvements have included investments in capital equipment to reduce manufacturing costs and increase line speeds and improve quality, restructure and consolidation of raw material sourcing, contracting with alternative manufacturers and service providers where necessary, improving warehouse and distribution operations and costs and the redesign of packaging and displays to reduce the cost of these displays while maintaining quality.

Product conversions were done on our top three brands over the past year, WD-40 Spot Shot and 2000 Flushes.

These conversions included changes in formulations and/or delivery systems that improved the product and added value to the consumer as well as enhancing gross margin.

These initiatives required up front investment and expenses that initially negatively impacted the gross margin.

We began to see these changes pay off during the year and in the third quarter added 30 basis points to the gross margin percentage.

The impact does not include lower petroleum-based, sorry, does not include lower petroleum based material cost which Jay will cover in more detail.

We have realized lower petroleum-based material costs in the third quarter due to the lower oil prices and sourcing changes made in fiscal year this year.

We have been very pleased with the cost benefits we are seeing with the consolidation, restructuring and other changes our team has implemented for these materials.

I hope I've been able to give you additional perspective on the Company's overall performance for the third quarter and year-to-date.

Now let's talk about sales in a little more depth.

Our sales results in fiscal 2009 versus 2008 by product line were as follows--Multi-purpose maintenance product sales were down 40% globally in the third quarter and down 1% on a constant currency basis, both WD-40 and 3-IN-ONE brands experienced sales decline in Q3 across all three segments, the Americas, Europe and Asia Pacific, which were attributed to the weakening economies and the foreign exchange impact.

Year-to-date multi-purpose maintenance sales were down 7% at actual exchange rates yet were up 4% in constant currency.

Home care and cleaning products were down 22% globally in both the quarter and year-to-date with all brands down versus last year.

Spot Shot showed the least decline and continued to benefit from the comprehensive campaign built around the Marley and Me movie.

The year long campaign includes commercial advertising on TV and in movie theatres, discounts with purchase promotions with the movie and DVD release, print ads in magazines and special in store displays.

Home care and cleaning products in the U.S.

were impacted by loss distribution, some diminishing product categories, competitive activity and the overall economic slowdown.

Home care and cleaning products fared better in our international markets yet were negatively impacted in changes in the Far East currency exchange rates.

Europe's results and actual exchange rates resulted in declines of 18% in Q3 and 15% year-to-date, yet in constant currency, the product group was up 14% and 10% respectively.

Australia's home care and cleaning product sales and actual exchange rates resulted in a decline of 15% in Q3 and 40% year-to-date yet in constant currency the product group was up 15% and 9% respectively.

Now, a look at our business by trading block.

The Americas segment increased from 59% of global sales in Q3 of the last year to 60% of global sales in the current year.

Net sales in the Americas declined by 16% in Q3 and 8% year-to-date.

On a constant currency basis sales declined by 14% in Q3 and 6% year-to-date.

Americas multi-purpose maintenance product sales were down 11% in Q3 yet up 2% year-to-date.

Home care and cleaning products declined 24% in both Q3 and year-to-date due to the many competitive category and economic challenges discussed earlier.

U.S.

sales were down 15% in Q3 and are down 7% year-to-date, multi-purpose maintenance products were down 10% in Q3 yet are up 4% year-to-date.

Home care and cleaning were down 24% in Q3 and 23% year-to-date.

The sales decline in multi-purpose maintenance products in the third quarter versus the fiscal last year was due to loss distribution and the impact of customers reducing inventory levels in response to general economic conditions.

The third quarter last year also benefited from the activities surrounding the Smart Store conversion.

Our Latin American business is primarily based on multi-purpose maintenance products.

Total sales were down 90% in Q3 and 3% year-to-date.

The declines are attributed to both timing of price increases compared to last year as well as the impact of local economic conditions and currency valuations.

Canada sells both multi-purpose maintenance products and home cleaning products.

Canada net sales decreased 18% in Q3 and 16% year-to-date, which was virtually all due to changes in foreign currency exchange rates.

In constant currency, Canada sales were up 1% in Q3 and down 2% year-to-date with the dips due to declines in the home care and cleaning segment.

Now to Europe, which shifted slightly from 32% of global sales in Q3 of last fiscal year to 31 of global sales in the current year.

Total sales in U.S.

dollars decreased 17% in Q3 and 15% year-to-date at actual exchange rates, yet in constant currency rates increased 14% in Q3 and 9% year-to-date.

The pound sterling is the functional currency for our European results and when we speak to results in constant currency they are based on holding steady the foreign exchange relationship of the pound to the U.S.

dollar.

Current quarter actual exchange rates put Q3 results at $4.6 million below Q3 of last fiscal year, whereas sales grew by $3.6 million on a constant currency basis.

The difference equates to a currency exchange impact of $8.2 million on Q3 results alone.

Year-to-date foreign currency exchange impact on sales was $20.2 million.

Performance varied across countries and in their respective currencies.

The Europe trading block did benefit from the conversion of sales in local currencies to pound sterling yet ultimately were negatively impacted by the sharp declines in the exchange rate between the pound sterling and the U.S.

dollar.

Most of Europe experienced sales declines at actual Q3 exchange rates yet positive growth on a constant currency basis.

The following are the results across the European markets on a constant currency basis.

The UK increased 16% in Q3 and 9% year-to-date.

The direct markets which include France, Germany, Iberia and Italy grew 8% in Q3 and 9% year-to-date and the distributor markets which include Eastern Europe, Northern Europe and Middle East grew 21% in Q3 and 8% year-to-date.

Now to Asia Pacific which accounted for 9% of total Company sales in Q3 and year-to-date.

The Asia Pacific region which includes Asia and Australia experienced sales declines of 16% or $1.2 million in Q3 compared to the same quarter last year.

On a constant currency basis sales decreased by $400,000 or 6% in Q3.

Year-to-date sales decrease of 12% in U.S.

dollars yet on a constant currency basis decreased 5% or by $1 million.

The declines in Asia Pacific were primarily due to our sales in China and Asia distributor markets.

China sales decreased 32% in Q3 and 11% year-to-date and Asia distributors decreased 3% in Q3 and 9% year-to-date.

These decreases were primarily due to the slow economic environment which began to impact our sales during the first quarter of this fiscal year.

We expect the overall economic uncertainty in the region to negatively impact sales for the remainder of fiscal 2009.

Sales in Australia decreased 23% in U.S.

dollars in Q3 and 17% year-to-date, yet on a constant currency basis grew 6% in Q3 and 5% year-to-date.

The moderate growth in constant currency was a result of price increases as well as some good promotional activity.

That's it for the sales update.

Here is Jay Rembolt, our Chief Financial Officer who will continue the review of the financials.

Garry, thank you.

In addition to the information that we are presenting in the call, we suggest that you review our 10-Q which we'll file tomorrow, July 9.

First, our third quarter results.

Gross margin was 50.9% of sales in the third quarter compared to 46.5% of sales in Q3 last year.

The 4.4 percentage point increase in margin was primarily attributable to price increases, along with lower discounts and favorable impacts from sourcing changes and product conversions that Garry talked about.

These impacts were partially offset by special close out transactions along with segment and sales mix changes during the quarter.

The price increases implemented in Q1 and Q2 of fiscal '09 added approximately 5.3 percentage points to our gross margin in the third quarter.

The price increases were primarily across our multi-purpose maintenance products although some price increases were implemented on our home care and cleaning products in Europe.

Our promotional discounts had an impact.

We had lower advertising and promotional discounts in the current period and that had a positive impact on our gross margin, impacting it by 0.4 percentage points.

There's some of our A&P costs such as customer rebates, display allowances, slotting, coupons, are treated as a reduction in sales, and during the quarter we had a lower percentage of says subject to these promotional allowances.

A look at our input costs.

While we experienced lower costs of petroleum based materials during the quarter, this was fully offset by higher cost of aerosol cans.

As discussed last quarter, there's a delay in the flow through of raw material costs due to production and inventory life cycles.

The cost of oil based materials in our Q3 cost of goods reflected the lower pricing of Q2 and positively impacted our gross margin by two percentage points.

This benefit was offset by the dramatic increases in our cost of aerosol cans that took effect earlier this calendar year.

These higher can costs flowed through into our Q3 cost of goods sold and had a negative impact on gross margin of 2 percentage points so it was completely offset the benefit from the lower cost of oil.

We experienced increases in the cost of cans in the U.S.

That exceeded 40%.

The pricing for tin plate, the material used in our cans is set annually and is independent of the movement in the price of steel and the spot market while steel prices have experienced declines from the highs of last year, the cost of aerosol cans has not similarly benefited.

The sourcing changes and product conversions that Garry discussed earlier also had a positive impact on gross margin.

There were other impacts that offset these benefits including increases in costs of other raw materials, special close out transactions and changes in segment and product mix period to period.

Now, moving on to our operating expenses, beginning with selling, general and administrative expenses, our SG&A for the third quarter decreased from $21.4 million to $18.4 million and slightly increased as a percentage of sales from 26.1% to 26.8% versus Q3 last year.

The decrease stems from changes in foreign currency exchange rates compared to Q3 last year which had an impact of $2.6 million.

Freight costs which decreased by $1.3 million are due primarily to lower sales and lower fuel cost along with increased shipping efficiencies.

We had lower miscellaneous expenses of about $0.4 million resulting from decreases in stock based compensation, professional services and bad debt expense.

These favorable impacts were partially offset by higher employee related costs which include salaries, profit-sharing and other fringe benefits.

In the quarter these increased $1.3 million resulting from annual compensation increases as well as higher staffing levels to support the growth of our international operations.

Research and development costs also increased by $0.3 million due to timing of new product development activity.

Our advertising and sales promotional expense increased to $5.3 million in the third quarter from $4.3 million in Q3 last year and as a percent of sales increased to 7.7% from the 5.3% we experienced in the prior year.

The higher level of investment is due to the timing of advertisement activities as well as higher investment to promote the Spot Shot brand of home care and cleaning products in the U.S..

This higher investment was partially offset by the favorable impact of foreign exchange rates in the current period.

Amortization of intangible assets of $0.1 million is related to customer lists acquired in the 1001 acquisition completed in fiscal 2004.

Operating income in the third quarter was $11.2 million compared to $12.3 million in Q3 of last year.

Net interest expense in Q3 was $0.6 million up slightly from the same period last year.

The increase in net interest expense is the result of lower interest expense and even lower interest income as an offset.

Interest expense was lower as we reduced our debt with our annual $10.7 million principal payment in October, however we had lower interest income resulting from lower interest rates compared to the prior year.

Our other income decreased by $0.4 million primarily due to foreign currency exchange losses.

The third quarter last year had $0.2 million or of foreign exchange gains whereas the current quarter had $0.2 million of foreign exchange losses.

The provision for income tax increased from 32.9% in Q3 fiscal '08 to 33.9% in the current quarter primarily due to the benefits stemming from expiring state and federal statutes that were reduced in the current quarter.

Net income in Q3 was $6.9 million, a decrease of 15% from Q3 last year.

Foreign currency exchange rates period over period had a negative impact on net income of $0.9 million.

Q3 fiscal '09 results on a constant currency basis would have produced net income of $7.8 million or 3.7% below last fiscal year.

On a diluted per share basis earnings were $0.41 in the third quarter compared to $0.49 last year.

Diluted shares outstanding remained flat to Q3 last year at 16.6 million shares.

Now on to the year-to-date results.

Many of the themes and drivers of the year-to-date results are consistent with those we just discussed for Q3.

Our year-to-date gross margin grew 1.3 percentage points up to 48.7% of sales compared to the 47.4% we experienced last year.

The gross margin percentage benefited from price increases implemented during Q1 and Q2 of fiscal '09 as well as a positive impact from product conversions and sourcing changes.

These benefits were offset by higher cost of products, changes in sales mix and increased promotional allowances.

Price increases added 4.6 percentage points to the gross margin in the first nine months of 2009.

Gross margin was also positively impacted by product conversions and sourcing changes, whereas short-term expenses related to product conversion and sourcing changes reduced gross margin last fiscal year, we are realizing benefit from these changes in the current year.

These positive impacts were mostly offset by higher input costs.

As noted earlier in the discussion, we had not realized the full benefit of lower petroleum based costs until the third quarter.

The average cost of petroleum based material is much higher in the current year-to-date period compared to last fiscal year.

The significant cost increases in aerosol cans in this calendar year also affected our margin.

The combined impact of higher cost of petroleum based products as well as aerosol cans negatively impacted our year-to-date gross margin by 2.2 percentage points.

Another favorable impact to gross margin resulted from changes in advertising and promotional allowances that we experienced in Q1 and Q2 that had been -- that were reduced over the prior period.

Other impacts that negatively affected gross margin included increases in other raw material costs, some close out transactions, changes in segment and product mix.

Our operating expenses beginning with SG&A for the first nine months had a decrease.

Our SG&A decreased from 63.0 million to $57.4 million and as a percentage of sales increased slightly from 26.2% to 26.8%.

The decrease in SG&A stems primarily from changes in foreign currency exchange rates compared to last year which decreased the expense by $6.2 million for the nine month period, and freight costs which decreased $2.6 million primarily due to lower sales, lower fuel costs, and improved shipping efficiencies.

Partially offsetting these decreases were employee related expenses such as salaries, profit-sharing and other fringe benefits which increased 2.1% due to the annual compensation increases as well as higher staffing levels.

Research and development costs are up $0.7 million in the year due to the nature and timing of new product development activities we've undertaken.

Other miscellaneous expenses including stock based compensation and bad debt expense had increased $0.4 million over last year.

Advertising and sales promotional expenses increased slightly to $15.3 million in the first nine months and increased as a percentage of sales to 7.2% versus 6.3% in the prior period.

The $0.1 million year-to-date increase over last fiscal year was due to an increase in advertising activities, however was partly offset or mitigated by favorable impact from foreign exchange rates which had a $1.8 million benefit in the year-to-date period.

Investment in global advertising sales promotional expenses for 2009 is expected to be in the range of 6.5 to 7.5% for the year.

Amortization of intangible assets of $0.3 million in the first nine months is related to the 1001 customer lists.

Our year-to-date results also include the second quarter $2.8 million impairment charge related to the Carpet Fresh brand.

Our operating income for the first nine months was $28.6 million compared to $35.1 million in the same period last year.

Year-to-date net interest expense was $1.5 million up $0.3 million from the same period last year.

As noted in the Q3 discussion, even though we had lower interest expense from lower debt, we had even lower interest income to offset it.

Other income decreased $0.2 million in the year-to-date period to $0.5 million.

The decrease versus the prior year is due to lower foreign currency gains in the current year.

The provision for income taxes decreased from 33.7% in the first nine months of fiscal '08 to 32.4% in the current year.

This is primarily due to the tax benefits we achieved in the second quarter due to the change in the California tax laws.

Year-to-date net income decreased 19% to $8.7 million compared to $23.0 million in the same period last year.

Foreign currency exchange rates had a $3.3 million negative impact on income.

Fiscal 2009 year-to-date results translated to U.S.

dollars at the same prior year rate or on a constant currency basis would have produced net income of $22.0 million or 4.3% off of the current period last year.

On a diluted per share basis earnings were $1.12 compared to $1.36 in the first nine months of fiscal '08.

Year-to-date diluted shares outstanding have decreased slightly to 16.7 million shares compared to 16.9 million in the same period last year.

Regarding the dividend, on June 23, the Board of Directors declared a quarterly dividend of $0.25 per share payable on July 31, 2009, to shareholders of record on July 17, 2009.

Based on today's closing price of $28.08 a share, the annualized dividend yield would be 3.6%.

About our balance sheet, at May 31, cash was $36.2 million down from $42 million at the end of fiscal '08 primarily due to our annual payment of principal of $10.7 million, dividends paid of $12.4 million, approximately $2.5 million used for capital expenditures during the period and a $3.1 million foreign currency impact on our cash.

These cash outflows were partially offset by $2.2 million provided by operating activities as well as the proceeds of $0.6 million from the issuance of common stock as a result of stock options.

We continue to deliver the Company with our annual $10.7 million October principal payments as of the 31st of May, our outstanding principal balance is $32.1 million.

Maintaining liquidity continues to be a priority for us and we believe that our existing cash, the liquidity available on our undrawn $10 million line of credit and our anticipated cash flows from operations will be sufficient to meet the projected operating and capital requirements of our business.

We are pleased that our Company has such a solid financial foundation with consistent cash flows and a strong balance sheet.

We were well positioned for both present and the future and again, more information will be available in our 10-Q which will be filed tomorrow and thanks so much.

Now back to Garry.

Thanks, Jay.

Now let's discuss our guidance and outlook for the rest of this year.

As noted earlier, we realized some positive sales trends in the third quarter versus the second quarter.

The trend combined with promotional activity planned for the fourth quarter has led us to tighten the range of guidance we provided in Q2.

The following fiscal year 2009 guidance does not include any acquisition activity and assumed foreign currency exchange rates will remain at recent levels for the fourth quarter.

We now expect our net sales to as we've said be significantly impacted by changes in foreign currency exchange rates with this fiscal years result and that would give us a sales range of 283 million to $290 million.

Our forecasted sales on a constant currency basis to that of fiscal 2008 would have produced net sales of between 313 million and $320 million, fairly level to the fiscal 2000 results of $317 million.

We expect our global advertising and promotional investment to be in the range of 6.5 and 7.5 of net sales.

We expect our net income to be in the range of 24.2 million to $25.9 million which would achieve EPS of $1.45 to $1.55 assuming 16.7 million shares outstanding.

Foreign exchange impact is the major driver in the decline in earnings versus fiscal 2008 which is expected to reduce our net income by $4.3 million or $0.25 per share.

Excluding this impact, fiscal 2009 net income would range between 28.5 million and $30.2 million compared to fiscal 2008 actual income of $27.6 million.

Worldwide economic recovery may still be slow and ahead of us.

The good news is that our business remains strong and we're well positioned around the world to generate growth.

While external forces are currently slowing us down this too shall pass and WD-40 Company will eventually return to steady growth in our developing markets.

Our tribe will continue to maximize opportunities in mature markets through new product introductions in areas where we have the right to win and we will continue to manage our business to improve our gross margin.

As in life, business does not always come with a clear road map.

These are uncertain times and it is especially important that we as leaders continue to care about our people and be candid with all of our stakeholders.

We must act responsibly and not be afraid of accountability.

We must continue to focus on the future and the opportunities that come from these uncertain yet exciting times.

Thank you very much for joining us today.

We would be pleased to answer any of your questions at this time.

Thank you.

(Operator Instructions) We'll go first to Liam Burke with Janney Montgomery Scott.

How are you this afternoon?

Good afternoon.

Garry could you give us a little more detail on the launch of Blue Works?

What channel -- is it going to be in a particular trade channel or how do you plan on promoting and introducing it?

Blue Works is primarily a range of industrial grade multi-purpose maintenance products.

There are a number of SKUs in the range and if you look at our investor presentation which I know you've seen, Liam, there's a map of our markets and this is primarily focused to the left of the consumer, so it's the people who are doers and maintenance, plant maintenance and repair.

So it's to that left and what we call MRO, maintenance repair and overhaul.

Okay, but how are you going to reach that?

Are you going to advertise or how is it?

Okay, good question.

Primarily the distribution system or the distribution mechanism takes us to those trade channels.

We'll be using sampling.

We'll be putting umbrella or media that is primarily based at those trade channels, so you're not going to see this advertised in one of the sporting magazines but if you were a trade user, you might see it in plant and equipment magazine, you may see it in general maintenance areas, so we'll be sampling, the good thing about it too it comes with the WD-40 DNA so it's a very impressive looking can, called Blue Works, why Blue, well, WD-40 is blue so it's from the home of the hero and it actually wears our new corporate logo on the bottom right hand corner that endorses it as a product that meets the standards of its parent brand of WD-40.

Great.

And on the home care and cleaning, you said that Spot Shot was the best performer of the group.

Obviously there was some promotion in there.

Could you give us more detail on how that performed on a revenue basis and whether or not you give us specifics or a range of performance or the other home cleaning?

I know you're managing them for cash rather than growth but is there any more detail you can give us on the revenue side there?

No.

We haven't broken out the detail by brand, but the two big brands in that area are Spot Shot and 2000 Flushes.

That's where the majority of our activities are concerned, and they are still getting attention as far as some levels of R&D development and formulation changes.

X-14 as you may recall, we're paring it back to basically one product which is the mildew stain remover over time and 2000 Flushes, sorry, Carpet Fresh, we're concentrating on the aerosol side of that, particularly growing it outside of the U.S..

Carpet Fresh is very successful and continues to be very successful under the 1001 brand in the UK, and it's doing very well in Australia under the Novac brand so we still see market opportunities there but as we've stated earlier, we're going to over time reduce our dependence on the volatility that surrounds the grocery trade channel and as I've often said concentrate more on where we have the right to win which is around the WD-40 brand and adjacent areas to that.

Great.

Thank you, Garry.

Thank you, Liam.

We'll move on to Alan Robinson with Royal Bank of Canada.

Good afternoon, Garry, Jay.

Hello.

I apologize in advance.

I'm suffering from a bit of a rusty voice this afternoon, so if you have any products to address that perhaps you could let me know afterwards.

Well, menthol will do you well.

I'm kind of curious on your cost containment measures.

How would you view opportunities now for further cost containment measures going forward?

Is there much more to achieve here or have you addressed the major cost saving opportunities already?

We had a goal to get our gross margin back over 50%.

We've stated that goal for a couple of years now and we've done it in a number of ways as Jay shared in improvement in supply chain efficiencies, in changes in formulation.

We will be relentlessly looking for continued savings primarily to offset what I think is still going to come to us which is some increases although we should be acting in a recessionary type environment.

We're still just gob smacked to see that steel can prices continue to increase and they're still talking about further increases, but we're looking at alternatives of sourcing in that area, so we're never going to stop looking.

If we get lucky, some more of it will flow through but we think that the current level of gross margin is the right business model for the Company.

We don't want to insult our consumers with prices that are higher than they should be and we also don't want to entice competition because we get overly greedy.

So I think it's a major, I'm really proud of the team to get us back to where we are in this environment and it's been a goal that we've been striving for for some time.

Yes, that is quite an achievement.

In terms of tin cans can you remind us when you expect to start to benefit from lower tin place prices if at all?

You mentioned perhaps there was a bias for the upside but is that a reset that starts in your second fiscal quarter?

I'm trying to remember how that works?

Yes, that's exactly right.

The pricing is set in January, so we're currently experiencing the uptick that we saw this last January.

That was about 40%.

And we are living with that although we continue to have dialogue with our can manufacturers around the appropriateness of that price throughout the remainder of the year, and we have yet to get any sort of confirmation that we'll see any reduction, but there is concern as we go forward that by the time we hit January next year, we may have some additional increases from the dialogue we've had.

That's just, I hope that gives you a flavor of the timing.

Yes, okay, that's useful and then does the introduction of this Trigger Pro format allow you to bypass the need for aerosol cans and therefore perhaps offer a boost to your gross margins?

Well, no, Trigger Pro is still a steel can, really just a steel can without being aerosolized, and we've looked at alternative ways of carrying that product to market.

We just haven't found one that gives us the benefit of the steel can.

The Trigger Pro because of its end-user has to be a rugged can, it's got to be thrown around in tool boxes, it's got to not sit under the sink like a can of hair spray or shaving cream, but we continue to look for alternatives, just with Trigger Pro it had to be a steel can.

So the only difference is it's not going to be pressurized?

That's correct.

It has a trigger mechanism on the top.

The advantage is there are a number of manufacturing sites around the world for whatever reason and I won't go into whether I believe they're good or bad reasons, don't want to have aerosol cans in the production area so this fits into that category and from the research we've done, some of our end-users like the controllability of the spray with the trigger and it gives it an alternate delivery system and one of our goals has been stated that we're going to grow the WD-40 brand through global expansion and new delivery systems and this year we've had Smart Straw, we've got Trigger Pro, last year Big Blast and we're really looking at new and innovative ways of delivering solutions to our end-users through new delivery systems.

That's helpful and then can you comment broadly on what you're seeing in terms of potential acquisitions in the current environment?

Is there anything that's getting interesting now or is it still really your focus to develop things internally?

We are certainly looking and the bottom line is we have yet to identify anything that is attractive in either price or margin that is in an area where we believe we can make a significant impact in it.

We continue to look outside of the United States for opportunities because there may be more outside than in, but we have one person dedicated to looking and viewing acquisition opportunities and we've looked at quite a few in the last six to eight months.

Just nothing has met our criteria.

And then the last question I apologize if you've covered this already but could you repeat the constant currency sales figures in the three geographic segments in the quarter?

I'll let Jay see if he can find those.

That's fine.

I can take that off line and let the next caller chime in.

Okay, we'll find them and I'll make sure I mention them before the call is ended.

Thank you.

Thank you.

And from JPMorgan, Jeff Zekauskas.

This is Ben Richardson sitting in for Jeff.

Hello, Ben.

Hello.

So just wondered if you might speak to pricing.

Are you seeing a difference in big box pricing versus smaller retailers?

I don't understand the question, Ben.

Is it such that your big box pricing trends in terms of your price increases might be different than pricing you're implementing now for smaller retailers?

We only have one price and it's driven by volume so everybody has the same opportunities, so certainly mix of sales may make a difference but we certainly apply the same pricing opportunities to all segments of the market.

And are you seeing better pricing traction in any particular region?

We see pushback from various customers but we don't implement selective price rises by customer and then if we do execute price risers by region, it's complete over that total region.

During the last year, we've basically had price increases across all of our geographic regions in the world.

The timing of them have been different depending on the seasons or where we are but certainly they've been across all regions.

Okay.

And speaking to gross margin, how much of this might have been, there's a footnote here speaking to the cost of products acquired from related parties.

How much of this might be a one-time benefit versus the year ago?

With respect to our costs associated from acquisitions from related parties is that the question?

Yes.

We had much small ever impact in the current year of costs associated from a related party.

If we look at that related party, that was our VML relationship which as we said earlier had filed bankruptcy, so that, we no longer, we have just a small amount of business continuing with that entity.

Okay.

All right that's good for now.

I can jump back into the queue.

With respect for margin impact, we had a margin impact associated with the related party last year as they were experiencing losses so our last years margin was adversely impacted.

The current quarter, the current quarters margin had minimal impact associated with either a benefit or a detriment in the current quarter with respect to the related party.

I don't know if that helps clarify it a little bit?

Excellent.

Thank you much.

We'll go next to Joe Altobello with Oppenheimer.

Thanks.

Hi, guys, good afternoon.

Hello, Joe.

Hi, Joe.

Just a few questions.

First, Garry, just wanted to go back to a comment you made to an earlier question about the pricing.

Obviously you've taken a lot of pricing within your WD-40 business and you did say you were getting pushback.

You're not at risk of having to roll back any of those price increases, are you?

Well, I don't think you're never not at risk but how are we going to know because what we've had and I can't really argue the point other than with fact is as oil prices have changed and shifted our retailers have said well why aren't the prices going down and fortunately, we were up front with them as they were going up and we were also up front with them about the can prices that were offset so I would suggest that they scratch their heads sometimes and say well why aren't can d prices going down and we scratch our head with them and said we understand that, but we are not rolling back prices.

If we saw a significant drop in our real cost of goods, of course we would do that, but we're not seeing that.

Okay, got it.

And then just going back to the second quarter, obviously, you had a pretty significant decline in sales and you seen a bit of an uptick in the third quarter.

How much of the uptick in the third quarter do you think is a result of retailers who were destocking last quarter after buying ahead of the price increases, now sort of restocking after drawing inventory down, I guess the question I'm trying to ask is if you take the second and the third quarter is the truth somewhere in between?

Joe, good question and we were having a discussion about that, I was talking with our VP of Sales about that this morning.

There's no doubt that in the major trade channels the word of the day is inventory and inventory levels.

I think, speaking from our side, I think we've been through the severeness of destocking and we're now getting to the stage where we're continually monitoring our levels within our customers to make sure that they don't go out of stock.

I'm wondering whether it will ever get any different than that.

I'm wondering whether there's been a big learning moment here and they are going to try and make this the norm so I don't think we'll see any significant further downward pressure and if they do they're out of business because we don't have a lot of inventory in the supply chain, nor do I think they are going to a stage where they maybe get back to the inventory levels they were at, so I think we've leveled off, Joe, and it's our job now to have promotional programs that generate the type of volume we want in the stores to generate the purchase of our product through impulse.

But did the quarter benefit from any restocking or was sell-in pretty similar to sell-through?

Our indications are sell-in is pretty similar to sell-through.

We don't see any major restocking going on.

Okay, and then looking at Q2 or Q3 versus Q2, I don't believe your business is that seasonal so is it fair to look at those on a sequential basis or is there any seasonality to the third quarter that's unusual?

It's less seasonal today than it ever was because of our spread around the world and I don't think there's a lot of seasonality.

If there is seasonality we create it through when we have promotions.

We do have as Jay or I shared we do have a very full promotional calendar in the fourth quarter and in looking forward, so we're a pretty cheap date in this environment now because we do have traffic and we do generate store traffic so and then our marketing teams have been very innovative with being able to do things like twin pack WD-40 with (inaudible) oil lube or including our new no rush shield in a twin pack.

Now that we've got these other products there's some new promotional activities that are allowing us to make different and enticing offers to our customers and to our consumers.

Okay.

And then lastly one for Jay and I apologize if I missed something here but your gross margin was up 440 basis points and you did a bit of a walk for us earlier in the call with pricing being positive 30 bips, the change of promotional allowance a positive 40 bips.

You talk about petroleum and aerosol cans offsetting each other so what's the other offset that I'm missing?

We talked about the impact of just other raw material cost increases that we've seen.

We had some special close out transactions in the quarter.

There was also changes in product mix as well as segment mix.

Some of our segments have a better margin impact than others and so we saw a favorable impact, or an adverse impact to offset some of those others in the quarter.

We didn't identify them with the same degree that we did to the key drivers of our upward impact.

But there were probably a couple hundred basis points is that fair to say?

Yes.

It would have made up the difference between -- to get us back to the 4.4.

Got it.

Okay.

Great.

Thank you.

Before I take the next call I'll just go back and for the information on Alan.

On a constant currency basis, Americas sales declined 14% in Q3 and are down 6% year-to-date.

In Europe, in U.S.

dollars, we were down 17% in Q3 and 15% year-to-date yet on a constant currency basis we're up 14% in Q3 and 9% year-to-date, and in Asia Pacific, year-to-date sales were down 12% in U.S.

dollars but on a constant currency basis were down by 5%.

(Operator Instructions) From the Robins Group, Frank Magdlen.

Good afternoon.

Afternoon, Frank.

In the Blue Works have you started any of that promotional activity?

Was that evident in the third quarter numbers?

No.

It's in its final stage of launch, so there's nothing in there at all.

And does it work any differently than WD-40?

Well, it's different products.

So it's formulated differently?

Yes, they're products that's things like contact cleaners and different types of lubricants or white lithium or silicon, so these sort of products are being used by MRO, maintenance repair and overhaul people so what we've done is come up with a range of products that absolutely are best-in-class.

These have been in development for about two years in formulation.

We've tested them.

They're best-in-class, equal to or better than anything else that's on the market, got the WD-40 brand, Company logo, seal of approval, and we've picked off what we believe have some very very good formulations.

All right and Garry, maybe you could summarize.

You're giving a lot of data over various geographies and various product categories.

On the last call you were talking quite a bit about stabilizing some of your product lines and various regions as well, but could you kind of summarize where you think you are in that process?

Well, I think we continue to have long term and meaningful growth opportunities globally in our multi-purpose maintenance products.

That growth will come from geographic expansion outside of the United States, evidenced by places like China and Russia and Eastern Europe and the other Asian countries.

In the areas of mature markets like the U.S.

the multi-purpose maintenance products growth will come from new delivery systems like the new Trigger Pro we've just released, expansions under the Blue Works brand will come from there.

On household products or home care and cleaning products we're still seeing reasonable growth in both Australia and in the UK.

In the U.S.

we turned off the, if you will, the development tank there because we said really, we would prefer to be putting that time, talent and treasure in places that were a little easier for us to win and we've brought that down to about where we think it might be for a while, so now it's really making sure we keep the R&D and product development running well in the multi-purpose maintenance and adjacent categories which we've identified in our map that we have in our investor presentations that we call our playground here.

That's where we'll be putting our efforts so geographic expansion, product line expansion, growth, multi-purpose, maintenance products, adjacent categories is kind of the growth engine.

But have you stabilized the product categories that you've been talking about in the past couple conference calls?

Well, I don't know if we've stabilized them.

I don't know if we have the ability to stabilize them.

It's hard to tell.

We've certainly come to grips with where we want to be amongst them.

All right, now one last question.

It appears to me that you're narrowing the range on advertising and promotion that you're going to be using for this year but it seems that you took a little bit off the top end and is that more of a permanent change?

Well, it's a change in that if we're not expanding in the high cost areas of groceries then the cost of advertising information comes down a little bit.

We still have to maintain our investment there.

It's just that if we're not launching products into grocery, you don't have a huge launch bill, if you like, launching into these other trade channels that we go into is a little more cost effective for us than in the grocery trade channel.

All right thank you.

Thank you.

Next we'll go to Robert Felice with Gabelli & Company.

Hi guys.

Most of my questions have been answered.

I actually just have one more.

Maybe you can help me with this.

If I look at your guidance, revenue, net income, and A&S, the range around A&S and make some rough assumptions around your SG&A, it looks like you expect your gross margin to compress in the fourth quarter versus the third quarter quite a bit, and I'm trying to understand what the drivers are there, especially given the fact that on a sequential basis FX will likely be a tail wind given the way foreign currencies move over the last couple of weeks?

I think that we guide really on the revenue side and the net income side and there will be and can be some changes throughout the middle of that.

We see our margin for the fourth quarter hovering around the 50%.

Now it might not be quite at 50% but I think our expectation is that we'll be able to maintain the margin that we achieved in the second quarter or somewhere close to that, certainly improved over what we've seen in the past year.

And on the currency side, we've not factored any improvement in currency.

We're saying we see it as it is today so if it improves well then our results will improve but we've sort of said given what we know today.

Okay, so broadly speaking would you say given the actions you've taken that are in place, the gross margin around 50% is kind of now a run rate level going forward or all else equal assuming raw material costs don't change, mix doesn't change, assuming no surprises?

I've stated for at least two years that it is our goal and our business model was built on a gross margin of around 50%.

We had that absolutely destroyed on us in the past three years in two ways.

One was the enormous run up in oil prices and secondly, the just unbelievable increase in can prices and we've struggled over time to get back to where we are and it's our goal to try and maintain that position because if you took the 4 percentage points of gross margin that we lost and added that into our results last year, that's why our EBITDA has been flat because we've had the gross margin eroded so we fought hard to get there, it wasn't gifted to us and we're going to fight hard to stay there.

Okay, great.

Thanks for taking my questions.

You're welcome.

Next we'll go back to Ben Richardson.

Yes, this is Silke Kueck at JPMorgan.

How are you?

Hi.

I also was wondering whether I could ask one question or clarification on the gross margin.

So from what I remember, your tin plate related maybe make up something like 10 or 15% of your raw material costs and your petroleum related costs maybe make up 50% of your raw material costs?

No, I think they are about even.

Silke, there's a slide with that break down in our investor presentation but I think they are about even.

Right, but then there's things in there that are sort of like base oil, various hydrocarbons, so if you take everything together, it seems it's more than that the petroleum related materials really are a bigger number than 50%?

No.

Oil based products are 30% and our can is 33%.

Indicative of a break down and then the next biggest one is plastic at 19 and then manufacturing fees are about 16 and 3% makes up the rest, so oil based products are 30 and can or steel cans is 33.

It is still puzzling because that means if your tin plate prices or can prices increase 40%, I guess it means your petroleum related prices also fell about 40% to even that out and then -- but one would think that other materials particularly your plastic is down as well and so there was some comment that was made that other raw materials moved up but plastic costs really haven't moved up either.

We haven't seen that.

We haven't seen, plastics maybe in some areas but if you look at the plastics we use, trigger sprays, et cetera, the cost of our Smart Straw is in there.

We haven't seen any massive changes down in plastic and plastic is about 16% of the total.

That's interesting.

It seems that the input components or if you just look at the basic commodities that you used to have plastics are down a lot so one would have just expected that.

I agree with you and I'm taking you along to our supplier and you can tell them exactly the same thing because I'm telling the steel people that.

I don't know if you saw the article, it was in the Wall Street Journal, I think it was at the end of our last quarter where the behavior in the marketplace for steel cans is absolutely counterintuitive to what we're seeing in steel, and we would tell--.

With tin plate prices I do understand that so tin plate is different from making steel and so you do have only selected producers who make it where I would think with plastics it's sort of much more commoditized and much more widely available than tin plate maybe?

Well, all we can do is share with you the percentages which we've done and give you our experiences and I can assure you that we've got a very aggressive team of people that are looking for every penny they can get and we haven't seen a dramatic drop in plastic input prices.

Well, maybe then that means just longer term maybe there's more room for improvement if it turns out you can wring out maybe some more savings from your raw material suppliers?

That would be what I would call a high class problem.

Okay.

That's all I have.

Thanks very much.

Thank you.

Mr.

Ridge, there are no further questions at this time.

I'll turn the conference back over to you for any closing additional comments.

Okay, well thank you very much and we look forward to sharing with you another 90 days or so and in the meantime, let's be leaders and make a difference, we can change the attitude out there if we want to do that so thank you very much.

We'll talk to you in about 90 days.

Thank you.

Ladies and gentlemen, that does conclude today's conference.

We thank you for your participation and you may now disconnect.