WD-40 Co (WDFC) 2010 Q2 法說會逐字稿

Good day, everyone.

Thanks very much for holding and welcome to this WD-40 Company second quarter 2010 earnings release conference call.

Today's call is being recorded and at this time I'd like to turn the call over to the Vice President of Corporate Relations for WD-40 Company, Maria Mitchell.

Please go ahead.

Good afternoon and thank you for joining us for our second quarter earnings call for fiscal 2010.

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

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

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

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward-looking statements including the impact in changes in foreign currency exchange rates, impact of commodity prices, customer inventory stocking levels, the impact of new product introductions and the uncertainty in economic conditions both in the United States and internationally.

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

The risks and uncertainties are detailed from time to time in reports filed by WD-40 Company with the SEC including Forms 8-K, 10-Q, and 10-K.

Readers are urged to carefully review these and other documents and to stay up-to-date with our most recent Company developments provided in the Investor Relations section of our website at wd40company.com.

Our third quarter fiscal 2010 earnings conference call is scheduled to take place on Wednesday, July 7, 2010, at 2 PM.

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

Thank you, Maria, good day and good afternoon.

Today, we reported net sales of $80.6 million for the second quarter of fiscal 2010, an increase of 30% over Q2 last fiscal year.

Year-to-date net sales were $158.3 million, an increase of 9% versus the same period last year.

Net income for the second quarter was $10.7 million compared to $4.1 million in Q2 last fiscal year.

Diluted earnings per share for the second quarter was $0.64 compared to $0.25 for the same period last fiscal year.

Year-to-date net income was $20.1 million compared to $11.8 million in the same period last year and year-to-date diluted earnings per share were $1.20 up from $0.71 in the same period last year.

These results reflect the continued improvement in global economic conditions and the execution of our core strategic initiatives.

We've seen a steady increase in sales over the past year across all of our three trading blocks which are the Americas, Europe and the Asia Pacific region.

This steady increase in sales is mostly due to organic growth and a recovery in our base business rather than price increases or fluctuations in foreign currency exchange rates.

The top line growth has flowed down to the bottom line as we have maintained both a healthy gross margin and level operating expenses.

We offset the rise in some of our major import costs through disciplined management of promotional discounts along with increased efficiencies in our supply chain network.

Total operating expenses have remained relatively flat for the period over period and have decreased as a percentage of sales.

Year-to-date operating expenses also do not include the brand impairment charge that we experienced in the prior fiscal year.

Our results year-to-date have been positive and this strengthens our outlook for the rest of this fiscal year 2010.

In addition to positive trends in the global economy and our operating results, we continue to make progress in our four major strategic initiatives during the quarter.

We call them the fantastic four.

Now talking about them a little.

Global expansion our first initiative, continues to be a major driver in our sales growth.

All three trading blocks experienced sales growth period over period as well as compared to the first quarter of the current fiscal year.

We saw the greatest percentage increase among our international markets, primarily Europe and Asia Pacific.

Period over period, total sales outside the US grew by 41% in the second quarter and 10% as compared to the prior fiscal year periods.

As a percentage of total revenue, sales outside the US were 55% of global sales in the second quarter compared to 51% in the prior fiscal year period.

Global expansion also applies to our supply chain network.

In the second quarter we realized gross margin benefits from the expansion of our Smart Straw manufacturing into Europe.

This initiative mitigates foreign currency exchange rate risks to our cost of product while also realizing the cost savings in freight and inventory carrying costs.

We see many sales and supply chain opportunities through our global expansion initiatives.

The launch of our Blue Works brand during the second quarter helped us continue our focus on our second initiative which is maximizing our position in the multi-purpose maintenance product segments.

Blue Works is a best-in-class product line specifically for industrial maintenance and repair market users.

The trial and buy nature of this channel will translate into a slow sales ramp up compared to the front load nature of our traditional retail sales model.

However, the sales and potential high gross margins from Blue Works is expected to be accretive to our business in the long term with both the US and -- within both the US and international markets.

During the quarter we launched advertising and sampling promotions in industrial trade magazines and print.

Early indications from these advertising vehicles are positive.

Just like the launch of our original WD-40 product, we are continuing to convert one user at a time for a lifetime.

For our third initiative, developing our business through acquisitions, joint ventures, licensing and strategic partnerships, we continue to evaluate potential partners and refine our strategy for pursuing licensing opportunities.

As we have discussed with you before, we want to find the right opportunity versus any opportunity and ensure that we invest our time, talent and treasure in programs that will provide long term growth and returns for our shareholders and for our tribe members.

In addition to acquisitions we continue to evaluate alternative strategies for some of our home care and cleaning products brands.

While our goal is to continue to harvest these brands, we are open to potential divestiture opportunities.

Ideally any divestiture of a home care and cleaning product brand would coincide with an opportunity in our multi-purpose maintenance product segment or segments identified in our sandbox of play.

As for our fourth strategic initiative, WD-40 brand exploration, we've made concrete progress in leveraging our core brand across our portfolio of businesses.

Blue Works, which launched in Q2, is the first product to carry the WD-40 Company's signature of endorsement.

Also, referred to internally as the WD-40 D&A.

We believe WD-40 D&A will communicate our brands legacy and leverage it has an endorsement on other products.

In addition our Blue Works to Blue Works, we've completed the packaging and creative design on several products and promotional SKUs that include the WD-40 D&A.

You'll see some of these revised packaging starting to appear on shelves in Q4 of this fiscal year.

In addition to the D&A -- WD-40 D&A, our brand exploration and extension project team, or BEEP as we like to call them here, continue to research to better understand the future opportunities we have to establish with end-users through the loyalty that we've established with the WD-40 brand.

Now that we've covered the update on the strategic initiatives let's talk about our second quarter results in a little more detail.

We are pleased with the sales and profit growth in Q2 as well as the positive trends towards these over our last few quarters.

Our multi-purpose maintenance product sales were up 39% in Q2 and up 12% year-to-date.

While the prior fiscal year second quarter reflected the worst of the recession, our current fiscal year second quarter results of $65.6 million reflected an 8% growth over this fiscal year's first quarter results of $60.7 million.

Q2 was the largest sales quarter we've had in over a year driven primarily by the resurgence of WD-40 across all three major trading blocks.

Global sales of WD-40 grew 40% in Q2 compared to the same period last year while 3-IN-ONE sales grew 25% compared to the same period last fiscal year.

Year-to-date global WD-40 sales grew by 12% while 3-IN-ONE sales grew by 15% year to date.

The growth of the WD-40 sales was driven by increased distribution in our current customers and new distribution and promotional activities, whereas sales of 3-IN-ONE were boosted by new innovation and distribution in the Asia Pacific region.

In Q1 we launched a new formula of 3-IN-ONE in China targeted specifically at the automotive trade channel under the 3-IN-ONE Pro line.

Blue Works launched during the quarter in the US and accounted for less than 1% of global sales.

By trade block, sales of multi-purpose maintenance products in Q4 were up 29% in the Americas, up 51% in Europe and up 55% in Asia Pacific.

Home care and cleaning products were up 1% globally in Q2 versus the same period last year.

This group includes Spot Shot, 2000 Flushes, Carpet Fresh No-Vac, 1001, X-14 and Lava and Solvol brands.

By trading blocks, sales of home care and cleaning products in Q2 were down 3% in the Americas, up 5% in Europe and up 40% in Asia Pacific.

The slight decrease in the Americas was due to strong Spot Shot sales being offset by sales declines across other brands.

The growth in Europe was entirely due to the 1001 brand and the growth in Asia Pacific was driven by Australia, which was favorably impacted by changes in foreign currency exchange rates, the level of promotional activities and increased distribution of No-Vac.

Now on to our results by segment.

As mentioned earlier, we experienced healthy growth across all three trading blocks.

Price increases, most of which occurred in Q1 of fiscal year 2009, had little impact on sales in the current quarter as compared to the same period last year.

There was favorable impact from changes in foreign currency and exchange rates mostly in the European trading block.

On a constant currency basis, our global net sales in the second quarter would have been $76.7 million versus the actual of $80.6 million.

Year-to-date, global sales in constant currency would have been $156.2 million versus $158.3 million.

Sales in the Americas increased to $44.2 million in Q2, up $7 million or 19% versus Q2 last year.

Year-to-date sales in the Americas were up 6%.

In the US, sales increased by 19% in the second quarter and 6% year-to-date driven by higher sales of WD-40 and Spot Shot.

The sales growth was attributed to improved economic conditions, new distribution, and timing of promotional activities in many of our accounts.

Home care and cleaning product sales were down 4% in Q2 and down 1% year-to-date with growth in the Spot Shot brand offset by the declines in other brands.

The most significant of these sales decreases in the second quarter was from the Carpet Fresh brand and X-14 hard surface cleaners which decreased $300,000 or 19% and $200,000 or 28% respectively.

These declines were a result of several factors including loss distribution, the discontinuation of certain product offerings and the effects of our competitive factors, our strategic decision to focus our research and development on resources on our multi-purpose maintenance product segments and other areas within our identified sandbox.

Sales in Latin America increased by 10% in the second quarter and 1% year-to-date with most of the growth in the WD-40 brand.

Sales in Canada increased by 23% in the second quarter and 3% compared to the last fiscal year to date.

Canada's growth was driven by WD-40 and Spot Shot as well as a favorable impact from changes in foreign currency exchange rates.

On a constant currency basis, sales in Canada grew 6% in the same quarter and were down 5% compared to the same period of last fiscal year.

We also began shipping Blue Works product line in December as I mentioned.

Due to the trial and buy nature of this target market we experienced a high level of sampling rather than front loading of our sales.

Blue Works is being marketed directly to industrial users versus being sold in retail outlets.

We expect to see a modest increase in sales over time as we build distribution with our industrial customers.

Sales in Europe increased to $28.6 million in Q2 up $9.1 million, or 46% versus Q2 of last fiscal year.

Year-to-date, sales in Europe were up 12% with substantial growth in the second quarter led to the segment increasing to 35% of our global sales compared to 32% in prior fiscal year period.

A portion of the sales increase was due to changes in foreign currency exchange rates versus period over period.

European sales on a constant currency basis would have been $26.1 million in the second quarter with a 34% growth for the period.

Foreign currency impact was negligible year-to-date as sales on a constant currency basis would have been $55.5 million versus the actual of $55.9 million.

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

Both markets generated double digit sales increases in the second quarter in both actual results and constant currency.

We have a direct sales force in the UK, Italy, France and Iberia, which includes Spain and Portugal and in the markets we term as the Germanics which includes Germany, Austria, Denmark, Holland and Switzerland, all of these direct markets grew versus prior fiscal year quarter and in total were up 37% in Q2 and up 14% year-to-date.

The sales growth in our direct markets was primarily due to economic conditions that continued growth of our WD-40 Smart Straw delivery system, new distribution, increased promotional activities.

France and Iberia also benefit from continued growth of the 3-IN-ONE line of products.

We sell-through exclusive independent marketing distributors in Eastern and Northern Europe and the Middle East and Africa with virtually all sales consisting of the WD-40 brand, all three distributor markets grew versus the prior fiscal year in the quarter and in total were up 78% in Q2 and 9% year-to-date.

Now, to Asia Pacific where sales increased to $7.7 million in Q2 up $2.7 million or 53% versus Q2 last fiscal year.

Year-to-date sales in Asia Pacific were up 12%.

The substantial growth in the second quarter led to the segment increasing to 10% of global sales versus 8 in the prior fiscal year period.

A portion of the sales increase was due to foreign -- changes in foreign currency exchange rates period versus period.

Asia Pacific sales on a constant currency basis would have been $6.9 million for the second quarter with a 35% growth.

Year-to-date sales on a constant currency basis would be $13.4 million versus the actual $14.5 million.

Sales in Australia increased 52% in the second quarter and 29% year-to-date compared to the same period of last fiscal year.

On a constant currency basis sales increased 12% in Q2 and 4% year-to-date.

The sales group growth in Australia was mainly due to a favorable impact of changes in foreign currency exchange rates, promotional activities and the new distribution of WD-40 brand including Smart Straw.

China and many of the Asian markets in other region experienced sales growth in the second quarter compared to both the prior fiscal year period and most recent Q1.

Sales in Asia, including China, represented 61% of the total sales in the Asia Pacific segment in Q2, and increased 53% for the quarter.

China sales grew 7% while sales across the rest of the Asian region increased 75% from the period to period.

This sales growth was attributed to higher sales of WD-40 products stemming from improved economic conditions, increased distribution and significant promotional activities compared to the Q2 of last fiscal year.

I'm going to take a break.

That's it for the sales update.

Now over to Jay Rembolt who will continue the review of our financials.

Garry, thank you.

First, just a reminder for you to review our 10-Q which we'll file April the 8th.

Now, on to our -- the rest of our second quarter results beginning with gross margin.

We're pleased that in addition to the strong sales during the quarter, we were able again to keep our gross margin above the 50% level, as is our stated goal.

Gross margin in the second quarter was 52.4% compared to the 49.6% in Q2 last year.

The 280 basis point increase was primarily attributable to lower discounts and the positive impact from sourcing changes, partially offset by a net increase in input costs.

Price increases that were implemented in Q1 and Q2 of last year added about 10 basis points to the margin in the current quarter.

The lower discounts were much more impactful, increasing our gross margin by 140 basis points.

Discounts to net sales include coupon redemptions, allowances to retailers for space, advertising, promotional activity, volume discounts and other one-time or ongoing promotional incentives.

Period versus period, a lower portion of our sales was subject to these allowances in this year's quarter.

Let's look at the shifts in major input costs.

While our Q2 petroleum based costs were lower than in the prior year, we experienced a net increase in input costs primarily due to aerosol cans.

Cost for our petroleum based materials were lower this quarter than in Q2 last year and benefited gross margin by 70 basis points.

This benefit was more than offset by the dramatic increase in the cost of our aerosol cans that began in Q2 of fiscal 2009.

The higher cost of cans negatively impact our gross margin in the current period by 150 basis points.

And just a quick look back, although oil prices in the market were much lower last year in Q2, the impact of these low prices have not yet made their way into our Q2 cost of goods.

Based on our production in inventory life cycles, there's approximately about a three to four month lag before these costs actually hit our cost of goods.

Inputs or impact related to sourcing changes positively affected our gross margin by 140 basis points.

These changes include lower manufacturing costs associated with investments in equipment, lower manufacturing costs in supply chain efficiencies achieved from our supplier consolidation efforts, and expansion of Smart Straw manufacturing to Europe which, as Garry said, mitigated any foreign currency impacts and also reduced freight and inventory storage costs.

Changes in sales mix benefited gross margin by 15 basis points, while other miscellaneous impacts combined positively impacted our gross margin by 20 basis points .

This completes the gross margin discussion, now on to other operating expenses beginning with selling, general and administrative expenses.

Our SG&A expense in Q2 was $20.1 million versus the $17.8 million in the prior year quarter.

And as a percentage of sales was 24.9% versus 28.8% in the prior year period.

The increase in SG&A expenditure was primarily due to higher employee related costs and foreign currency exchange impacts.

Employee related costs increased by $1.2 million primarily due to higher bonus expense.

Many of our regions are expected to achieve higher sales and profit performance metrics for fiscal 2010 as compared to the prior year.

Changes in foreign currency exchange rates compared to Q2 last year increased SG&A expense by $0.9 million.

Freight and all other expenses combined increased $0.3 million period to period.

Advertising, sales and promotion expense in Q2 was $5.4 million versus $4.6 million in the prior year quarter.

Due to higher sales volumes in the current year, advertising and promotional expense decreased as a percentage of sales to 6.6% versus 7.4% in Q2 last year.

The increase in expenditure was primarily due to the timing of investment in advertising activities and the impact of foreign currency exchange rates.

Amortization of intangible assets was $0.2 million compared to $0.1 million in the prior year quarter.

The current quarter includes amortization related to the Carpet Fresh and the X-14 trade names which were both changed to definite lived intangibles at August 31 of last year.

Both periods include $0.1 million of amortization related to customer lists acquired in the 1001 acquisition which was completed in fiscal year 2004.

Last years results in the second quarter also included a $2.8 million non-cash impairment charge related to the Carpet Fresh brand.

The annual impairment tests performed in the current quarter did not result in any impairment charges for either our goodwill or any of our other indefinite lived intangible assets.

The net total result of changes in operating expenses was negligible with operating expenses totaling $25.6 million in the current quarter versus $25.3 million in Q2 last year.

Due to higher sales volume, improved gross margin, our operating income in Q2 was $16.6 million, compared to $5.3 million in the prior year.

Net interest expense for Q2 was $0.4 million down $0.1 million versus the same period last year.

Our other income decreased by $0.5 million, primarily due to foreign currency exchange losses in Q2 versus foreign currency exchange gains in Q2 of the prior year.

Our provision for income taxes in Q2 was 34.2% versus 23% in the prior year quarter.

The low tax rate in Q2 last year was due to a one-time California tax law change that occurred during that quarter.

The tax law change caused a revaluation of our deferred tax assets and liabilities and resulted in income tax benefit of approximately $0.5 million in Q2 of last year.

Net income in Q2 was $10.7 million versus $4.1 million in the prior year quarter.

Changes in foreign currency exchange rates had a favorable impact on net income of $0.7 million in the quarter.

Q2 fiscal 2010 results on a constant currency basis would have produced net income of $10.0 million.

On a diluted per share basis earnings were $0.64 in Q2 compared to the $0.25 in the prior year quarter.

Diluted shares outstanding were consistent with the prior year period at $16.7 million shares.

Now let's take a look at the six months.

Many of the themes and drivers of the year-to-date results are consistent with those we've just discussed for Q2.

Our gross margin -- the year-to-date gross margin of 51.9% is 420 basis points higher than the 47.7% achieved in the prior fiscal period.

Price increases and lower discounts contributed 80 basis points and 120 basis points respectively.

Lower petroleum based materials costs benefited gross margin by 200 basis points, but were fully offset by the higher cost of cans which negatively impacted our gross margin by 240 basis points.

Sourcing changes favorably impacted gross margin by 170 basis points, while sales mix and other miscellaneous items had a favorable impact on gross margin of 70 basis points.

Our selling, general and administrative expenses increased from $39 million to $39.9 million.

Due to the higher sales volume, SG&A as a percent of sales, however, decreased from 26.8% to 25.2%.

The increase in SG&A expenditure stems primarily from the employee related costs which increased by $1.9 million due to some annual compensation increases during the first quarter of 2009, as well as higher bonus accruals that we've talked about.

As noted in the Q2 highlights, many regions are expected to achieve higher sales and profit performance metrics for fiscal year 2010, partially offsetting the higher employee related expenses were lower freight of $0.5 million, resulting from shipping efficiencies, lower professional service costs of $0.7 million primarily legal expenses, and miscellaneous expenses lower by $0.3 million, broker sales, commissions, stock based comp, and bad debt expense combined.

Changes in foreign currency exchange rates compared to the first half of last fiscal year increased SG&A expense by $0.5 million.

Advertising and sales promotion expenses increased slightly to $10.6 million in the first six months, compared to the $10.0 million in the prior year period.

As a result of higher sales volumes in the current year, advertising and sales promotion expenses decreased to 6.7% of net sales compared to the 6.9% in the prior year.

Investment in global advertising sales promotion expenses for fiscal 2010 is expected to be in the range of 6.5% to 8% of sales.

Amortization of intangible assets of $0.4 million is related to the amortization of the 1001 brand customer list and the Carpet Fresh and X-14 trade names.

Last year's first half results also included a $2.8 million impairment charge related to the Carpet Fresh brand.

No impairments were recorded in the first half of the current fiscal year.

Total operating expenses were $50.8 million year-to-date compared to $50.2 million in the prior year period.

Higher net sales combined with the improved gross margin and lower operating expenses resulted in a $13.9 million increase in operating income.

For the first six months of the year, operating income was $31.3 million in fiscal 2010 versus $17.4 million in fiscal year 2009.

Net interest expense decreased $0.1 million year-to-date to $0.8 million.

Other income decreased $0.6 million to $0.1 million.

The decrease of other income was primarily due to lower foreign currency exchange gains.

Provision for income taxes year-to-date increased from $31.4 million last year to $34.3 million in the current year.

As we discussed, the prior year had a nice benefit from the California tax law changes.

Year-to-date net income was $20.1 million compared to $11.8 million in the same period last year.

Changes in foreign currency exchange rates had a $0.4 million favorable impact on net income.

First half 2010 results on a constant currency basis would have produced net income of $19.7 million.

On a diluted per share basis, year-to-date earnings were $1.20 compared to the $0.71 in fiscal '09.

Year-to-date diluted earnings per share or year-to-date shares outstanding on a diluted basis remain constant at 16.7.

Regarding the dividend on March 23, the Directors declared a quarterly cash dividend of $0.25 per share payable on April 30, 2010, to shareholders of record on April 16, and based on today's closing price of $33.47, the annualized dividend yield would be close to 3%.

Our balance sheet continues to remain strong and at February 28, our cash and cash equivalents were $48.9 million up from $46.0 million at the end of fiscal '09.

Cash provided by operations was $23.4 million, the issuance of common stock on the exercise of stock options provided an additional $0.9 million of cash.

These cash inflows were partially offset by our $10.7 million annual principal payments, our dividend payments of $8.3 million during the year and $0.8 million used for capital expenditures during the period.

Cash was also negatively impacted by $1.7 million due to changes in foreign currency exchange rates.

We continue to delever the Company with our annual October $10.7 million principal payment.

As of February 28, our outstanding balance on our original $75 million loan was $21.4 million.

The final payment will be due October 2011.

During the three months ended February 28, 2010, we didn't purchase any shares under the share buyback plan.

The Company is authorized to acquire up to 15 million of its outstanding shares through December 8, 2010.

The Company continues to be financially strong and stable.

We believe our existing cash and the liquidity available from our credit facilities and our anticipated cash flows from operations will support the execution of our strategic initiatives.

This completes the financial overview.

Again, more information will be available on our 10-Q, which we'll file tomorrow and thank you and now back to

Thanks, Jay.

The increased momentum we've seen across the globe falls in line with our expectations.

With a half year under our belt we're able to raise our fiscal year 2010 guidance.

Please note that we do expect that there will be a higher level of advertising and promotional investment in Q3 and Q4 and along with that, we will have higher bonus and other people related costs that will keep net income within the following range.

Higher bonus eligibility and pay outs to our valued tribe members would be a good problem to have.

So, we have revised our fiscal year guidance for 2010 which now reflects that.

We expect our net sales to be in the range of $308 million to $321 million or growth of between 5.5% and 9.9% versus fiscal 2009.

We expect our global advertising and promotional investment to be in the range of 6.5% and 8% of net sales and we would expect net income to be between $32.2 million and $33.8 million, which would achieve EPS of between $1.92 and $2.01 assuming that we had 16.8 million shares outstanding.

This fiscal year 2010 guidance does not include any acquisition activities and assumes foreign currency exchange rates will remain close to the recent levels.

As always, we continue to search for new business opportunities and will share with you when those new developments evolve.

In closing, I'd like to share with you a quote from Abraham Lincoln.

You will remember this quote as I shared it with you in our shareholder letter last year.

It is that the dogmas of the acquired past are inadequate to the stormy present.

The occasion is piled high with difficulty and we must rise with the occasion.

As our case is anew, so we must think and act anew.

WD-40 Company is rising to the occasion as we continue to think and act anew.

Before we open the call for questions, I would like to ensure that we share with you what we see are the key takeaways from today's call as it relates to the balance of this fiscal year.

We are cautiously optimistic about the positive trends in the global economy.

Our goal of achieving gross margin above 50% is being realized.

The tailwind from lower oil prices is turning to a headwind as oil moves towards $90 a barrel.

We expect our bonus expense to be higher in Q3 and Q4 as it drives growth behaviors.

Blue Works is building slowly as expected.

Our work on leveraging the trust we've established in the WD-40 brand continues.

Foreign currency exchange rates had a minimal impact on our results during this fiscal -- current fiscal year.

We believe our home care and cleaning products futures have stabilized for now.

Our brand investment for the year is in line with historical levels and we expect it to remain that way through the end of this fiscal year.

Thank you for joining us today.

We would be pleased to now open the conference call for your questions.

(Operator Instructions) First up from JPMorgan we have Jeff Zekauskas.

Hi, good afternoon.

Hi, Jeff, good afternoon.

A couple of questions.

I'm a little puzzled about your earnings guidance for the year in that you earned $1.20 in the first half of the year, so in order to hit your guidance, you'd earned somewhere between $0.72 and $0.81 in the second half.

And last year, you earned $1.02 in the second half and last year, your sales were $146.5 million in the second half and this year you're projecting sales of somewhere between $149 million and $162 million, so it seems that what you're projecting are sort of earnings going down, 20% to 30% in the second half.

Is that what you mean to do?

What we said is that we see a headwind to our gross margin.

We will have some higher ANP investments.

We will also expect some higher increased bonus expense, which will have an earnings -- will reduce our earnings impact in the second half of the year.

Right, no, I understand all of that, but it would seem to me that your earnings really should be materially higher and as far as bonus expense goes, I think it's important that people be dully compensated but it's also the case that there really hasn't been much earnings growth over a multi-year period of time and your earnings were 184 last year on an adjusted basis.

And so growing to 192 to 201 is not in the scheme of things all that strong, so -- or is there a lot of play in your numbers?

Can it turn out that these are relatively conservative estimates that you got?

There's no doubt, Jeff, that we are cautious in our earnings estimates.

We are concerned a little about the movement in the oil price.

It's approaching 90 now.

We don't know where that's going to end up.

We're hopeful that the global economy will continue where it is.

So I think we're prudent in what we're saying.

Yes, we are being cautious.

We don't want this to turn into euphoria.

We want to be responsible and give people a responsible view of where we think we are.

We have raised our guidance.

We are now seeing sales growth across all of our channels and certainly if the momentum of our first half of the year was to continue the way it has, then the result will look different, but he who learns to forecast by the crystal ball learns to eat glass.

Yes, no, I know that.

And we're being cautious and we're being certainly responsible.

So were your volumes this quarter -- certainly there was a very large year-over-year change.

Do you find your volumes in the second quarter unusually high and do you expect them, or are you worried they might sharply fall coming up?

No, I think they returned to somewhat normal levels, but we are getting a couple of offsets from that.

We're certainly getting unit volume growth, real volume growth across the world.

We're getting the benefit of higher sales dollars as more of our sales are now in Smart Straw which is increasing the, if you will, our revenue per ounce because of the delivery system, so that's been a positive.

We went through a little traumatic time as we converted Smart Straw a year and a half ago that might have pulled us down a little lower.

So no, I think we're returning to normal and we are seeing real volume growth.

We're seeing volume growth in the countries outside of the US that were a little flat.

So we're doing pretty well.

I guess lastly, can you give us just some very rough targets for Blue Works either for 2010 or for 2012?

What are you hoping to achieve in terms of sales of these products?

We don't know yet, Jeff and I don't want to tip my hand to our competitor.

We'll give you a little better update of that at the end of Q3 and Q4, but we believe it's a good piece of business.

If you look at the aggregate size of the market it's probably in total somewhere to $300 million to $400 million and we would like to get a nice piece of that, but right now, it's a different business model.

We're selling to end-users which we've never done before directly with this product line, but so far it's been very encouraging and as we said, we want to win one customer at a time for life.

Okay, great.

Thank you very much.

Thanks, Jeff.

Next up we have a question from Joe Altobello from Oppenheimer & Company.

Hi, good afternoon.

First question I guess and I apologize if I missed this, but your guidance for this year sounds like it assumes the commodities both on the can side and the auto side stay where they're currently at.

Is that the case?

The guidance is assuming that oil is going to be up, move from a tailwind to a headwind and cans are probably stable.

Yes, but you're baking in $88 to $90 oil in the second half into that guidance.

Yes.

Now in terms of your can costs, you have essentially figured out what they are roughly around January for the next 12 months, so the can costs at this point are pretty much locked in, right?

Yes, until they decide to unlock them like they did once before, but we believe they're somewhat stable now.

So on the oil side have you done any hedging or anything like that to mitigate that?

No.

Okay.

We've looked at opportunities but it's difficult.

Okay, and then moving on to WD-40, you mentioned the brand was up 40% globally.

Could you remind us what the year ago period was, what kind of base period we are working against?

Go to your next question and someone will look it up.

Okay, so in terms of that 40% you mention a couple things drove it, distribution and promotion activity.

On the distribution side, was it expanding into new markets or was it driving deeper into existing markets?

Could you give us a little bit more color around the term distribution?

In markets that still have upside market potential, both things are going on.

In places like China and Russia and France and Germany and Spain, as well as selling deeper into current distribution, we sell to new people every day both end-users and customers.

In the US, there would have been not necessarily new distribution, but certainly I think we have seen stocking levels in the US return to norm and of course, we're getting a lot of benefit from our Smart Straw.

We converted that in the US nearly two years ago now, I think it was April 1, two years ago and it's really now embedded into the distribution system with the promotional activity where that is strong.

So that's really two sides.

We're seeing real unit volume growth in ounces in every trading block around the world.

Okay, you mentioned in the US, you're seeing more normalized retail activity or as the inventory activity.

So does that indicate you saw a little bit of a restock in the quarter?

No, what happened was we're getting a lot of good promotional activity now and we never suffered dramatically by destocking.

Where we saw restocking a little bit is more in the industrial segment.

I think we're seeing some of the smaller industrial accounts are now getting back into business as manufacturing returns, so consumption is going back there and there's restocking, but that would be where it was.

On your question on WD-40, our prior year quarter was $43.6 million and this quarter is $61.3 million.

Okay, but I'm sorry, in terms of the year-over-year change, what was the WD-40 performance in the year ago period?

$43.6 million.

In the same period versus $61.3 million this quarter.

Okay, I'll follow-up off line and I guess lastly, this is more of an M&A question but Garry you mentioned home care and cleaning looking at alternatives there.

Has there been interest in that segment and secondly in terms of acquisitions, have you seen any increase in potential properties of opportunities for you?

The first question is has there been any interest.

We don't have a for sale sign on these things, so we monitor them.

On the acquisition side, there's stuff happening out there.

We are still not excited about either the quality or the price of things we're seeing, but we continue to look globally for those sort of opportunities.

But what's really exciting is about all of the organic growth that's coming from a lot of work that's been done on product innovation and truly strengthening our global trade.

One thing, the question you meant to ask that you forgot to ask me was what percentage of our business is outside the US now and 55% of our total company sales are now outside of the United States, up from 51% a year ago and that's the fastest growing part of our business.

So we are truly a global company.

Perfect, okay, thank you very much.

Moving on now to Liam Burke at Janney Montgomery Scott.

Good afternoon, Garry, Jay.

Hi, Liam.

Jay, I guess you mentioned your comment but Garry could weigh in.

You mentioned a major contribution in margin and progressed margin improvement were better management of promotional discounts.

Is that a sustainable strategy in the future?

Well we've seen it both in the first quarter and the second quarter.

I'm sure that we will change, if you look back to really the prior year, some of the things that we had done were change some of our promotional tactics to better incentivize promotional activity by our customers and so we would have gone to a little bit heavier activities around in those areas.

So that's something that we've done less of in the current quarter as well as in the prior quarter and we're just evaluating how much that marketing mix continues to change.

Some of the things that have changed too, Liam, and I'll give you an example of how the discounts and allowances may have changed, but the promotional power hasn't.

One of the big large promotions we've got going at the moment is a twin pack of WD-40 with a free bonus of a 3-IN-ONE no rush shield, so a couple of things are happening there.

We're offering great value to our end-users and to our customers because of some of the efficiencies we've had in the supply chain, the margins are still being held up because of the cost of that promotional activity is in the gross margin, but you don't have to give it away as price when we're giving it away as value.

So these are some of the things.

The other thing that's happening too is that mix of sales changes, and we're getting a higher percentage of sales in our multi-purpose maintenance products category away from home care and cleaning, there are less of the sales promotional discounts driven in those trade channels than there are typically in the deep discounting of the grocery trade channel.

Okay.

That's great.

On the Asia Pacific, you had about a 7% increase in revenue from China.

That's been an area investment.

Last quarter I believe year-over-year numbers are down.

Are you seeing positive momentum there?

Yes, we are.

We certainly have seen the manufacturing segments that we were selling into are starting to improve.

We're very bullish long term on China.

This is not a Rome was built in one day deal.

As I said in the last conference call, it's going to be a bit of a bumpy ride as we go through it, but China will be just an unbelievable market for us over time and we just have to be patient and make sure that we're delivering good value on our time talent treasure there.

So I'd ask everyone to be patient.

It's actually, on a profitability basis, performing better than we expected because normally, we would be pouring investment in there and it's actually doing well for us.

So China is a long term bet, but it's a big one and it's going to be great.

Thank you.

Question now from Loran Braverman at Standard & Poor's.

Hi.

Thanks very much.

Earlier you gave some of a market size figure for Blue Works, I think it was around $300 million to $400 million and I wondered if that was just in the US or a global figure?

This number I said was an aggregate size of what we can see the visible competitive set is in that market.

So I don't know whether that is a market size or not but it's what we see.

Was that just US or was that global?

That's just US.

Okay, and also you provide so much information in your release and then so much on the call, but I'm curious as to whether it be possible for you to apply the operating profits by the geographic segments?

I know we can get it in the 10-Q, but it's practically the only major information you don't supply on either the release or the call.

And just speaking for myself, I'm surprised when I see the margins, sometimes one division is dramatically different than I would have expected and I don't know to ask about it until after the Q is out.

Thanks for the suggestion.

I'm wondering if it's possible to supply that in the release?

Thanks for the feedback.

We'll take that on notice and see what we can do.

The Q will be delivered tomorrow though.

Right.

Well in the quarter that you just reported, given how much the margin is up versus last year, I would expect all of the divisions to have had -- geographic segments to have had higher margins, but given the US, is still the -- Americas is still the largest single component, that must have been dramatically higher, even higher than it would have been in the November quarter, my guess in order to come out with the operating margin.

And I'm just wondering if there's anything that I should be asking now that I would be asking tomorrow after I see the 10-Q in terms of the Americas margin and sustainability in that segment.

It's pretty vanilla really.

We had increased sales on a higher gross margin number on relatively flat operating expenses.

So the two things that are really driven are we are getting growth in sales and we have strengthened our gross margin.

Okay, well thank you.

Thank you.

(Operator Instructions) We'll go to our next question from Robert Felice at J Goldman and Company.

Hi.

Most of my questions have been answered.

Just have one or two others.

Can you give us a sense as to how much you expect SG&A to increase in the second half of 2010 versus the first half of 2010?

I'm just trying to get a sense as to the magnitude of the headwind you're facing as a result of the incremental bonuses and any other expenses.

No, we don't provide that detail on that.

It will be in the 6.5% to 8% range that we shared, but because promotional periods and promotions can move quarter to quarter, we don't get that granular.

No, no, no, Garry.

Not on the advertising and sales.

I was talking about on the SG&A side.

Oh, no I'm sorry we don't.

We don't guide to that.

Okay, can you give us a sense as to the incremental bonus expense at least, given that you called that out specifically?

We don't know what it is yet because we haven't got the results.

Because it's driven by results.

Okay, fair enough and then just lastly, in the press release Garry you made a comment that if oil prices and other commodities stay at their current levels you'd expect to be able to sustain gross margins above the 50% target level.

Is that an assumption that's currently baked into the guidance?

Well yes and no.

If you look at the first half of the year our goal was to get margin up above 50.

We've actually been running at about 51.4 which is a bit of a -- not a surprise, but it's a high class problem to have.

We think we can stay above 50, but we're assuming that for the full year, we're not going to have the second half at 51.4.

It might be somewhat less than that but we don't really know yet.

So we're confident for the full year we'll definitely be above 50.

We're at 51.4 now.

It would be great if we could end the year at 51.4.

That's not baked into the assumption.

There's too many variables on that, but the 50 is okay.

Okay, fair enough.

Thanks for taking the questions.

You're welcome.

Ladies and gentlemen, there are no other questions holding, so I'll turn things back over to Garry Ridge for any additional or closing comments.

That's it for us.

We'll get out and sell some stuff and talk to you in about another 90 days.

Thanks for being with us today.

Good afternoon.

Once again thanks very much for joining us ladies and gentlemen.

That will conclude today's call.

Have a good day.