WD-40 Co (WDFC) 2010 Q3 法說會逐字稿

Good day, and welcome to this WD-40 Company third quarter 2010 earnings release conference call.

Today's call is being recorded.

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

Maria Mitchell.

Please go ahead, ma'am.

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

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

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

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

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

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

The risks and uncertainties are detailed from time to time in reports filed by WD-40 Company with the SEC, including Forms 8-K, 10-Q, 10-K, and readers are urged to carefully review these and other documents and to stay up-to-date with our most recent Company developments, provided in the Investor Relations section of our website at WD40Company.com.

Our fourth quarter fiscal 2010 earnings conference call is scheduled to take place on October 15th, 2010, at 2:00 PM.

This is a special message to our Spanish trust.

[Spoken in Spanish].

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

Thank you.

I hope Maria, you were wishing them well, because they just got into the Final of the World Cup.

Today we reported net sales of $82.6 million for the third quarter of fiscal year 2010.

An increase of 20% over Q3 last fiscal year.

Year-to-date net sales were $240.8 million, an increase of 12% versus the same period last year.

Net income for the quarter was $9.1 million, compared to $6.9 million in Q3 last fiscal year, and diluted earnings per share for the third quarter were $0.54, compared to $0.41 for the same period last year.

Year-to-date net income was $29.2 million, compared to $18.7 million in the same period last fiscal year, and year-to-date diluted earnings per share were $1.74, up from $1.12 for the same period last year.

Before we cover the details on our results, I'd like to give you an update on our Fantastic Four core strategic initiatives, and how they are impacting our results.

Global expansion, our first initiative, continues to be a major driver of our sales and profit growth.

All three trading blocks experienced sales growth period over period, both Q3 and year-to-date, with the greatest percentage increase in our markets outside of the US.

Period over period, total sales outside the US grew by 31% in the third quarter, and 16% year-to-date as compared to the prior fiscal year.

As a percentage of revenues, sales outside the US were 53% of global sales in the third quarter, compared to 49% in the prior fiscal year period.

The launch of our new Blue Works brand during the second quarter of the current fiscal year resulted from our second initiative, which is maximizing our position in the multi-purpose maintenance products segment.

Blue Works is a Best-in-Class product line being marketed directly to industrial users, versus being sold in the normal retail outlets.

Due to the trial and buy nature of the target market, we experienced a high level of sampling during the third quarter, just like the launch of our original WD-40 product years ago, we are converting one user at a time for a lifetime.

Feedback from our sampling program has been positive, and we are using it to fine-tune our marketing strategy and the R&D efforts.

In addition to Blue Works, we continue to grow our 3-IN-ONE brand in markets outside the US, particularly with the launch of new products in France, Australia, China, Spain, and Germany.

Our third initiative, developing our business through acquisitions, joint ventures, licensing and strategic partnerships, we continue to evaluate opportunities that fit our strategic sandbox.

Our sandbox, which is available for review in the investor presentation posted on our website, identifies where we believe we have the best opportunities to win, based on our core competencies.

The market for acquisitions has been heating up, with more options that fit our strategic road map becoming available.

As always, product, price, timing, strategic fit and the return on the investments are key drivers for us in these areas.

Our fourth strategic initiative, leveraging the trust we established with end users through the WD-40 brand, continues to take shape.

The WD-40 Company Signature of Endorsement, referred to internally at the WD-40 D&A, is proving to be successful for us.

Blue Works is the first product using the WD-40 D&A, and user feedback has shown it to be critical in the trial and use of the new product.

In Q4, we'll be testing the use of the WD-40 D&A on our Lava brand of heavy duty hand soap, which will be available in some automotive departments where WD-40 is sold.

We continue our research to identify opportunities for the possible extension of the WD-40 brand.

Before I move on to our third quarter results, I'd also like to update you on the status of our tribe.

Development of our tribe members is embedded in our culture, and we want WD-40 Company to be a place where people come to work to create positive lasting memories for them, our end users and our shareholders.

I'm pleased to share with you that the results of our latest employee opinion survey indicate that our employees like coming to work here.

Our employee engagement score is above 93%, and 99% of our employees globally in the survey recorded WD-40 was a place where they were treated with respect and dignity.

I think we're in the top of our class with these scores.

As for our third quarter results, we're pleased with the sales and profit growth in the period, as well as the positive trends and results over the last few quarters.

Our multi-purpose maintenance product sales were up 29% in Q3, and are up 17% year-to-date.

This is the fifth consecutive quarter of growth in our multi-purpose maintenance product sales.

Our quarterly sales have steadily grown from $47.1 million in Q2 fiscal 2009, during the recession, to $67.9 million in the current quarter.

While most of the growth has been driven by our core brand, WD-40, we've also seen positive growth from our 3-IN-ONE line and the launch of Blue Works.

Furthermore, we realized growth across all three trading blocks in the quarter and year-to-date.

Global WD-40 brand sales grew by 30% in Q3, compared to the same period last fiscal year, while 3-IN-ONE sales grew by 18%.

Year-to-date global WD-40 sales grew by 17%, while 3-IN-ONE sales grew by 16%.

In addition to the improved economic growth conditions, growth of the WD-40 brand sales was driven by increased distribution and promotional activities, whereas sales of 3-IN-ONE benefited by new innovation and distribution in the Asia-Pacific region.

In Q1 of the current fiscal year, we launched the new formulations in China, targeted especially to the automotive trade, under the 3-IN-ONE Pro line.

Blue Works, launched during the second quarter in the US, has accounted for less than 1% of our global sales for Q3 and year-to-date.

By trading blocks, sales of our multi-purpose products in Q3 were up 26% in the Americas, up 28% in Europe, and up 53% in Asia-Pacific.

Home care and cleaning products were down 10% globally in Q3 versus the same period last fiscal year.

The group includes Spot Shot, 2000 Flushes, Carpet Fresh, No-Vac, 1001, X14, Lava and Solvol brands.

By trading block, the sales of our home care and cleaning products in Q3 were down 14% in the Americas and down 7% in Europe, and up 36% in Asia-Pacific.

Per our strategic road map, the home care and cleaning products segment is a smaller portion of our total business, and accounted for 18% of global net sales in Q3 compared to 24% in the period last year.

The lower sales and distribution are attributed to the loss of distribution or the discontinuation of certain products.

The effect of competitive factors and strategic decisions to focus on our multi-purpose maintenance products.

Now, I'll move on to some of the results by segment.

As mentioned earlier, we experienced healthy growth across all three of our trading blocks in Q3 and year-to-date.

The growth was driven primarily by higher volume and increased distribution.

Price increases 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 exchange rates, mostly in our European trading block.

Our 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 $79.7 million, versus the actual of $82.6 million.

And year-to-date, global sales in constant currency would have been $235.9 million, versus the actual of $240.8 million.

Sales in the Americas segment increased 13% in the third quarter, driven by increased volume through existing channels and timing of promotional activities.

Sales in Europe increased 25% in the third quarter, primarily due to improved economic conditions and the continued growth of WD-40 Smart Straw, as well as the increased volume and promotional activities.

Sales in Asia-Pacific increased 50% due to the improved economic conditions, significant promotional activities, and the favorable impact of changes in foreign currency exchange rates.

Now for a little more detail on the Americas.

While we realized strong growth in the Americas, this segment accounted for 56% of global sales in the third quarter versus 60% in the prior year.

Sales in the Americas increased to $46.5 million in Q3, up $5.4 million or 13% versus Q3 last year.

Year-to-date sales in the Americas were up 8%.

In the US, sales increased by 10% in the third quarter, and are up 8% year-to-date.

The higher sales were driven by the WD-40 brand volume, which offset declines in home care and cleaning products.

Multi-purpose maintenance products were up 23% in Q3, and are up 16% year-to-date.

The sales growth was attributed to improved economic conditions, new distribution and the timing of promotional activities.

Home care and cleaning products were down 16% in Q3, and down 6% year-to-date.

A portion of the decline in Q3 stems from the discontinuation of certain products, which had a large closeout sales in Q3 of fiscal 2009, which were not repeated in the current fiscal year.

Excluding prior year closeout sales, home care and cleaning products would be down 11% in Q3, and down 4% year-to-date.

Sales in Latin America increased by 41% in the third quarter, and 12% year-to-date, with most of the growth in the WD-40 brand.

The significant increase in the third quarter reflects the resurgence of distributor markets that were greatly impacted by the recession and currency devaluations in the prior year.

Sales in Canada increased by 26% in the third quarter, and 9% year-to-date, compared to the prior year.

Canada's growth was driven by favorable impact from changes in foreign currency exchange rates, as well as volume growth in the WD-40 brand.

On a constant currency basis, sales in Canada grew 5% in the third quarter, and are down 2% year-to-date.

Now on to the European trading block.

Sales in Europe increased to $27 million in Q3, up $5.3 million or 25% versus Q3 last year.

Year-to-date sales in Europe were up 16%.

The segment increased slightly to account for about 33% of global sales in Q3, compared to 31% in prior fiscal year periods.

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

Europe's sales on a constant currency basis would have been $25.5 million in the third quarter, reflecting an 18% growth.

Year-to-date sales on a constant currency basis would have been $81 million, versus the actual of $82.9 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 third quarter in both actual results and in constant currency.

We have direct sales forces in the UK, Italy, France and Iberia, which includes Spain and Portugal, and the market which we term the Germanics region which includes Germany, Austria, Denmark, Holland and Switzerland.

With the exception of the UK, all of these direct markets grew versus prior fiscal year quarter, and in total were up 18% in Q3, and up 15% year-to-date.

The UK was down 5% in Q3 and down 3% year-to-date, primarily due to the unfavorable impact of changes in foreign currency exchange rates.

The sales growth in our direct markets was primarily due to improved economic conditions, the continued growth of the WD-40 Smart Straw product and increased volume in promotional activities.

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

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

All three distributor markets grew versus the prior fiscal year quarter, and in total are up 42% in Q3, and are up 18% year-to-date.

Last but not least, we have the Asia-Pacific region.

Sales in the region increased to $9.1 million in Q3, up $3 million or 50% versus Q3 last year.

Year-to-date sales in Asia-Pacific were up 24%, the substantial growth of the third quarter led the segment, comprising of 11% of our global sales versus 9% in the prior fiscal year period.

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

Asia-Pacific sales on a constant currency basis would have been $8.3 million in the third quarter, reflecting a 36% growth.

Year-to-date sales in constant currency would have been $21.6 million, versus the actual of $23.6 million.

Sales in Australia increased 56% in Q3, and 38% year-to-date, compared to the prior fiscal year periods.

Primarily due to the favorable impact of changes in foreign currency exchange rates.

On a constant currency basis, sales increased 17% in Q3, and 9% year-to-date.

The sales growth was also attributed to marketing and promotional activities.

China, and many of the markets throughout the Asia region, continued to experience sales growth in the third quarter.

Sales in China increased by $1 million due to the significant promotional activities with sales more than double the prior year period.

Sales throughout the rest of Asia increased by $800,000 or 27% in Q3, due to the higher sales of WD-40 products throughout the distributor markets.

Year-to-date China sales were up 17%, and the rest of Asia was up 16%.

That's my wrap-up of the trading.

I'll now pass it over to Jay, who will continue with an update on the financials.

Garry, thank you.

In addition to the information that we're presenting on this call, we also suggest that you review our 10-Q, which we'll file tomorrow.

First, our third quarter results, starting with our gross margin.

We continue to exceed our gross margin threshold of 50%, despite cost pressures we've seen in the marketplace.

The sales growth that Garry described details along with our strong gross margin resulted in higher net income.

Gross margin in the third quarter increased 30 basis points, and was 51.2%, compared to the 50.9% in Q3 last year.

Lower discounts, positive impacts from sourcing changes, and sales mix were substantially offset by increases in major input costs.

Lower promotional trade discounts, period versus period, increased our gross margin by 60 basis points.

Trade discounts, which are treated as a reduction to sales include coupon redemptions, allowances to retailers for space, co-op advertising, and other promotional activity spend.

Period versus period, a lower portion of our sales was subjected to these promotional allowances this year.

Looking at our cost of goods and the major shifts in input costs, we experienced a net unfavorable impact of 150 basis points, resulting from changes in our major input costs.

This was primarily due to higher prices for petroleum-based materials and aerosol cans.

The higher cost for petroleum-based materials period versus period negatively impacted our gross margin by 110 basis points.

While we have seen a small cost decrease in aerosol cans in the current quarter, the net price of cans period over period was higher, and negatively impacted our gross margin by 40 basis points.

There's often a delay of a quarter or more before raw material cost changes flow into our cost of goods sold.

This is due to production and inventory life cycles.

Favorable impacts related to sourcing changes positively impacted our gross margin by 70 basis points.

These changes include lower manufacturing costs associated with investments we've made in equipment, and lower manufacturing costs and supply chain efficiencies achieved from a variety of supplier change initiatives.

Changes in sales mix also benefited gross margin by 90 basis points.

Other miscellaneous impacts combined to negatively impact our gross margin by 40 basis points.

This kind of wraps up the gross margin discussion.

Now let's take a look at our operating expenses.

Our SG&A expense in Q3 was $23.3 million, versus the $18.4 million in the prior year quarter.

As a percentage of net sales, it was 28.3% in Q3, versus 26.8% in the prior year period.

The increase in SG&A expenditures was primarily due to higher employee-related costs, as well as the impact of foreign currency exchange rates.

Employee-related costs increased by $3.4 million primarily due to higher estimated bonus expense.

Many of our regions this year are expected to achieve higher sales and profit targets, certainly in comparison to the prior year.

Changes in foreign currency exchange rates compared to Q3 last year increased SG&A expense by $0.7 million.

We had other drivers of the increase in SG&A, which include higher professional services of about $300,000 due to legal and other professional fees, higher freight expense of around $200,000, resulting from the higher sales volumes, and other miscellaneous expenses increased by $0.3 million.

Advertising and sales promotion expense in Q3 was $5.7 million versus the $5.3 million in the prior year quarter.

The increase was primarily due to the impact of changes in foreign currency exchange rates, along with a slightly higher investment.

Due to the higher sales volume in the current quarter, advertising and sales promotion expense decreased as a percent of sales to 6.9%, versus 7.7% in Q3 of last year.

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 export trade names which were changed to definite lived intangibles at August 31st, 2009.

Both periods include approximately $100,000 of amortization related to customer lists acquired in the 1001 acquisition back in fiscal 2004.

Total operating expenses in the current quarter were $29.2 million, versus $23.8 million in Q3 last year.

Due to higher sales volume and improved gross margin, operating income in Q3 was $13 million, compared to the $11.2 million in the prior year quarter.

Net interest expense in Q3 was $4.4 million, down $0.2 million versus the same period last year.

Other income in Q3 was less than $100,000, and resulted from foreign currency exchange gains.

In the prior year period, we realized net expense of about $200,000, primarily due to foreign currency exchange losses.

The provision for income tax in Q3 was 28.4%, versus the 33.9% in the prior year quarter.

The lower tax rate was driven by the release of tax liabilities, stemming from the expiration of statutes along with the adjustments related to the filing of the Company's federal and state tax returns.

Net income in Q3 was $9.1 million, versus the $6.9 million in the prior year quarter.

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

Q3 2010 results on a constant currency basis would have produced net income of $8.7 million.

On a diluted per share basis, earnings were $0.54 in Q3, compared to the $0.41 in the prior year quarter.

Diluted shares outstanding increased slightly to 16.8 million shares.

Now on to our year-to-date results.

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

Let's take a quick look anyway.

Gross margin, our year-to-date gross margin of 51.7% is 300 basis points higher than the 48.7% achieved in the prior fiscal year period.

Price increases, lower discounts contributed 60 basis points, and 100 basis points respectively.

Lower petroleum-based costs benefited gross margin by 110 basis points, but were more than offset by the higher cost of aerosol cans which had a negative impact on gross margin of 170 basis points.

Sourcing changes favorably impacted our gross margin by 80 basis points, while sales mix and other miscellaneous items combined had a favorable impact on gross margin of 100 basis points.

Our gross margin was also positively impacted by 20 basis points due to prior year losses associated with a former related party manufacturer that were not incurred in the current fiscal year.

Selling, general and administrative expenses increased from $57.4 million to $63.2 million.

Due to the higher sales volume, SG&A as a percent of sales decreased slightly to 26.3% compared to the 26.8% in the prior year period.

The increase in SG&A expenditure was primarily driven by higher employee related costs, which increased by $5.4 million, and that was primarily due to the higher bonus accruals.

As noted in the Q3 highlights, many of our regions expect to achieve higher sales and profits in the current year.

In the prior fiscal year, the achievement of these measures by many of our regions were unusually low.

In addition, changes in foreign currency exchange rates, compared to the prior fiscal year period, increased our SG&A expense by $1.1 million year-to-date.

Items partially offsetting these higher expenses were a decrease in professional services of $0.4 million, and a decrease in other miscellaneous expenses of $0.3 million.

Our advertising and sales promotion expenses increased to $16.2 million year-to-date, compared to the $15.3 million in the prior period.

However, as a result of the higher sales volume in the current year, advertising and sales promotion expenses increased to 6.7% of net sales, compared to the 7.2% in the prior year period.

Investment in global advertising and sales promotion expenses for the fiscal year 2010 is expected to be in the range of 6.5% to 7.5% of sales.

Amortization of intangible assets of $0.5 million is related to the amortization of the 1001 brand customer list, the Carpet Fresh and export trade names.

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

No impairments have been recorded in the current fiscal year.

Total operating expenses were $80 million year-to-date, compared to $75.8 million in the prior year period.

Higher net sales, along with improved gross margin, contributed to the $15.8 million increase in operating income.

Year-to-date operating income was $44.4 million in fiscal 2010, versus the $28.6 million in fiscal 2009.

Year-to-date net interest expense decreased $0.3 million to $1.2 million.

Other income decreased $0.4 million, just $100,000.

The decrease in the other income was primarily due to lower foreign currency exchange gains in the current year.

The provision for income taxes year-to-date increased slightly from $32.4 million in fiscal 2009, to $32.6 million in fiscal 2010.

The tax rate for both periods was lower than normal.

Fiscal 2010 reflects nonrecurring adjustments associated with the expiration of certain statutes, and fiscal 2009 reflects one-time tax law changes.

Year-to-date net income was $29.2 million, compared to the $18.7 million in the same period last year.

Changes in foreign currency exchange rates added a $0.7 million favorable impact on net income.

Year-to-date fiscal 2010 results on a constant currency basis would reduce net income of $28.5 million.

On a diluted per share basis, year-to-date earnings were $1.74, compared to the $1.12 in fiscal 2009.

Year-to-date diluted shares outstanding remain constant at $16.7 million.

Regarding the dividend, on June 22nd, the Board of Directors declared a quarterly cash dividend of $0.25 per share, payable on July 30th, 2010, to shareholders of record on July 16th, 2010.

Based on today's closing price of $33.90, the annualized dividend yield would be about 2.9%.

Our balance sheet continues to strengthen.

At May 31st, cash and cash equivalents were $59.1 million, up from the $46 million at the end of fiscal 2009.

Cash provided by operating activities was $38.8 million.

Issuance of common stock upon the exercise of stock options provided an additional $2.6 million.

These cash inflows were partially offset by our annual $10.7 million principal payment, dividends paid of $12.5 million, $1.3 million used for capital expenditures during the period, and $4 million due to changes in foreign currency exchange rates.

We continue to delever the Company with our annual October principal payment, and as of May 31st, our outstanding balance on our original $75 million term loan was $21.4 million.

The final principal payment of $10.7 million will be due in October 2011.

The Company is authorized to acquire up to $15 million of its $50 million worth of its outstanding shares through December 8th, 2010, and to date, we have not made any purchases under the share buyback plan.

This completes the financial overview.

We are pleased with our results, and the continued financial strength that we experienced, but again, more information will be on our 10-Q, which will be filed tomorrow.

Thanks so much.

Now back to you, Garry.

Great.

Thanks, Jay.

We've been very pleased with our results year-to-date.

We've seen the revitalization across nearly all our markets that were heavily impacted by past global recessions.

We are beginning to bear the fruit from our execution of our core strategic initiatives, and our focus on multi-purpose maintenance product segments globally.

We continue to keep our gross margin above our benchmark, despite rising cost pressures and our performance has enabled us to reward our valued tribe members with higher bonuses for the hard work and dedication they have demonstrated through the recent trying and uncertain times.

That said, we find it appropriate to update our fiscal 2010 guidance.

The guidance update is mostly driven by our actual sales results, particularly the sales growth year-to-date, and the favorable tax rate we experienced during the third quarter.

As of fourth quarter, we have some promotional sales and activities late in the period that may push into next fiscal year.

We assume for the fourth quarter that we will maintain our gross margin above 50%, and still anticipate a high level of advertising promotional investment compared to the quarters Q1 through Q3 this fiscal year.

So, our updated fiscal year guidance for 2000 reflects that we expect our net sales results to be in the range of $313 million to $319 million, or a growth of between 7.2% and 9.2% versus fiscal 2009.

We expect our investment in global advertising and promotion expenses 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 $34.4 million, and $36 million, which would achieve an EPS of $2.05, to $2.14, assuming 16.8 million shares outstanding.

The fiscal year 2010 guidance does not include any acquisition activity, 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 any developments that may evolve over time.

That's it for now.

Lots to do.

Lots of challenges ahead.

But we're the boys and girls that are pleased to be delivering good results in these uncertain times.

As the Travis Tritt song says, "I hear there is trouble in the neighborhood, but we're doing all right".

Thank you for joining us today.

Again, congratulations to the people of Spain as they enter into the final of the World Cup, commiserations to Germany who fought hard and we look forward to Holland and Spain knocking it out on Sunday.

Isn't it great to be a global company?

Thank you for joining us today.

We're pleased to open the conference call to your questions.

(Operator Instructions).

Our first question comes from Ben Richardson of JPMorgan.

Good afternoon.

Hello, Ben.

Hello.

Just had a couple questions on your top line expectations for the fourth quarter.

And we've seen pretty strong growth here in multi-purpose maintenance, and is that something that you're expecting to slow?

Is it such that you've pulled some sales forward with moving product into the distributor markets or is this a restocking trend or is it something more?

Thank you for the question, Ben.

Couple of points to make there.

Certainly we're having a very good year of growth year-over-year.

We've often said that, don't follow us quarter to quarter.

Having said that, as we look at the fourth quarter, we're looking at a quarter that is probably about what last year's quarter was, even with about a $3 million negative impact on the sales from foreign exchange year-over-year.

We don't see that the fourth quarter has any reflection on what our future growth looks like.

As we've shared earlier, we think going forward we'll continue to see single digit growth in our mature markets and double-digit growth in our growth markets.

So we'll be pleased to come in at around the sales growth of 9% or so, between 7.2% and 9% something for the year.

And again, this is more just a shifting of sales from one quarter to another and, again, about a $3 million headwind from exchange quarter-over-quarter from 2009 to 2010.

All right.

And going forward, your expectation for raw materials, is it such that you'd expect those costs to continue to rise or -- it seems like crude is headed down, at least.

We've seen some kind of moderate fluctuations of our input costs.

I think if we look forward, while we are always attentive to potential price changes, our focus is really on keeping our margin and holding our margin.

So while we might have some fluctuation in input cost, we will do whatever we can to manage our gross margin above our threshold.

That would include price increases as needed, but the work that we've done over the last couple of years has begun to pay off and we see that continuing.

Okay.

I appreciate that.

I'll step back in the queue.

Thank you.

Our next question comes from Liam Burke of Janney Montgomery Scott.

Thank you.

Good afternoon, Garry.

God afternoon, Jay.

Hi.

Garry, you talked about among your four initiatives the D&A, the WD-40 D&A, partnerships, and then the extension of multi-purpose brands.

You talked about the introduction of the WD-40 Company branded Lava soap.

How extensive is this -- how fast is this pipeline growing, and do you have anything in the size of a Blue Works in the pipeline?

We're looking at a number of different options to develop the multi-purpose maintenance product segment, Liam.

We're not at liberty to talk about specifics, but suffice to say, it is one of our core Fantastic Four strategic drivers.

We are putting a significant amount of our efforts towards the development in that area.

Any of the growth that we're getting now and any of the growth that we're talking about going forward is coming from only strategic drivers one and two, which is the global expansion, which we continue to be very happy with, and then the second one is once these products are developed, like Blue Works, and the 3-IN-ONE brand, is being expanded, we have a complete range of products in Australia now, and in France and Spain that carries the D&A logo, WD-40 on the 3-IN-ONE brand.

We're particularly happy with some of the work there.

We don't have visibility yet of any of the further development in partnerships or licensing or even the fourth initiative of leveraging the WD-40 brand.

They're kind of the reserve growth strategies and we're working hard to bring them into play as we go forward.

Great.

And on home care and cleaning, was it the same as previous quarter where you saw growth from Spot Shot and then sort of a declining on the other brands?

We saw growth in Spot Shot.

We also saw growth in the Australian market with our cleaning products.

The other products were basically flat or down a little and then there was a clear comparison year-over-year in the third quarter of last year, we had some sales of clear out product that we didn't have this year.

So, but Spot Shot continues to perform well, and the others are relatively flat, except for Australia, where we saw a little bit of growth.

Great.

And Jay, on the capital expenditures, they're down year-over-year even though you've had to purchase some equipment for manufacturing to drive efficiencies on the manufacturing side.

Is there anything through the end of the year that you see that will step up CapEx?

We don't see it.

It might get to $2 million or a little over, but I think that the spend we had historically was -- we had a heavy upspend in last year and the year before for that equipment and we see kind of a normalized run rate of about $2 million, ignoring any sort of initiatives associated with manufacturing type equipment.

Great.

Thank you.

Thanks, Liam.

Our next question is a follow-up from Ben Richardson of JPMorgan.

Good afternoon.

This is Ben's colleague, Silke Kueck, how are you?

Fine.

I want to ask a follow-up to Ben's question.

When I look at the results in the US, which I believe grew 10% year-over-year in the quarter, can you talk about how the individual months went?

How was March versus April versus May and what are the trends in June and that is like the indication that we've gotten from companies that are selling through Lowe's or Home Depot is that probably volume trends in March and April were particularly strong and like slowed in May and June.

Is that how you see it or do you see it different?

Well, Silke, remember, let's put it in perspective.

53% of our sales are outside the United States so even though we love Lowe's and Home Depot, it doesn't have the same sort of impact.

We don't break it down.

But our overall sales for the three months in the quarter were relatively equal month by month.

We haven't noticed any material or noticeable shift in that but it's again, because we're so diversified.

We have a huge part of our business in Europe and Asia, so we get to participate in different levels of market activity in different geographies.

Okay.

And so again, so when you said the business is growing equal amount, that's true globally and is it also true for the US business?

Typical for much of this year.

There wasn't any different there that would make any big difference to either month.

That's helpful.

And in terms of raw materials outside of steel cans, are the input costs trading up or down?

Like it seems that various base commodity chemicals have stepped down sharply and maybe some of the immediate products stayed still high because of outages but on the margins it seems that input costs are just beginning to roll over, leaving steel costs aside.

Well, 66% of the cost of a WD-40 can, or in fact you could nearly extrapolate that out to our total business comes from two areas, steel and petroleum.

So it's very easy -- and there's a slide in our investor presentation that shows that.

The other 30% is made up of filling fees, plastics, miscellaneous chemicals.

So the impact even if they move, is not material on our margins.

As far as oil's concerned, you can see where that is.

It's kind of fluctuating in that band of $75 to $85.

We're comfortable with it there.

Steel cans, tin plate came off a little bit.

There's a lot of discussion of what it's going to be in the future.

But we would say that the upward pressure is not as great as it was a year ago and probably a little more stable than we've seen it for some time.

That's helpful.

And--?

I just want to add to that.

As Jay mentioned earlier too, we really focus on not only the input cost, but on making sure that our gross margin stays above our business model objective of 50%.

And gross margin comes to us you through a number of ways.

It comes through mix of sales.

If you look at the mix of sales through geography, our margins are a little higher in Europe than they are in the US.

It comes from innovation, bringing our Smart Straw product into play and how that is now a bigger part of our business globally.

It comes from supply chain enhancements.

It comes from capital expenditure in machinery to increase the line speeds in some of our more volume-related products.

So there's a number of things that we work on.

But again, our focus is keeping the margin above that critical 50% mark which meets what we call our 50, 30, 20 model.

50% or better gross margin, 30% or less cost of running our business and 20% or higher EBITDA.

What's the penetration rate of Smart Straw at this point?

Smart Straw is very well penetrated in the US, because we converted all of the US primarily to Smart Straw nearly two years ago.

Then it's at different levels around the world.

It has a reasonable penetration in Europe.

It has some penetration in Australia.

The developing countries or emerging markets of course are not ready to pay for the value of Smart Straw, so we're still selling the traditional can into those markets.

So it varies.

It's very well-developed in the US, less so in other countries around the world.

And the conversion in the US took about 12 to 18 months?

Did it take longer than that?

We converted in April 2008, so we are about two years out now.

So there will still be classic cans in the market I guess, but most of the -- all of primarily what we ship now is our Smart Straw can, except for a couple of sizes in our larger industrial size, and then of course in our small 3-ounce size where the smart straw isn't appropriate nor cost effective.

How do you envision the rollout of Blue Works, particularly in the US?

Well, we like where we are so far.

Blue Works is a range of products that's being sold directly to end users, so it's a different sales model than the one we normally use but so far we're more than happy with the response we're getting.

We've had a lot of sampling by end users.

It will be a slow build but one that at this stage we're more than happy with and we'll be moving Blue Works into the a couple of our European markets in the first part of next year.

That's helpful.

I'll get back into queue.

Thank you.

Okay.

Our next question comes from Alan Robinson of Royal Bank of Canada.

Good afternoon, chaps.

Hello, Alan.

Hi, Alan.

Jay, I think this one's for you.

We certainly appreciate the guidance but what range of tax rates for the fourth quarter is your annual guidance based on now?

We would envision 34.7, 35.2, somewhere in that range.

That's for the fourth quarter, yes?

For the fourth quarter.

Got it.

Okay.

Thank you.

That's very useful.

And then Garry, I guess this is for you.

This is the second consecutive quarter of impressive international growth.

Could you provide some color on how confident you are that you turned around from the declines we saw in fiscal 2009 internationally?

I mean, in particular, I'm interested in some of the permanent changes you've made either in distribution channels or in marketing efforts internationally?

Alan, we didn't really suffer internationally during the recession from unit sales in country.

It was ForEx that hit us.

But we've had many, many years now on double-digit sales growth internationally in Europe in local currencies, in real volume, so this is not a new thing for us and we're very comfortable that the model that we started to execute back in 1999, 2000, is continuing to deliver us new users internationally and we've got a long runway.

It's just now that it's at a size that people are paying attention to it.

So we believe we can continue to grow our non-US business by double-digit rates into the future and our domestic US business by low single digit rates and that's volume, not pricing.

Okay.

That's useful.

Are there any distribution agreements that are coming up for renegotiation internationally or is that not something we should worry about?

No, they come up for -- we have our marketing distributors on rotating contracts.

We don't have any long-term distribution -- although we do have distributors that have been with us for 35 years who continue to perform very well, but our distribution arrangements are very close, and are renegotiated on performance based on an annual basis.

Okay.

And then regarding your third -- the third of your Fantastic Four, the acquisitions, joint ventures, et cetera, if everything went according to plan over the next 18 months or so, how would you envisage or what would be your ideal situation there?

Would it be a single transformative acquisition or would it be more like three or four small tuck-ins?

Probably three or four small tuck-ins.

I didn't play with Transformer dolls when I was a kid, because they were too complicated.

I don't think you can transform businesses like that.

We continue to search the globe for acquisitions that fall nicely into our sandbox, but we are, again, challenged by the pricing that some others are prepared to pay that we really don't see the value in.

So I think it would be more of a couple or three smaller yet meaningful acquisitions than something that would change the landscape of our business and really take our focus off where we have great opportunities in developing our brands outside the US.

All right.

Great stuff.

Thank you.

Thanks.

Our next question comes from Joe Altobello of Oppenheimer and Company.

Hey, guys.

Good afternoon.

Long time no see, Joe.

It's been a while.

Week or so.

Quick question for you.

First, earlier in the Q&A, Garry, you mentioned the FX headwind in the fourth quarter.

You also mentioned a shift in sales and I apologize if you covered this, but could you give a little more clarity on the shift in sales.

Sounds like it's coming from 4Q, got pulled into 3Q and if you could quantify that for us?

Yes, it's probably going to go from Q4 to Q1 2011.

We've got promotional activities that straddle over the months of September and October and August.

So we're not sure whether some will fall in this year or next year or not.

And that's really -- we're at the mercy of our customers and ship dates there but because they're so close, there may be some that would go into Q1 of next year, certainly they didn't come into Q3.

And then so that would be the shift if there's any.

So we see Q4 being kind of equal to flat to last year, maybe up a little, but certainly being impacted by about a $3 million headwind on exchange, if you comparable year-over-year.

And then we look into next year as we've said, the same sort of growth expectations we've been talking about.

So for the year, looks pretty good.

I heard someone speak at your conference the other day, if you can grow 2% to 4% in this economy you're doing very well.

I guess if we're going to grow 7.5% to 9%, we're doing better than okay.

In terms of the fourth quarter if I read your guidance right, the $6 million range you provided for the full year, it sounds like the high end of that range assumes that you get all of those sales in the fourth quarter, the low end assumes all of them shift into 1Q and the mid range is sort of 50/50, is that the right way to interpret that?

Jay?

I mean, I think that we looked -- I think that's a pretty -- that's about as close as you can get.

Okay.

Great.

And then in terms of gross margin, your gross margin's been above 50% for a number of quarters now.

And you said it would still be above 50% in the fourth quarter.

As you look into fiscal 2011, it seems like in terms of the commodity environment, it's relatively manageable right now.

I would imagine you would expect to see gross margin above 50%.

Would you expect to see gross margin up year-over-year next year?

No.

But certainly it will be above 50%.

That's our goal.

Okay.

So you expect it to be flat to down next year?

Didn't say that.

I said I don't know.

I'm sorry.

Okay.

I thought you said no.

Apologize.

Okay.

Just one last one before I go.

The home care and cleaning products line you mentioned your loss in distribution there, it eroded a little bit in the third quarter from 2Q.

Have we sort of reached a steady state level here in terms of that business or segment?

We believe so.

We believe so.

And year-over-year I don't know if you heard earlier, Joe, when we talked about it, there were some clear out sales in Q3 of last year so that had a little bit to do.

But we would say in the home care and cleaning products we've got good businesses in Spot Shot that continues to grow, the others are relatively flat and then Australia bounces around with the UK.

We had growth in Australia, a little down in the UK.

And in total I think it was 18% of our total sales, so it's becoming a lesser portion, but certainly it's manageable and stirring up good cash and we're putting that cash to work.

Perfect.

Thanks, guys.

Thank you, Joe.

We'll take our last question from Kim Kiro of Value Holdings.

Good afternoon.

Good afternoon.

Can you hear me?

Yes.

WD-40 pays a relatively attractive dividend.

I think some investors invest in the Company partly because of the yield and as you know, the aftertax yield to US shareholders is set to fall by 25% next year as the tax rate goes from 15% to 40%.

Would the Board consider accelerating some or all of next year's dividend into 2010 so that we can continue earning a similar aftertax yield for another year?

Thanks for the question.

Not something we discuss at this table.

Certainly the Board look at our dividend, our dividend policy, and our dividend payment in line with our cash position and future uses of cash on a quarterly basis, and they do that, as I said, every quarter.

So that's not something that I would have at this table for discussion.

Maybe you guys can consider it based on all the criteria you just mentioned.

I mean, you're certainly capable of doing that, and it would create positive lasting memories for shareholders.

Thank you very much.

We appreciate that.

Thank you.

We'll take the question on notice.

Thank you.

That concludes our question-and-answer session.

I'll turn the call back to our moderators for any closing remarks.

I think that's it for us.

We'll see you in about 90 days, and let's look forward to a good World Cup final, and again congratulations to our Spanish teammates, our tribe members.

All the best.

Talk to you again soon.

Bye.

This does conclude today's conference call.

We thank you for your participation and have a wonderful day.