WD-40 Co (WDFC) 2011 Q1 法說會逐字稿

Good day, and welcome to the WD-40 Company first quarter 2011 earnings release conference.

Today's call is being recorded.

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

Maria Mitchell.

Please go ahead.

Good afternoon, and thank you for joining us for our first-quarter earnings call for fiscal 2011.

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 raw materials, impact of new products and brands, 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 second-quarter earnings conference call is scheduled to take place on Wednesday, April 6, 2011.

Now, we pass it over to Garry Ridge.

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

Today we reported net sales of $80.9 million for the first quarter of fiscal year 2011, an increase of 4% over Q1 last fiscal year.

Net income for the first quarter was $9.1 million compared to $9.4 million in Q1 last fiscal year.

Diluted earnings per share for the first quarter were $0.53 compared to $0.56 for the same period last year.

Q1 was a good quarter for us, particularly given it followed a very strong fourth quarter and promotional period.

The sales growth of 4% in Q1 versus the same period last year was driven by higher volume, increased distribution and market development outside of the United States.

We had somewhat stable global economies and were able manage our costs in an environment of rising material import costs.

The impact from the changes in foreign currency exchange rates was also not material.

As we review our results for this quarter, we will be doing so under the guise of our four strategic initiatives and the 50/30/20 rule we shared with you in our annual shareholder meeting and our annual shareholder letter.

Our strategic initiatives provide the road map for long-term growth while our 50/30/20 rule provides measures for tracking our progress.

The target to net sales are challenging.

A 50% gross margin, 30% cost of running our business and a 20% EBITDA.

While our results may vary quarter to quarter, depending on our economic factors and timing of promotional and investment activities, we are constantly working towards achieving our 50/30/20 targets over the long-term.

Our sales growth of 4% over Q1 and the fiscal year was driven by our first two strategic initiatives, the global expansion and maximizing of our multipurpose, maintenance products.

All of our growth quarter to quarter came from segments outside the US, and primarily from our brands in the multipurpose products category.

Markets outside the US accounted for 62% of global sales in the first quarter compared to 54% in the prior fiscal year quarter.

Sales of our multipurpose maintenance products accounted for 82% of our global sales compared to 78% in the prior-year quarter.

Our multipurpose maintenance product sales were up 10% in Q1 compared to the same period in fiscal last quarter.

By trading block, the category was down 5% in the Americas, up 13% in Europe and up 17% in Asia Pacific.

While most of the growth was driven by our core brand, WD-40, we also generated positive growth from our line of 3-In-One and to a lesser extent, from our new Blue Works brand.

Global WD-40 sales grew by 10% in Q1 compared to the prior fiscal year quarter, while 3-In-One brand sales increased 4%.

In addition to the improved economy, growth of the WD-40 brand sales was driven by the market penetration of Smart Straw, particularly in Europe and significant promotional activities and market expansion in the Asia Pacific segment.

3-in-One brand sales benefited from new innovation and increased distribution in Europe, but not Australia.

Blue Works was launched in the US during the second quarter of fiscal year 2010 and accounted for less than 1% of global sales in the current quarter.

We just launched Blue Works in the United Kingdom, and that market will begin shipping the product in the second quarter of this fiscal year.

Home care and cleaning product sales contributed -- continued to represent a smaller portion of our business per our strategic road map.

The category accounted for 18% of global net sales in Q1 compared to 22% in the prior fiscal year period.

These products include Spot Shot, 2000 Flushes, Carpet Fresh No-Vac, 1001, X-14 and Lava and the Solvol brands.

Total home care and cleaning products were down 16% globally in Q1.

By trading block, sales of home care and cleaning products were down 22% in the Americas, were up 6% in Europe and up 19% in Asia Pacific.

While the category performed well outside the US, the US market was challenged due to the timing of promotional activities, the volatility of orders and some lost distribution.

Home care and cleaning product sales were down 24% in the US, primarily due to the Spot Shot brand.

In the prior-year first quarter, sales of Spot Shot were very strong due to heavy promotional period coinciding with the comprehensive campaign around the successful film, Cloudy With a Chance of Meatballs.

We did not have a comparable program in the current quarter as the promotional calendar for Spot Shot, as well as other home care and cleaning products, is more concentrated in the back half of fiscal 2011.

Also contributing to the lower sales was the timing of initial purchases with Warehouse Club store accounts in the prior-year quarter, some lost distribution at certain home improvement centers and our voluntary discontinuation of sales with low profit customers and channels.

Now, onto the results by segment, and we'll start firstly with the Americas.

Sales in the Americas decreased to $39.2 million in Q1, down $4.5 million, or 10% versus Q1 last fiscal year.

The segment accounted for 48% of global sales in the first quarter versus 56% in the prior year.

Multipurpose maintenance product sales were down 5% in Q1, and home care and cleaning products were down 22%.

The decline in the Americas were mostly attributed to the US market.

US sales were down 13%, driven by a 43% decline in the Spot Shot brand and a 7% decline in WD-40 brand.

As I shared earlier, Spot Shot was impacted by the timing of promotional activities, timing of purchases by key accounts and lost distribution with certain customers and channels.

WD-40 was impacted by lost distribution of certain size and configurations at a few key accounts and a lower level of replenishment orders and the timing of promotional activities.

In the US, we expect to see WD-40 sales be heavier in the back half of the fiscal year due to the timing of a significant promotional campaign that will launch in Q2 and run into Q3.

Sales in Latin America increased 13% in the quarter, mostly due to the WD-40 brand.

Sales in Canada decreased 11% in the first quarter due to the lower sales of multipurpose maintenance products, stemming from the timing of promotional activities.

Changes in foreign currency exchange rates did not have a material impact on sales.

Now, let's cross over and have a look at what happened in Europe.

Sales in Europe increased to $30.8 million in Q1, up 13% versus fiscal Q1 of last year.

This segment accounted for 38% of global sales compared to 35% in the Q1 of last fiscal year.

Changes in foreign currency rates, period versus period, had an unfavorable impact on sales.

Europe sales on a constant currency basis would have been $31.8 million in the first quarter, reflecting a 16% growth.

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

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

Sales in our Europe direct markets were up 17% in Q1, primarily due to the continued growth of the WD-40 Smart Straw and 3-In-One products' promotional activities and ongoing growth of our core business.

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

Our distributor markets in total were up 7% in Q1, driven by promotional activities in eastern Europe and the ongoing growth of our core business.

Now, let's take a look at the Asia Pacific area.

Sales in Asia Pacific region increased to $11 million in Q1, or 61% versus Q1 of last fiscal year.

This segment accounted for 14% of the global sales in Q1 versus 9% in the prior fiscal year.

Changes in currency exchange rates, period versus period, had a favorable impact on sales.

Asia Pacific sales on a constant currency basis would have been $10.6 million in the first quarter, reflecting a 57% growth.

Sales in Australia increased 26% in Q1 compared to the prior fiscal year period, primarily due to the improved economic conditions, promotional activities with several key customers and the favorable impact of changes in the foreign currency exchange rates.

On a consistent currency basis, sales increased 16% in Q1 compared to the prior fiscal-year period.

China and many of the markets throughout the Asian region continued to experience sales growth in the first quarter.

Sales in China more than doubled period versus period, to $2 million in Q1, due to the ongoing growth of our core base business and the significant promotional activities aimed at building end-user awareness and distribution.

Sales in the rest of Asia increased 75% to $5.5 million in the current quarter.

The region benefited from the growth of WD-40 products throughout the distribution network markets including the Philippines and Taiwan, Indonesia, Hong Kong and Singapore.

That's about it for me for the sales update.

I'll pass over to Jay now who will continue with a review of the financials.

Thanks, Garry.

In addition to the information that we are presenting on this call today, we suggest that you review our Form 10-K, which will be filed today.

I will continue with the rest of the financials.

In our shareholders letter, we describe the 50/30/20 rule, which is a set of financial measures we use to track our business.

The 50 represents gross margin, which we target to be at or above 50% of net sales.

The 30 represent our cost of doing business, which is our total operating expenses, excluding depreciation and amortization.

Our target for that is 30% or less.

Finally, the 20 represents EBITDA.

If our gross margin is at or above 50% and our cost of business is 30% or less, our EBITDA will be at or above 20% of net sales.

EBITDA is earnings before interest, taxes, depreciation and amortization.

The descriptions and reconciliations of these non-GAAP measures are available in our Q1 investor presentation, which will be posted to our investor relations website.

Let's begin with the 50, gross margin.

Our gross margin continues to be above our threshold of 50%, despite higher cost of petroleum-based materials compared to the prior fiscal year.

Gross margin in the first quarter was 50.9% compared to 51.4% in Q1 last fiscal year.

The decrease of 50 basis points in gross margin, or approximately $400,000, was primarily attributed to the higher cost of petroleum-based materials which were partially offset by the positive impact from lower promotional trade discounts, slightly lower aerosol can costs and price increases taken on certain home care and cleaning products.

Our costs -- in the input costs, we experienced a net, unfavorable impact of 90 basis points from our major input costs.

This was primarily due to higher prices for petroleum-based materials, which had a negative impact on our gross margin of 160 basis points.

This was partially offset by lower costs for aerosol cans, which had a positive impact on our gross margin of 70 basis points.

We had favorable changes in promotional trade discounts.

This quarter's lower level of the trade discounts compared to the prior year increased our gross margin by 50 basis points.

Promotional trade discounts, as you may remember, are treated as a reduction to sales and they include coupon redemptions, allowances to retailers for shelf space, cooperative advertising and promotional activity, volume discounts and other one-time or ongoing promotional incentives.

Price increases favorably impacted our gross margin by 10 basis points, period versus period.

The impact stems from price increases implemented during Q1 of the current year, on specific Spot Shot aerosol and the 1001 brand products.

We had some impacts from foreign currency exchange rates within our European segment that negatively impacted our gross margin by 20 basis points.

This segment generates revenues in multiple currencies which are converted into pounds sterling and then translated into US dollars.

Cost of goods are sourced in pounds sterling while revenues are generated in euros, pounds sterling and the US dollar.

And recently, the value of the euro to the pounds sterling deteriorated compared to the prior year, causing revenues from our euro-based currency countries to be worth less in pounds sterling, thus eroding the gross margin for a part of our European segment.

That completes the gross margin discussion, now onto the 30, our cost of doing business.

In the current quarter, the cost of doing business was 34% to net sales compared to the 32% in Q1 of the prior fiscal year.

Our long-term goal is to reach 30%.

The increase in the cost of business percentage in Q1 was driven primarily by increases in both SG&A costs, as well as A&P investment.

Our SG&A expense in Q1 was $21.6 million versus $19.8 million in the prior fiscal-year quarter.

As a percentage of net sales, it was $26.8 million in Q1 versus $25.5 million in the prior-year quarter.

The increase in SG&A expense was primarily due to higher employee-related costs and higher travel and meeting expenses.

Employee-related costs increased by $0.5 million, primarily due to higher salary and fringe expenses and some higher staffing in certain segments.

Higher travel and meeting expenses of $0.6 million, were driven by a higher level of travel and expenses associated with various sales meetings, as well as activities in support of our strategic initiatives.

Professional services increased $0.3 million, due to higher legal and consulting costs, while other miscellaneous expenses combined increased by $0.4 million.

Changes in foreign currency rates did not have a material impact on SG&A expenses this year versus last year.

Advertising and sales promotion expense in Q1 was $6.1 million versus $5.2 million in the prior year quarter.

Advertising and sales promotion expense increased as a percent of sales to 7.5% from the 6.7% in Q1 of last year.

The increase was primarily due to a higher level of advertising and sales promotion activities in our European and Asia Pacific segments.

Amortization of intangible assets was $0.2 million in Q1 and flat to the prior-year quarter.

The expense in both periods is related to the Carpet Fresh and X-14 trade names and the customer list acquired in the 1001 acquisition.

Total expenses in the current quarter were $27.9 million versus the $25.2 million in Q1 of last year.

Operating income in Q1 was $13.3 million compared to $14.7 million in the prior-year quarter.

EBITDA, the last of our 50/30/20 measures, was 18% to net sales in Q1 compared to 20% in the prior fiscal-year quarter.

The slight decrease in EBITDA percentage resulted from higher SG&A and A&P investment expenses.

Wile our goal is to achieve EBITDA of 20% of net sales, we will have variations from time to time as we invest for the future.

Interest income for both quarters was under $0.1 million.

Interest expense in Q1 was $0.3 million, down $0.2 million versus the same period last year due to the lower principal balance on our long-term debt.

Other income in Q1 was $0.2 million, compared to $0.1 million in the prior quarter.

The $0.1 million increase in the other income was primarily due to higher foreign currency exchange gains, period versus period.

The provision for income tax in Q1 was 31.5% versus 34.4% in the prior fiscal-year quarter.

The lower tax rate was driven by provision adjustments of $0.1 million recorded during the current quarter related to the filing of our 2010 federal tax return and a $1 million increase in the tax benefit from deductions related to qualified production activities.

Net income in Q1 was $9.1 million versus $9.4 million in the prior-year quarter.

The current -- the impact of foreign currency exchange rates did not have a material impact whatsoever.

Diluted earnings per share were 53 point -- $0.53 in Q1 compared to $0.56 in the prior-year quarter.

Diluted shares outstanding increased from 16.7 million to 17 million shares.

Regarding the dividend, on December 14, the Board of Directors declared a quarterly cash dividend of $0.27 per share.

The dividend will be payable on January 31, 2011, to shareholders of record on January 7, 2011.

Based on today's closing price of $39.94, the annualized dividend yield would be 2.7%.

About our balance sheet at November 30, 2010, cash and cash equivalents were $73.2 million, down slightly from the $75.9 million at the end of fiscal 2010.

Net cash provided by operating activities was $4.3 million in the current quarter, issuance of common stock on the exercises of stock options provided cash of $8.1 million.

These cash inflows were offset by our annual dividend -- excuse me, our annual principal payment of $10.7 million, dividends of $4.5 million and $0.8 million used for capital expenditures and some other miscellaneous items that combined to positively impact cash by $0.9 million.

The Company's financial condition and liquidity remain strong.

Our growing diversified global revenues and profits are expected to generate sufficient cash flow to meet our future operating needs.

Our long-term debt is scheduled to be paid in full with our final principal payment of $10.7 million, due October 2011.

Our $10 million line of credit remains open and unused.

In light of our strong cash position and goal to provide long-term return to shareholders, the Company's Board of Directors authorized another share repurchase plan.

The previous share buyback plan expired on December 8, 2010, but no shares were repurchased.

Under the new plan, approved on December 14, 2010, the Company may acquire up to $25 million of the Company's outstanding shares through December 13, 2011.

The Company intends to begin executing on the new buyback plan during the second quarter of the current fiscal year.

That now completes the financial overview.

More information will be available in our Form 10-Q.

Thanks so much, and now back to Garry.

Thank you, Jay.

Before we move onto our guidance, I'd like to update you on the progress we've made on our last two strategic initiatives.

That being developing our business through acquisitions, joint ventures, licensing and/or strategic partners and leveraging the trust of the WD-40 brand to grow our revenues and profits.

The two initiatives that are particularly important for our mature markets, including the US, Canada, Australia and the UK.

While we continue to search for acquisitions of value, we have also made significant progress on our BEEP, the Brand Exploration and Extension Project for the WD-40 brand.

We have various WD-40 BEEP products in development that will be tested in selected channels and customers in the UK and possibly other markets late this fiscal year.

In addition to the R&D investment, we'll be supporting the initiative with market research and advertising and promotional funds through fiscal years 2011 and 2012.

We see this as a great opportunity to build new sales pipelines for the fiscal year 2012 and beyond for our mature markets.

Now, on to our guidance, which remains unchanged from what we shared with you in October and then again at the annual shareholder meeting.

We still anticipate fiscal year 2011 will be a great year.

We expect our international markets to continue to grow and for the sales of the US to gain speed with the major promotions planned on the back half of the fiscal year.

As we said in the beginning of this call, while results may vary quarter to quarter depending on economic factors and timing of promotional investment activities, we are constantly working towards achieving our sales and our 50/30/20 targets over the long-term.

I am very pleased with our tribe for their -- and the hard work that they have done to initiate and develop new market opportunities and the gross margin protection strategies that they are executing.

The following fiscal year 2011 guidance does not include any acquisition activity and assumes foreign currency exchange rates will remain close to recent levels.

So, we expect our fiscal year net sales results to be in the range of $340 million to $355 million, or growth of between 5.7% and 10.4% versus fiscal year 2010.

We expect our global advertising and promotional investment to be in the range of 6.5% to 8% of net sales.

We expect our net income of $37.8 million to $40.3 million, which would achieve an EPS of $2.25 to $2.40 assuming, 16.8 million weighted average shares outstanding.

And in closing, as I normally do, I'd like to share a quote with you this day from Robert Louis Stevenson.

Don't judge each day by the harvest you reap, but by the seeds that you plant.

Thank you for joining us today.

We'll pass back to the operator, and we'd be happy to now open the conference call to your questions.

(Operator Instructions) And we will take our first question from Liam Burke with Janney Capital Markets.

Good afternoon, Garry, good afternoon, Jay.

Hi, Liam.

Garry, you mentioned in your prepared comments on WD-40 brand in the US, there was lost distribution.

Is that a meaningful amount?

And where would that -- where would you have seen that?

I would say it's not meaningful, or either isn't permanent.

We did lose some distribution of a couple of sizes of our product in particular trade channel and a particular customer that I won't mention.

But, I don't think that-- we don't feel that that is a long-term thing.

It's a little bit of play that is going on.

So, we will regain that through the second quarter when we execute on the great promotion that we will be launching very soon.

And I am presuming that promotion, we are just going to have to wait and see what that is when it rolls out?

Yes, we will be releasing details of it early, later in January.

Okay.

Jay, you mentioned that tin plate costs were down year-over-year.

Now, if I understand it correctly, those prices are set annually?

Yes, they have been set annually.

Although in -- if you remember, it was the end of -- in the middle of the year, we did get a price reduction of this year.

All right.

So that is what it us the benefit.

Okay, great, thank you.

Okay, and we will go to our next question from [Henry Kaplan] with Oppenheimer.

Hello, and thanks for taking my questions.

Hi, Henry.

How are you?

Great.

Happy new year.

Happy new year.

I guess the first question is just in terms of the M&A market.

You have a significant amount of cash, net cash on the balance sheet.

And wanted to get an update on your outlook there and see if you have any more color in terms of size or potential leverage that you may or may not want to lever up to to make an acquisition?

Sure, as far as leverage is concerned, our position remains unchanged, as has always been, which is that we would look at levering three to four times aggregate EBITDA inclusive of the EBITDA from the acquisition we would make.

So, our EBITDA is now running, I don't know, mid 50s, and so that would give us somewhere in the middle area of $200 million plus whatever we brought in.

So, that's about the size of what we are looking at or a combination up to that size.

We have been very active and looked at a number of things in the past months.

Nothing has really -- well nothing has excited us to the point of making a move or has -- the valuation side has been also something that we still are seeing some prices being paid at valuations that we think are somewhat unrealistic.

So, it's a continuation.

We know what we are looking for, but it will be something that fits very nicely in our sandbox and where we have the right to win.

We're not at all just looking in the US; we are looking across the world.

So, hopefully, if we continue to fish, we will catch a fish of a size that suits us sometime into the future.

Okay.

That's helpful.

And then in terms of commodities and specifically tin plate, I think you touched on this earlier, but did -- were prices reset on tin plate for this year?

Because I think that happens every January, and I just wanted to get an update on your expectations for --

Yes, we are in our final negotiations around tin plate pricing for the remainder of the year.

So, you should see that shortly.

Okay.

And is your expectation that they will go up or down or remain constant?

What are you thinking?

Our expectations, or at least what we've built into the remainder of the year in our forecast has been that we will see a rise in them.

And as Jay said, we have taken that into consideration in the guidance and our forecast going forward.

Okay.

Do you care to quantify that, what you are baking in?

No, not until we actually get those numbers.

Okay.

And then in terms of oil prices, they have certainly ticked up a little bit as of late, hovering around $90 a barrel.

I wanted to see what your expectations were and what you build into your guidance for the year.

As we shared with you before, when oil was oscillating between $75 and $85, it was in our band.

Once it is above that, it gets in an area that we are not that comfortable with.

Certainly, the dramatic impact is when it goes, when it spikes and sticks, so we're watching it very closely.

We are looking at and continue to look at a number of different areas of enhancement of margin.

We have executed -- or have planned and will execute a couple of price rises, particularly in offshore markets.

But again, our goal is to keep our gross margin at and above 50% and eventually grow it.

So, we will be working with that.

And certainly, we pay a lot of attention.

We've got target teams all around the world working diligently on ways of extracting costs that doesn't add value to our product and making sure that we keep that gross margin above the 50% and growing.

So, all of our innovation efforts, of course to our own products that will be enhancing our gross margins.

Okay.

And then, just two last questions if I could, one is more of a housekeeping question.

In terms of your tax rate, it was a little bit lower than we were expecting and wanted to see what I should be thinking about for the full year.

And then the other question has to do with more, just in terms of the sales in the Joe's versus pros, if you will.

I think that's how you've referenced that in the past.

And if you could just talk about any changes you have seen in those particular end markets.

Well, I will cover the tax rate.

In our current tax rate, it was a little bit lower.

If you look, though, on an annualized basis, or the less than $100,000 impacts from really the true-up of our provision as a result of filing our tax returns, it had a small impact -- will have a small impact on our overall annual rate.

We do get a benefit, or an increased benefit from the ongoing qualified production activities that will continue to accrue throughout the year.

So, our tax rate, we are envisioning in the high 33%s, low 34%s.

And it is what we are expecting for the annual.

And Henry, your question on end users, that's a very big question.

Which particular market would you like to me talk about geographically?

Because it's -- we sell to repair maintenance or maintenance repair and overhaul, as you know, the trades and the end user, consumer.

But their profile and where they are is different, so.

Generally, there is nothing I have to report that is much different from last time.

You would see that the business in Asia has done very well.

We had a 61% increase; we are very pleased to see the traction we are getting in China where our sales doubled in the quarter.

Our Blue Works business in the MRO area continues to be a slow build, but we're happy with that.

So, I think the landscape wise, I don't see any material changes from where we were before.

Okay.

Thank you very much.

And we will move onto our next question from Jeff Zekauskas with JPMorgan Chase.

Hi, good afternoon.

Hello, Jeff.

Hi.

In terms of your home care and cleaning products business, do you expect revenues to grow this year?

No.

And that's largely an issue in the United States, but you expect your offshore revenues to grow somewhat?

Yes.

There will be small growth offshore, but we took a decision some time ago that we shared with you all where we re-signed a lot of our R&D work to our maintenance products.

Our goal with our home care and cleaning products is to stabilize it, which I believe we've done.

There is not a lot of innovation in that area.

It is still growing in Australia because the Carpet Fresh product there is very dominant and still gaining share.

In fact, it's probably the only product in the category.

And then our 1001 business in the UK is also doing reasonably well and overall, we will see it be relatively flat.

Okay.

Was there anything unusual in your Asian revenues, or are we now at a new plateau for that geographic segment?

Well, what you are seeing, Jeff, is the main part of it is in China where as we build markets, we do get spikes from time to time.

But certainly, we are encouraged that we are starting to bite in China, we are getting momentum.

We are not only finding new users every day, but the old ones are coming back to buy.

So, we are building the core business as well as building the promotional side.

So, we are excited about Asia, and we are excited that the work and the investment we put into China is continuing to give us the rewards.

We are seeing larger reorders from our distributor customers in China.

So, it is what we want it to be, it's a great big market, and we look forward to it being a size of material proportion to the Company over time.

Do you expect multipurpose lubricants in the US to grow this year, even though they shrank in the first quarter?

Often what can happen, obviously in your business, is that you can have a lot of quarter to quarter volatility but still have a reasonable growth pattern.

Absolutely.

We expect our multipurpose maintenance products to grow in the US this year.

On the raw material side, I noticed that your gross margin improved a little bit sequentially.

And so I take it that that's in part a function of the direction of raw materials, namely, your petroleum raw materials probably went down a little bit.

But now, kerosene is moving up.

And so, when we look -- when we think about your gross margins in the coming two quarters, are they likely to resemble the first quarter, plus or minus a little bit?

Or is there a mix effect that would lift them comparably to where you were in the second two quarters last year?

Well --

It's a little long-winded.

Yes, no Jeff, thank you.

I think that as we look forward throughout the remainder of the year, we are seeing our margins continue to be -- remain above our 50% threshold.

And we will see fluctuations from quarter to quarter.

Some of that fluctuations comes with promotional mix as well.

Our sales mix at different times generates higher opportunities for -- sales often come with higher costs on certain promotional items.

So, we will see our margin fluctuate throughout the remainder of the year, but it will continue to remain above the 50% level.

Well, I would hope it would remain above 50%.

I guess what I would ask is, is it going to remain around the 51% level?

We have seen oil spike up and so should -- absent changes that would continue to have that rise, I would say that that is certainly our target.

Are you going to increase prices to try to offset the inflation in your lubricant costs, or are you not going to do that?

We would prefer not to.

However, if we need to, we will.

Again, we have about a 90-day lag in the impact of the way kerosene moves around.

And what we are looking for is a little stability.

Where is it going to sit?

Because what we can't do is go to the market with regular rapid price increases, nor do we want to go too early, nor do we want to go too late.

So, we are trying to offset some of the impacts of oil as it has been in the past by innovation and other cost saving measures that we are taking within the Company.

For example, the automation of our production lines with Smart Straw, some packaging.

It is not a silver bullet, Jeff, and there is not one prize here.

So, if we do want to take pricing, we also have to have the justification to go to our customers and say, this is why.

And we are just hoping now if it will stabilize around where it is, then we will be able to make those decisions.

We have already planned and will execute some price changes in Europe, but it's a balancing act that has more than the two parts of just steel and petroleum.

Just as a last comment, Garry, you have been very generous with your answers.

I can't get over the revenues in Asia Pacific.

I don't think you have ever had a quarter that is anywhere near as large as the one you reported.

No, that is correct.

Jeff, 62% of our business in this quarter came from places outside of the US.

And one of the reasons we invested in China four years ago was to build that business.

It's got a run rate now of about $8 million, and it was like $2.5 million a few years ago.

And it's a serious investment with serious people.

We have got about 40 people based there now.

And Jeff, you've followed us long enough.

You know it takes a while to get moving, but then it's like a snowball, it gets bigger as it goes down the mountain quicker.

So, we are wanting to continue to do that and continue to build the Asian market.

There are other opportunities there, too.

We have big markets in Indonesia which has been very good to us, our Indian business is starting to get some legs.

So, it takes a while with the people and -- to get our business model in place and to get our strategy executed, but then it's a great business for the future.

So, we are very pleased with what's happening in our Asia Pacific area, as we are in Europe.

That will soon be a GBP100 million business, which is pretty exciting.

So, your revenues in Asia in the year-ago quarter were $6.8 million.

So, to bridge roughly up $4 million, foreign a little better, foreign constant currency, if $1 million came from China, where did the other $3 million come from?

Some came from Australia, which had a strong quarter, and the rest came from all of the other markets, Indonesia, Taiwan, Malaysia, the Philippines, just all of our distributor markets.

Okay, good.

Thank you very much.

Thank you for your patience.

You're welcome.

(Operator Instructions).

We'll take our next question from Eric Hollowaty with Stephens Inc.

Most of my questions have been answered, but a quick one on Europe and Smart Straw.

I think you mentioned in your prepared comments that you saw some nice lift in the core WD-40 brand from continued penetration of the Smart Straw in Europe.

I was wondering, how much more runway is there in that market, or in other markets outside of Europe, for that matter for that mix shift to still benefit you?

Hi Eric, thanks for the question.

The United States is the only market that we have completely converted to Smart Straw.

So, we continue now to sell Smart Straw into some of the more developed markets in Europe such as the UK, Germany, France, Italy, but we haven't converted them in full.

It's more of a self conversion than a hard conversion in those countries.

So, right now, I would estimate there is still a fair runway for us in conversion to Smart Straw.

And in some countries, we haven't even taken it there yet.

People in China aren't ready for Smart Straw yet, because we are still selling them their first cans.

So, Smart Straw has a ways to go.

It's also been -- in Europe, it's been a great strategic tool for us to get a better position in the industrial trade channels because of its point of difference.

So, we're working on it there.

So, we have still got plenty of legs on our Smart Straw conversion globally.

Okay, great.

Thanks a lot, Garry.

One more, just on SG&A, and forgive me, I wasn't able to record perhaps all of the details of your SG&A bridge year-over-year.

But given that your infrastructure, at least as far as I understand it, is largely mature to the degree that you still have a lot of room to grow into it.

Can we expect first quarter to have been somewhat of an outlier as far as SG&A is concerned with some of the T&E and other items you mentioned?

I was wondering if you could give us some additional insight into how you are thinking about SG&A for the year?

Yes, I think the travel and entertainment was a little bit of a spike that we saw in the first quarter that we wouldn't expect to be duplicated throughout the remainder of the year.

We did have some increased professional costs that tend to vary with legal activities and things, so that's one that we don't really have a very good eye on.

The other part was salary increases and/or salary -- staff additions.

And that one is one that we would continue to expect to be at that level throughout the remainder of the year, potentially a little higher in some additional markets; for example, like China, where we might choose to have some additional headcount adds throughout the year.

I see, okay.

Thanks, Garry and Jay, and good luck.

Thank you.

Thanks, Eric.

And there are no further questions at this time.

Okay.

Well, thank you very much for joining us.

We look forward to being with you again in about another 90 days when we will be able to share with you some of the exciting news from our WD-40 promotion in the US and also share how we've been tracking in other parts of the world.

Good afternoon.

And ladies and gentlemen, this does conclude today's conference call.

We thank you for your participation.