WD-40 Co (WDFC) 2011 Q2 法說會逐字稿

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

Today's call is being recorded.

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

Please go ahead.

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

Today, we are pleased to have Gary 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 commodity prices, inventory levels of our customers, promotional timing, the introduction of new products, changes in foreign currency exchange rates, and the fluctuating global marketing 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 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 earnings conference call is scheduled to take place on Thursday, July 7, 2011.

At this point, I'd like to turn it over to Garry Ridge.

Good day.

Welcome to today's conference call.

Today we reported net sales of $79.2 million for the second quarter of fiscal year 2011, a decrease of 2% over Q2 last fiscal year.

Year-to-date, net sales were $160.1 million, an increase of 1% versus the same period last fiscal year.

Net income for the second quarter was $9.1 million, compared to $10.7 million in Q2 last fiscal year.

And diluted earnings per share for the second quarter were $0.53, down from $0.64, for the same period last fiscal year.

Year-to-date net income was $18.2 million, compared to $20.1 million in the same period last year.

And year-to-date, diluted earnings per share were $1.06, down from $1.20 for the same period last year.

Before we cover off on the details on our results, I'd like to -- as I normally do, give you an update on our Fantastic Four core strategic initiatives.

And we certainly have some good news to share.

Firstly, around global expansion, our first initiative, this continues to be a major driver of our sales and profit growth.

Period over period, total sales outside the US grew by 11% in the second quarter, and 15% year-to-date, as compared to the prior fiscal year periods.

As a percentage of total revenue, sales outside the US were 62% of global sales in the second quarter, compared to 55% in the prior year period.

Much of this growth was driven by the Asia Pacific segments, and the European distributor markets, which benefited from continued growth of the WD-40 products, the timing of promotional activities, and improved economic conditions.

Our second initiative, maximizing our position in the multi-purpose maintenance products, and we celebrated our first-year anniversary of the launch of our BLUE WORKS brand.

Sales of BLUE WORKS in the US increased 32% in the second quarter, compared to the prior-year period when the brand was first launched.

In addition to the UK, where we've launched earlier this year, we intend to take BLUE WORKS to Canada late this calendar year.

We've also commenced a market test in one country in Latin America.

As the -- as of the second quarter, the BLUE WORKS brand represented less than 1% of our global sales.

And while we know the maintenance, repair and overhaul channel, or MRO channel, is smaller and one that experiences a slower build, we feel that the BLUE WORKS brand will become a meaningful part of our business over the long term, providing incremental revenue streams.

Our third strategic initiative, process -- processes, as we continue to look for acquisitions, joint ventures and licensing opportunities.

We've done quite a bit of work, as we look at the potential products that could have meaningful adjacencies to our brand.

We have yet to find an appealing acquisition of size, or an evaluation we feel is acceptable.

We'll just keep looking.

We are making progress on our fourth strategic initiative, which is the development of -- which is development of a new brand called WD-40 Specialist.

The WD-40 Specialist line of products stems from our brand exploration and extension project, and will be a portfolio of specialty problem-solving products, aimed at the trade and doer enthusiast who currently use the WD-40 brand.

While we initially planned for a small test market in the UK, our market research gave us confidence to move forward with a launch both in the US and the UK, with some products in this line targeted to launch at the end of this fiscal year.

We expect phase one of the product line to be completed during fiscal year 2012.

As you all know, launching new products has its ebbs and flows, and we'll have a great opportunity to learn more about what appeals to our end-users and consumers.

We will use this research and learning to develop products that have staying power in the market, as this is a strategy that we believe will grow the overall category.

That means that, periodically, we'll assess and update our product portfolio to reflect an offering that continuously provides solutions for end-users and consumers.

That completes the update on our strategic initiatives, so let's move forward on the details of the second quarter, and year-to-date results starting with sales.

Global sales of multi-purpose maintenance products were flat in Q2, and are up 4% year-to-date.

Growth of the category in Europe and Asia Pacific in the second quarter was offset by declines in the Americas segment period versus period.

By trading block, sales of multi-purpose maintenance products in Q2 were down 14% in the Americas, up 12% in Europe, and up 20% in Asia Pacific.

The decrease in the Americas period versus period was driven by the timing of promotional activities, and a lower level of replenishment orders from certain of our key customers.

In the Americas, the first half of fiscal year 2010 was a heavy promotional period, while in fiscal 2011 most promotional activity will be occurring in the back half of the year.

Both WD-40 and 3-IN-ONE brand sales globally were flat in Q2, compared to the prior fiscal year.

Year-to-date, global sales grew by 5% in WD-40, while year-to-date, 3-IN-ONE sales grew by 2%.

Home care and cleaning products continues to represent a smaller portion of our business per our strategic road map, and accounted for 17% of global net sales in the second quarter, compared to 19% in the prior fiscal year.

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

Global sales of these products were down 8% in the second quarter, and are down 12% year-to-date.

By trading block, sales of home care and cleaning products in the second quarter were down 12% in the Americas, down 4% in Europe, but were up 27% in Asia Pacific.

With the exception of the Carpet Fresh brand, home care and cleaning product sales have been impacted by lost distribution, and our discontinuation of certain products, and the effects of competitive factors.

Sales have also been impacted by our strategic decision to focus our investment and innovation on our multi-purpose maintenance products, the result being the recent announcement of the new WD-40 Specialist brand.

Carpet Fresh brand was higher -- was the bright star in the category, growing 18% globally in the second quarter, and 7% year-to-date.

Carpet Fresh sales grew by 6% in the US in the second quarter due to new distribution with a major retail customer, while sales of No Vac in Australia grew 33%, due to its continued strong market position.

We'll now talk a little bit about our results by segment.

While global sales were down 2% in the second quarter, we experienced healthy growth in Europe and Asia Pacific.

The growth was driven primarily by increased distribution, and the ongoing growth of our base business, as price increases were minimal.

Impact from changes in foreign currency exchange rates was unfavorable, yet relatively small.

Our Q2 fiscal year 2011 results translated at last year's second-quarter exchange rates, or what we term as constant currency basis, would have produced net sales of $79.6 million versus the actual of $79.2 million.

Year-to-date net sales in constant currency would have been $161 million, versus the actual of $160.1 million.

Sales in the Americas segment decreased 14% in the second quarter driven by the US, stemming from lost distribution, a lower level of replenishment orders, and the timing of promotional activities.

Sales in Europe increased 11% in the second quarter, primarily due to the continued growth of WD-40, WD-40 Smart Straw, and increased focus on the industrial trade channels, and of course, the ongoing growth of our base business.

In the second quarter, sales in Asia Pacific increased 22%, due to improved economic conditions, and the ongoing growth of our base business, and our core business.

Now more details on the Americas.

Sales on the Americas decreased to $38.1 million in Q2, down $6.1 million, or 14% versus Q2 last year.

Year-to-date sales in the Americas are down 12%, the segment accounted for 48% of sales, global sales in the second quarter, versus 55% in the prior-year quarter.

In the US, sales were down 17% in the second quarter, and are down 15% year-to-date.

The lower sales were driven by the declines of the -- declines in the WD-40 and Spot Shot brands period versus period.

WD-40 sales were impacted by the timing of promotional activities, as sales on the brand are expected to grow substantially in the third quarter, due to our Military Can promotion now running nationwide.

The promotion includes four unique commemorative cans, celebrating the four major branches of the US military.

The comprehensive promotion includes celebrity endorsements, special in-store displays, and donations to organizations that support military personnel and their families.

$0.10 for each can sold will be donated by WD-40 Company to the selected charitable organizations.

The decrease in the Spot Shot sales in the US was due to several factors, including the timing and the lower level of promotional activities, specifically those within the warehouse club channel.

The brand was also impacted by lost distribution, and the effect of competitive factors.

Sales in Latin America increased by 3% in the second quarter, and were up 8% year-to-date, with most of the growth in the WD-40 brand.

Sales in Canada decreased by 2% in the second quarter and 6% year-to-date, compared to prior-year period, driven by lower sales of WD-40 and Spot Shot.

Changes in foreign currency exchange rates did not have a material impact on sales in the second quarter, or year-to-date.

Now let's skip over to Europe.

Sales in Europe increased to $31.8 million in Q2, up 11% versus Q2 last fiscal year.

Year-to-date sales in Europe were up 12%.

The segment grew to account for 40% of global sales in Q2, compared to 35% in the prior-year quarter.

European sales on a constant currency basis would have been $32.7 million in the second quarter, reflecting a 14% growth.

Year-to-date Europe sales on a constant currency basis would have been $64.4 million, reflecting a 15% growth.

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

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 region, which includes Germany, Austria, Denmark, Holland, Switzerland and Belgium.

Sales in our direct markets decreased 2% in Q2, and are up 6% year-to-date.

Sales growth in Italy and France, of 22% and 10%, respectively, in the second quarter was up -- offset by declines in the Germanics sales region, Iberia, and the UK sales declines which were driven by unfavorable changes in foreign exchange rates period versus period.

Overall, we're seeing unit growth in Europe and our direct markets, due to new distribution that's continued growth of the WD-40 Smart Straw, and our increased focus on the industrial channel and, of course, the ongoing growth of our base business.

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-year period and in total were up 46% in Q2, and are up 25% year-to-date.

The sales growth is a result of the increased promotional activities and the continued growth of our base business.

The distributor markets accounted for 35% of our total European segment sales in Q2, compared to 28% in the prior fiscal-year period.

Now we'll go down to Asia Pacific.

Sales in the region increased to $9.4 million in Q2, or 22% versus -- up 22% versus Q2 last fiscal year.

Year-to-date sales in Asia Pacific were up 40%.

The segment accounted for 12% of our global sales in Q2, versus 10% 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 $9.1 million in the second quarter, reflecting a 17% growth.

Year-to-date sales, on a constant currency basis, would have been $19.6 million, reflecting a 35% growth.

Sales in Australia increased 24% in Q2 and 25% year-to-date, compared to the prior fiscal-year periods, primarily due to the favorable impact of exchange -- of changes in foreign currency exchange rates.

On a constant currency basis, sales increased 12% in Q2, and were up 14% year-to-date.

The sales growth was also attributed to improved economic conditions, and the ongoing growth of our base business.

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

It's great to see sales in China increase 38% or $0.5 million due to the ongoing growth of our base business and the promotional activities in the country.

Sales through the rest of Asia increased $0.5 million or 15% in Q2, due to the improved economic conditions and the continued growth of WD-40 products.

Year-to-date, it's great to see our investment in China is delivering sales growth of 78%, sorry, 76% year-over-year, and the rest of Asia are up 43%.

That's it for the sales update.

Now I'll pass it over to Jay, who will review the financials, and progress between -- towards our 50/30/20 business model measures.

Thanks, Gary.

In addition to the information presented on this call, we suggest that you review our Form 10-Q, which we'll be filing tomorrow.

Before I continue with the rest of the financials, I'll highlight our 50/30/20 rule.

As you might remember, the 50/30/20 rule is a set of financial measures we use to run our business.

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

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

Our target is 30% or less.

And then, finally the 20, which represents EBITDA.

If our gross margin is at or above 50%, and our cost of doing 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 both our 10-Q, and our investor presentation.

First, we'll take a look at our gross margin, or the 50 in our 50/30/20 rule.

Our gross margin continued above our 50% threshold, despite an increase in major input costs.

Gross margin in the second quarter was 51.8%, compared to the 52.4% in Q2 last fiscal year.

The decrease of 60 basis points in gross margin was primarily attributed to the higher cost of raw materials, as well as sales mix, which were partially offset by the positive impacts from lower promotional trade discounts, and sales price increases.

Cost of products sold, the major input costs, we experienced a net unfavorable impact of 40 basis points from these.

This was primarily due to the combined effects of changes in the cost of petroleum-based materials and aerosol cans during Q2, compared to the prior year period.

A quick reminder, during -- regarding the timing of the impact of input cost changes, there's often a delay of a quarter or more, before raw material cost changes flow into our cost of goods sold.

As a result of recent aerosol can price increases and the increased cost of petroleum-based materials, we expect that raw materials will continue to negatively impact our cost of goods sold in future periods.

This quarter's lower level of trade promotional discounts, compared with the prior-year period, increased our gross margin by 40 basis points.

Trade promotion discounts, which are treated as reductions to sales, include coupon redemptions, allowances to retailers for shelf space, cooperative advertising and promotional activity, volume discounts, and other one-time or ongoing promotional incentives.

Sales price increases favorably impacted our gross margin by 30 basis points period versus period.

The impact stems from price increases implemented during Q1 and Q2 of the fiscal year on certain products in certain markets.

Additional price increases will be implemented in the third and fourth quarters, in an attempt to mitigate the higher costs of petroleum-based materials and aerosol cans.

Changes in sales mix negatively impacted our gross margin by 70 basis points in the quarter.

As Garry noted, we experienced strong sales growth in our distributor markets, in both Europe and in Asia during the quarter.

The distributor markets have lower margins compared to our direct markets.

The lower gross margins are a function of the lower pricing given to distributors, in exchange for managing sales and distribution in their respective territories.

All other impacts combined negatively impact our gross margin by 20 basis points.

This includes unfavorable changes in foreign currency exchange rates within our European segment.

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

Period versus period, the value of the euro to the pound sterling deteriorated, causing revenues from euro-based countries to be worth less in pounds sterling, thus eroding the gross margin in parts of our Europe segment.

The themes discussed for the quarter for gross margin, also applied to the year-to-date results.

Gross margin year-to-date was 51.4%, compared to 51.9% in the prior fiscal-year period.

The decrease of 50 basis points in gross margin was also attributed to the higher costs of raw materials, product mix, which partly offset by the positive impacts of lower promotional trade discounts and price increases.

That completes the gross margin discussion.

Now let's go on to the 30, or our cost of doing business.

In the current quarter, the cost of doing business was 34% of net sales, compared to 31% in Q2 of the prior fiscal year.

Our goal is to have cost of doing business to be at or below 30%.

The increase in cost of doing business percentage was primarily driven by increases in selling, general, and administrative expenses.

Our SG&A expense in Q2 was $21.6 million, versus $20.1 million for the prior fiscal year quarter.

A percentage of net sale -- as a percentage of net sales, it was 27.3%, versus the 24.9% in the prior year quarter.

The increase in SG&A expense was primarily due to increased employee-related costs, freight, consulting, legal, and other miscellaneous expenses.

Employee-related costs increased by $0.3 million, primarily due to annual compensation increases, and higher staffing levels, offset by lower bonus expense.

Professional service costs increased $0.5 million, due to higher consulting and legal fees.

Freight costs increased by $0.3 million, primarily due to the higher cost of diesel period versus period.

Other miscellaneous expenses, which include travel and meeting expenses, along with our research and development expenses, increased by $0.4 million period versus period.

Changes in foreign currency exchange rates did not have a material impact on SG&A expense during the period.

SG&A expense year-to-date was $43.3 million, versus $39.9 million in the prior-year fiscal period.

As a percent of net sales, SG&A expense was 27.0% year-to-date, versus 25.2% in the prior-year period.

The increase in SG&A expense was primarily driven due to higher employee-related costs, higher travel and meeting expenses, along with increased freight and professional service costs.

Advertising sales promotion expense in Q2 remained constant period to period at $5.4 million, but as a percentage of sales increased to 6.8%, from the 6.6% in Q2 of last fiscal year.

Year-to-date advertising and sales promotion expense increased $0.9 million, compared to the prior-year period.

Advertising and sales promotion expense, as a percent of sales increased to 7.1% year-to-date, from 6.7% in the prior fiscal-year period.

The increase in advertising and sales promotion expense was primarily due to a higher level of advertising and promotional activities in our Europe and Asia Pacific segments during our first quarter.

Amortization of intangible assets was $0.2 million in Q2, flat to the prior year quarter.

Year-to-date, amortization was $0.4 million, was also flat to the prior-year period.

The expense is related to Carpet Fresh and X-14 trade names, and customer lists associated with the acquisition of the 1001.

During the second quarter, we conducted our annual impairment test on our indefinite lived intangible assets, which included the 2000 Flushes, Spot Shot, and 1001 trade names.

While none of these intangible assets were impaired as of February 28, 2011, we determined that they should no longer be considered to have indefinite lives.

As a result, all three trade names were changed from indefinite lives to definite lived intangible assets effective February 28, 2011, and will be amortized beginning on March 1, 2011.

The annualized amortization expense is expected to be approximately $1.6 million.

Total operating expenses in the quarter were $27.2 million, versus $25.6 million in Q2 of last fiscal year.

Operating income in Q2 was $13.9 million, compared to $16.6 million in the prior-year quarter.

Year-to-date, our operating expenses were $55.1 million, versus $50.8 million in the prior-year period.

Operating income year-to-date was $27.2 million, compared to the $31.3 million in the prior-year period.

EBITDA, the last of our 50/30/20 measures, was 18% of net sales in Q2, compared to 22% in the prior fiscal-year quarter.

Year-to-date, EBITDA was 18%, compared to the 21% in the prior fiscal-year period.

We target to achieve EBITDA of 20% of net sales, but expect variations from time to time, as sales and AMP investment fluctuate with timing of promotional activities.

In addition, our EBITDA percentage is also affected by investments we make for future growth.

Interest income for both quarters was under $0.1 million.

Interest expense in Q2 was $0.2 million, down $0.2 million from the prior -- from the same period last year, due to the lower principal balance on our long-term debt.

Other expense in Q2 was $0.1 million, and slightly higher than the prior-year quarter, driven by foreign currency exchange losses period versus period.

Year-to-date, interest income was $0.1 million, in both fiscal-year periods.

Interest expense was $0.5 million, down $0.4 million versus the same period last year, because of the lower principal balance on our long term debt.

Other income year-to-date was $0.1 million, in both fiscal periods.

The provision for income taxes in Q2 was 32.9%, versus 34.2% in the prior fiscal-year quarter.

The lower tax rate was driven by the higher proportion of income from our foreign operations, which were taxed at lower rates, as well as from tax benefits from increased deductions related to qualified production activities.

Other items contributing to the lower tax rate include the reversal of tax reserves related to state audit settlements, the release of valuation allowances on foreign net operating loss carry forwards, and the favorable impact of recent reinstatement of the federal research and development credit.

Year-to-date, the provision for income taxes was 32.2%, versus the 34.3% in the prior fiscal-year period.

The lower tax rate year-to-date, was due to the same factors as discussed for Q2.

Net income in Q2 was $9.1 million, versus $10.7 million in the prior-year quarter.

The change in foreign currency exchange rates period to period did not have a material impact on net income.

Our diluted earnings per common share were $0.53 in Q2, compared to the $0.64 in the prior fiscal-year quarter.

Diluted shares outstanding increased from 16.7 million shares to 17.2 million shares.

And year-to-date, our net income was $18.2 million, versus $20.1 million in the prior-year period.

The change in foreign currency exchange rates period to period, again, didn't have a material impact on net income in that period.

Diluted earnings per common share were $1.06 year-to-date, compared to $1.20 in the fiscal-year period of the prior year.

Diluted shares outstanding increased from 16.7 million shares to 17.1 million shares.

Regarding our dividend, on March 22, the Board of Directors declared a quarterly cash dividend of $0.27 per share, payable on April 29, 2011, to shareholders of record on April 15.

Based on today's closing price of $43.67, the annual dividend yield would be 2.5%.

About our balance sheet, on February 28, 2011, cash and cash equivalents were $67.5 million, down from the $75.9 million at the end of fiscal 2010.

Net cash provided by operating activities was $8 million, while the issuance of common stock upon exercises of stock option provided $11.5 million.

These cash inflows were offset by our annual $10.7 million principal payments, dividends paid of $9.2 million, share repurchases of $9.6 million, and $1.3 million used for capital expenditures.

Cash was also positively impacted by $2 million, due to changes in foreign currency exchange rates.

Other miscellaneous items positively impacted cash by $0.9 million.

During the quarter, the Company began executing on the share buyback plan approved by the Board of Directors on December 14, 2010.

Under the plan, the Company is authorized to acquire up to $25 million of the Company's outstanding shares through December 13, 2011.

During the second quarter, we purchased 243,500 shares at a cost of $9.6 million under the plan.

On Monday, April 4, 2011, the Board of Directors voted to increase the authorization under the share buyback plan by $35 million, and to extend the term until April of 2013.

As a result, the Company is authorized to acquire up to $60 million of the Company's outstanding shares through April 4, 2013.

We remain confident in the strength of our balance sheet, and the consistency of our cash flows.

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

We continue to seek ways of utilizing our cash and liquidity to invest for the future, and provide long-term returns to shareholders.

This completes the financial overview.

More information will be available in our Form 10-Q, which will be filed tomorrow.

Thanks so much, and now back to Garry.

Great.

Thanks, Jay.

Now on to our fiscal year 2011 guidance, which has had very little change, as to our outlook for the full-year.

The guidance that I'm about to share with you does not include any acquisition activities, or the launch of the WD-40 Specialist brand in the US and the UK.

Our guidance also assumes foreign currency exchange rates will remain close to recent levels.

Our guidance also assumes -- expects, sorry, that our exchange rates will remain close to recent levels.

We expect our fiscal-year net sales results to be in the range of $335 million to $350 million, or a growth of between 4.2% and 8.9%, 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 in the range of $37.5 million to $39.5 million, which would achieve an EPS in the range of $2.23 to $2.35, assuming 16.8 million weighted average shares outstanding.

As you know, results may vary quarter to quarter depending on economic conditions, and the timing of promotional and investment activities.

And we are constantly working through the achievements to achieve our sales, and our 50/30/20 targets over the long term.

We anticipate ending this fiscal year within our target range, due to the higher expected sales in the back half of the year, stemming from our major promotional activities, particularly in the US.

We also anticipate that price increases in the third and fourth quarter will offset the flow through higher cost for aerosol cans and petroleum-based raw materials.

So what did you hear today?

You heard, growth outside the US is robust, and we are confident that will continue.

You heard, we expect due to the timing of promotional activities, the second half of the year in the US will be much stronger than the first half.

You heard, that although we had a cost of goods headwind now from oil, we believe we can manage through it.

You heard we have guided to a record year of sales and earnings.

You heard we've increased our buyback program by $50 million to $60 million in aggregate over a two-year period.

And you've heard that a line extension of the WD-40 -- we've increased it by $35 million, to an aggregate of $60 million is the share buyback.

Everybody just about fell off their chairs here, when I said that.

You should be in the room.

(Laughter).

And we've increased -- sorry -- and you've heard for the first time ever, WD-40 will line extend, with a new range of products called WD-40 Specialist.

So as I'd normally do, in closing, I'd like to share with you a quote from the famous basketball coach, John Madden -- Wooden, appropriate, as it's the end of the US March Madness here in the US.

And more appropriately, it describes the work we have done over the past three years, that has now delivered the opportunity of our new WD-40 Specialist brand.

John Wooden said, if you don't have time to do it right, when will you have time to do it over?

Thank you for joining us today.

We would be pleased to open now the conference to any questions.

Thank you.

(Operator Instructions).

And we'll take our first question from Henry Kaplan from Oppenheimer.

Hi.

Thanks for taking my questions.

I guess the first question is, I wanted to get a little more detail on the new WD-40 Specialist line of products, and kind of how you'll position that, in relation to your other products?

Thanks, Henry.

Good day.

Good to talk to you.

The WD-40 Specialist line of products stems from the brand extension program that we did, and we have been working on for three years.

It will be a portfolio of specialty problem-solving products, aimed at the trade and doer and user enthusiasts, who currently use the WD-40 brand.

We believe that it will be a game changer in category management.

And we'll be releasing a number of products progressively over the next period of time, the first of which we will see on shelves in the US and in the UK, latter in this fiscal year and early into next year.

So it's the result of a -- a lot of good work.

Particularly, the work that we did about, making sure that the Specialist product did not attack what we call the secret of success of the WD-40 brand.

Now, for competitive reasons, of course, I'm not going to say too much more about it, other than we are pleased that we got here.

And we're looking forward to it delivering revenue to us over a period of time.

What it does do for us now is, we believe we could -- with the Specialist brand, with BLUE WORKS, with the 3-IN-ONE brand, and with the core brand WD-40, we're able to throw a blanket over the volume of the uses in the category globally.

And the great thing about Specialist is, as like Smart Straw was, this is something that's going to enable us to take to our developed markets over a period of time around the world.

And as you know, our global positioning is one of the strongest things we have in the Company.

Got it.

And then, just in terms of the guidance, you lowered your sales outlook by about $5 million.

I wanted to know what was driving that, because if that was -- because I think what you highlighted was the timing of promotional activities.

So I wanted to know how -- if it's just the timing of promotional activities, does that shift sales into next year?

Is that why you lowered the guidance for this year, or is there something else going on there?

No, that's exactly right.

Our major promotion in the US this year, and I don't know if anyone has seen it yet but if you haven't, look for these cans on shelf.

They're absolutely stunning.

There are four special cans, that have a unique trade dress on them that supports the four areas of the military.

And we started shipping that basically in this quarter, which is later than we normally would.

And it was because we wanted to tie in with Memorial Day, and a whole bunch of other stuff.

So basically what's happening is those sales will just shift into the following year.

And we'll see the impact of our military commemorative can in the third, and then rolling into the fourth quarter.

Got it.

And then in terms of the commodity cost outlook, you mentioned obviously, higher oil costs, and tin plate, steel can costs.

Can you talk about, or quantify the price increases that you plan on taking to offset those in the second half?

Go ahead, Jay.

No, you go ahead.

No, we haven't quantified that.

Okay.

And the reason we are not quantifying it, Henry, is we're still in the marketplace now, talking, and working through the impact of it.

It will become more evident when we, when we actually implement them.

Okay.

Should we expect gross margins in the second half to improve -- or should we expect, or what -- or how should we be thinking about that?

We would expect them to remain above our 50%.

We don't see them improving from where we are today.

Relatively flat.

Relatively flat.

So what we're saying is, we expect -- or it's our intention to pick up the flow of cost increases through either price rises, or in mix of sales, depending on when some of these new products come on line.

Okay.

Thank you very much.

I'll let someone else ask questions.

Thank you, Henry.

And we'll hear next from Liam Burke with Janney Capital Markets.

Good afternoon, Garry.

Good afternoon, Jay.

Hi, Liam.

Garry, it looks like your BLUE WORKS, at least as a percentage of revenue growth is beginning to get some traction.

Do you see any, I mean, are you seeing continued momentum so the sales would begin to compound, and actually move the needle here?

Well, it's a big needle to move, when you look at we're moving the global needle against it.

What we can say, Liam, is that we continue to have the confidence that we had last quarter, and the quarter before.

The biggest month we ever had was in February of this year, where we're seeing an increase in our reorders from our current customer base, as well as gaining new end-users.

So our position is unchanged.

It's a slow build, it's a good build.

We're comfortable with the launch in the UK.

We're moving forward in Canada.

We've got some work going on in Latin America.

We're very pleased with the increased activity and visibility it's giving us of the WD-40 brand, because we have really turned up the volume a lot -- in that MRO trade channel, where as you know now, we have a number of independent sales reps across the US, and also in the UK now, who are making end-user calls, on behalf of us; they are promoting not only BLUE WORKS, but soon WD-40 as well.

And some other companies use a direct sales model to do that.

We think that's an expensive way to go to market.

We prefer to pay for performance, as we build the sales.

So overall, Liam, we're okay, and we feel it's a good long-term bet.

Okay.

And on the specialist line, that's a bit of a different strategy.

It's a brand extension of the WD-40 product.

Correct.

Is there anything you can borrow from the BLUE WORKS launch, that will give you a little bit of a head start into that, either managing the channel the same, or whatever?

Well it's going to go in a different channel.

It's going to go through retail where BLUE WORKS doesn't, but the great thing that we've borrowed from BLUE WORKS is all the R&D work that we did.

So we -- these BLUE WORKS formulas, some of them either will find their way into specialist in some way or another.

So we've done a -- that's been a great pay off, and hence why you will see towards the end of this year, this line extension on the shelf.

So a lot of the work we've been doing in the background that we haven't been able to share, because of reasons that are obvious, is now starting to play out for us.

Great.

And Jay, cash flow is down year-over-year.

Aside from normal working capital timing, was there anything unusual in the statement, other than that?

No.

If you look at just some of the things that -- we had a -- we had an increase in our A/R.

We had just a little bit of increase in our inventories.

And then we had some decrease in our payables, so but that's all normal fluctuations.

Nothing that would suggest any changes in our overall business model.

Great.

Thank you.

Thanks, Liam.

We'll hear next from Eric Hollowaty from Stephens Incorporated.

Hi, gentlemen.

Thanks for taking my call.

With respect to the price increases that you plan to take, I understand you don't want to telegraph the magnitude of those.

Any color you can give at least on category, and/or geographies?

I know you said you are looking at -- or you will be implementing ones -- in I think you said Europe and Asia that have not or were not substantially included in the second-quarter results, but anything you can give us on that?

Yes, it's a geographic move.

We have the same cost increases everywhere.

Okay.

So we'll be implementing across the globe, in the major categories, multi-purpose maintenance products, as well as selective household products.

So yes, it's not selective by geography or by product.

It's really just passing on the impact of oil going from $75 to $110 a barrel or whatever it is, and the impact of cans, the impact of our steel cans, which we had embedded already.

Everybody -- this unfortunately, we're all in the same ZIP code with this.

And there's not much we can do about it -- where we do everything we possibly can to drive costs out of our system that doesn't add value, because I guarantee you, the last thing that we want to do is raise our prices, and have our end-users and consumers pay more for our product.

Understood.

But this is the world we're in.

Yes, understood.

Should we take that then to mean that in terms of referencing the performance of your multi-purpose maintenance products category in the second quarter, that the majority of the sales shortfall was due to the promotions, and not to the lower replenishment, which might suggest an area of potential sales weakness, and therefore, maybe some more challenging area to implement price?

Yes, well, there were two things.

Certainly, a huge portion of the sales shift, is because our major promotion moved out of Q2 into Q3 and 4.

And in fact, we signaled the market on that back in the last quarter.

We said -- Q1 -- we said, that we're moving things along for the year.

Now whether that was heard or not, doesn't matter.

There's some fun and games going on in the market in the US, but they are not unusual.

And we're happy to play with those fun and games.

We know where our brands are.

We know what we do.

And where -- our ANU studies, our attitudes and usage studies, show particularly in the industrial segment, some upturn in consumption.

So yes, there's some game playing going on, but we won't name the players.

And we won't be too concerned about it, and we'll have a record year of sales and earnings.

And that's off the best year in the 57-year Company history.

And the business is not much different today than it was three months ago.

And our prediction for the year is not much different than what we talked about six months ago.

So as I've often said, if people follow us quarter to quarter, open the window at the 57th floor and jump out, because we -- we are not dumb enough, we are not dumb enough to run our business in 90-day intervals.

Understood.

One final quick one.

The guidance that you've given on earnings, with respect to raw materials, that basically assumes what -- current level petroleum prices going forward, or have you baked in anything else?

No.

We would expect or -- included in the -- in our guidance is, assuming raw materials stay similar to where they are today.

Okay, great.

All right.

Thanks very much, and best of luck.

Okay.

Thanks, Eric.

Thanks, Eric.

(Operator Instructions).

We'll hear next from Jeffrey Zekauskas from JPMorgan.

This is Ben Richardson, filling in for Jeff.

Hey, Ben.

Hello, how are you?

Good.

Just quickly wanted to address your strategy for share repurchase, given that you've expanded the program here, wondered if you could speak a little to the pace, or timing of that buyback?

Well, we've -- in this last quarter, in the second quarter, we acquired $9.6 million of share repurchase.

And as we look forward, we -- as a way of deploying our capital, we see an opportunity with our shares to repurchase that as we go forward.

So we would expect to continue to be active in share repurchase for the next few periods.

And as you know, we are limited by regulation on how much we can buy, on a daily, monthly, whatever it is basis.

So that's probably the governor, around the quantity that we buy over time.

I think in the first quarter, we were in the top end of that, Jay, would that be right?

Yes.

We're about in the mid portion.

In the mid portion of what we could buy, so we're pleased the Board supported it.

And the increase from $25 million to $60 million, gives us a $50 million buyback opportunity over the next two years.

And we'll be proceeding on that.

Okay, excellent.

And I guess, again, touching on your projected sales, it seems just from kind of back of the envelope glance here, that you're projecting a bit of a rebound in the Americas if -- and again, I'd assume this is based on promotions and whatever you might have going.

Yes, I mean --

What sort of strength are you projecting?

Well, we -- overall, you saw that we continue to grow at good robust rates outside the US.

And if you were to look at the quarter and the year, this far in total, the shortfall is in the US.

And it is in -- basically the majority is in the WD-40 brand.

And there's some in Spot Shot.

And the majority of the WD-40 brand is because, our major promotion has moved from Q1, 2 to Q3, 4.

We had a very strong first half year last year, and a weaker second half last year.

We're having a weaker first half in the US last year, and we'll have this year -- sorry -- and we'll have a stronger second half.

So overall, apart from about the $5 million mark, which is what we adjusted the top end revenue, because we may see some of that flop into next year depending.

We certainly, absolutely, are looking at a much larger second half in the US.

And then, that's what is being reflected in our guidance.

Excellent.

I appreciate the answer.

Okay.

Thank you.

And there are no further questions at this time.

I'd like to turn the conference back over to Garry Ridge.

Well, thank you.

Thank you for joining us today, and we'll look forward to updating you on our next conference call in 90 days or so.

Good afternoon.

Once again, this does conclude today's conference call.

Thank you all for your participation.