WD-40 Co (WDFC) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to this WD-40 first quarter 2012 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, Miss Maria Mitchell.

Please go ahead, ma'am.

Good afternoon, and thank you for joining us for our first quarter 2012 earnings call.

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

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

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

Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward-looking statements, including the impact of commodity prices, impact of changes in foreign currency exchange rates, the impact of introducing new products and fluctuating global market conditions, both in the United States and internationally.

The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis.

But there can be no assurance that the Company's expectations, beliefs or projections will be achieved or accomplished.

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

And readers are urged to carefully review these documents and other documents and to stay up-to-date with our most recent company developments provided in the Investor Relations section of our Web site at WD40company.com.

Our second quarter fiscal year 2012 earnings call is scheduled for Thursday, April 5, 2012.

I would like to turn it over now to Garry.

Thank you, Maria.

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

Today we reported net sales of $84.9 million for the first quarter of fiscal 2012, an increase of 5% over Q1 last fiscal year.

Net income for the first quarter was $6.8 million compared to $9.1 million in Q1 last fiscal year.

Diluted earnings per share for the first quarter were $0.42 compared to $0.53 for the same period last year.

As we review our results for the first quarter, we will be doing so under the 50/30/20 rule and our refreshed strategic initiatives that we shared with you last quarter.

Overall for us, Q1 was a good quarter.

We grew global sales versus the prior year quarter despite some economic uncertainties in Europe related to the Euro debt and currency crises.

We realized sales growth in the US as we had promised.

Asia and China continued to deliver stellar sales growth and we made significant progress on our strategic initiatives, and invested in projects that will improve our margin and profitability in the long term.

Our margin was below our 50% target due to our continued investments in the business and changes in our sales mix.

Earlier last year, we had set out to work on redesigning our supply chain architecture after assessing that we could experience significant cost savings in our North American supply chain.

We found that we would be able to save costs by consolidating our third party packaging facilities and restructuring our distribution centers network in the North America.

We began this transition during the first quarter, and while this investment has reduced our gross margin by 60 basis points in the period, we expect to benefit from the efficiencies once the initiative is fully integrated.

Our margin was also negatively impacted by changes in sales mix, as our distributor markets experienced double-digit growth.

The large portion of sales in distributor markets, period-versus-period, reduced our gross margin by over 40 basis points.

While our cost of business was above our target of 30%, as you would see, it's largely due to the timing of advertising and promotional investments that we are making, particularly in the WD-40 brand, including the launch of the WD-40 Specialist product line.

So, while EBITDA and net income did decrease versus the prior year period, we're excited that the investments we made in our business this quarter are expected to fuel growth and improve profitability over the long-term.

So, let's take a closer look at the progress we made in the first quarter towards our strategic initiatives.

It's important to note that the current growth is expected to come from our first two initiatives.

Number one being maximizing the WD-40 brand through geographic expansion and increased market penetration.

We continue to build the WD-40 foundation with double-digit growth of the WD-40 brand sales in several key international markets, including Asia, China, Australia, northern and eastern Europe, as well as the Middle East region.

While sales in several Euro-based countries declined due to the uncertainty related to the Euro crisis, total sales across our international markets still grew by 5% versus the period a year ago.

In our shareholder letter, we shared that we would be looking at new markets over the next 12 months, and one of them was sub-Sahara African market.

We are researching these opportunities and will update you as we learn more later in the year.

Our second strategic initiative is being the global leader in the WD-40 Company's product categories and platforms.

Even more exciting for us was the sales growth of our multi-purpose maintenance products in the US.

They grew by 6% versus the prior year period.

The US endured several set backs in fiscal 2011, including some lost distribution and reduced promotional activities with some key customers.

Part of the growth in the US is due to our work in creating a platform with the WD-40 Specialist product line.

Our preliminary launch with a key customer went very well and reorders came earlier than expected.

The success has led other key customers to order WD-40 Specialist ahead of the US national launch, which is taking place this month.

The leadership we now bring to the market with the WD-40 Specialist product line has resulted in us gaining back distribution on items previously lost.

We are fulfilling our second strategic initiative, being the global leader in the WD-40 product categories and platforms.

It's important to note that our sales growth of 5% over Q1 last year was driven by these first two strategic initiatives.

The next two strategic initiatives are designed to provide long-term growth for our WD-40 Company.

The third one is to focus on strategic business relationships, primarily acquisitions, joint ventures and strategic partnerships.

While we have not been able to find an acquisition opportunity that meets our criteria, we have been exploring partnerships and licensing arrangements to build product offerings for a new WD-40 Specialist product line.

The US national launch this month will include five products, two of which were developed by our partnership and licensing arrangements.

We're also pursuing long-term fundamental innovation for continued profitable growth of the Company.

There are several other products in the pipeline for the WD-40 Specialist product line, with some being developed internally, where we have the expertise, and others being developed by third parties who are for formulations and/or manufacturing capabilities we can leverage.

Our innovation efforts include researching new business processes, as well as new product platforms, product formulations and technologies.

We'll update you as we make progress.

Last, but definitely not least, under our fifth strategic initiative we continue to attract, develop, retain tribe members to execute our vision.

At a company conference this past October, we had the pleasure of awarding several anniversary pins for 10, 15, 20 and even 25 years service.

While tenure for employees at the US companies averages about four, the average tenure for WD-40 is 10 years.

We are quite proud of that.

Our culture and the investments we make in people not only help with that retainment, but also make it possible for us to attract new talent to execute our vision.

In fiscal year 2011, we expanded our tribe by 18 people, an increase of 6%, primarily in our rapidly growing international markets in China and Europe, as well as key areas, such as research and development.

Further hires are in the progress and plan for this year.

That completes the update on our strategic initiatives, so let's move on to the details of our first quarter results, starting with sales.

All of the growth of the previous period came from our brands in the multi-purpose maintenance products category.

Markets outside the US accounted for 62% of global sales in both periods.

Sales in the multi-purpose maintenance products category accounted for 83% of global sales, compared to 82% in the prior year period.

Our multi-purpose maintenance product sales were up 6% in Q1 compared to the prior fiscal year quarter.

By trade block, the category was up 5% in the Americas, down less than 1% in Europe and up 32% in Asia-Pacific.

While most of the growth was driven by the WD-40 multi-use product, we also generated positive growth from early sales of our new WD-40 specialist product line.

Global WD-40 brand sales grew by 7% in Q1 compared to the prior year fiscal period.

Most of the growth was driven by the Americas and Asia-Pacific.

Sales in the Americas benefited from the higher promotional activity in the US, as well as the additional orders for the WD-40 Specialist product line with a key customer.

Sales in Asia-Pacific benefited from the growth of the multi-purpose maintenance product throughout the distributor markets, including those in Korea and Indonesia and the Philippines.

Sales of WD-40 in China increased 57% period-versus-period, due to the ongoing growth of our business base and higher levels of orders placed by our customers during the promotional programs.

3-IN-ONE sales brand decreased 6% driven by declines in the European direct markets.

However, 3-IN-ONE brand sales grew 9% in the Americas and 45% in Asia-Pacific.

BLUE WORKS sales accounted for less than 1% of global sales in the current quarter.

The sales decline in Europe was attributed to lower orders flowing from strong promotional sales in the fourth quarter fiscal 2011, as well as the uncertain economic conditions which currently exist throughout Europe.

Home care and cleaning products sales continue to represent a smaller portion of our business per our strategic road map.

The category accounted for 17% of global net sales in Q1, compared to 18% in the prior year fiscal period.

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

Total home care and cleaning products sales were down 2% globally in Q1.

By trade block, sales of our home care and cleaning products were flat in the Americas, down 23% in Europe and up 16% in Asia-Pacific.

We are pleased with the relative stability of the platform portfolio sales in the Americas, given that the home care and cleaning product sales have been impacted by competition category declines, lost distribution, reduced product offerings and the volatility of orders from warehouse clubs and mass retail outlets.

The decline in Europe was focused in our UK market and was attributed to lower orders post a strong fourth quarter promotional period and the impact of price increases implemented during Q1.

Let's talk a look at our results by segment.

Let's start with the Americas.

Sales in the Americas increased to $40.6 million in Q1, up $1.4 million or 4% versus Q1 last fiscal year.

The segment accounted for 48% of global sales in both periods.

Multi-purpose maintenance product sales were up 5% in Q1 and home care and cleaning products were flat to prior year fiscal period, primarily driven by the US.

Total sales were up 4% driven by the WD-40 brand, including the WD-40 Specialist product.

Multi-purpose maintenance product sales were up 6% in Q1 and home care and cleaning products were flat.

Within the home care and cleaning products, the 12% decline in automatic toilet bowl cleaners was completely offset a 12% increase in the Solvol [and] Spot Shot brand.

Sales in Latin America decreased 2% in the first quarter with a slight decline attributed to the strong fourth quarter sales and promotional period.

Sales in Canada increased 8% in the first quarter due to higher sales of WD-40 and the 3-IN-ONE brands.

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

Let's go over to Europe.

Sales in Europe decreased to $30.1 million in Q1, down 2% versus Q1 last year.

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

Changes in foreign currency change rates versus period had a favorable impact on sales.

Europe's sales translated at last year's fiscal first quarter exchange rates, or what we term constant currency basis, would have been $29.6 million in the quarter, reflecting a decrease of 4%.

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 a direct sales force in the UK, Italy, France and Iberia, which includes Spain and Portugal.

And the markets we term as the Germanics region, which include Germany, Austria, Denmark, the Netherlands and Switzerland.

Sales in our European direct markets were down 13% in Q1, attributed to lower orders from strong promotional sales in the fourth quarter of fiscal 2011 and the uncertain economic conditions which currently exist throughout Europe.

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

Our distributor markets, in total, were up 18% in Q1, driven by several factors.

First, sales in the distributor markets were positively impacted period-versus-period by successful promotional programs.

Second, many distributors stocked up and placed a higher level of orders in advance of price increases that became effective at the end of Q1.

And third, we continue to see growth of our base business in these markets.

The distributor markets accounted for 43% of Europe's total sales in Q1, compared to 36% in the prior fiscal year period.

Now let's take a look at the Asia-Pacific segment.

Sales in Asia-Pacific region increased to $14.2 million in Q1, or up 30% versus Q1 last year.

The segment accounted for 17% of global sales in Q1 versus 14% in the prior year fiscal period.

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

Asia-Pacific sales, on a constant currency basis, would have been $13.7 million for the first quarter, reflecting a 25% growth.

Sales in Australia increased 16% in Q1 compared to the prior fiscal year period, primarily due to favorable impact of change in foreign currency exchange rates.

On a constant currency basis, sales increased 6% in Q1 compared to the prior fiscal year period.

Sales in Australia benefited from strong economic conditions and the ongoing growth of our base business.

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

Sales in China increased 55% due to the ongoing growth of our base business and higher levels of orders placed by our customers during promotional programs.

Sales in the rest of Asia increased 29% to $7 million in the quarter.

The region benefited from the growth of WD-40 multi-use products throughout the distributor markets, including Indonesia, the Philippines and Korea.

That's it for the sales update.

Now I'll pass it over to Jay who will continue the review of the financials.

Thanks, Garry.

In addition to the information we're presenting on this call, we suggest that you review our Form 10-K, which is being filed today.

I'll continue on with the rest of the financials.

First looking at our 50/30/20 rule, as you may remember, the 50/30/20 rule is a set of financial measures that 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 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 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 10-Q and in our investor presentations.

First a look at our gross margin, or the 50 of our 50/30/20 rule.

Gross margin for the first quarter was 48.7%, compared to the 50.9% in the prior fiscal year period.

The decrease of 220 basis points in gross margin was primarily attributable to the higher cost of raw materials, as well as manufacturing costs, which were partially offset by the positive impacts from price increases.

There were several other factors impacting our margin during the period, including cost related to the transition phase of our North American supply chain project, shifts in sales mix, and higher promotional discounts.

A look at our higher input costs; we experienced a net unfavorable impact of 230 basis points from petroleum-based materials and aerosol can costs in the first quarter.

While oil prices in our petroleum base material cost were slightly lower in the first quarter of the current year compared to the fourth quarter of fiscal 2011, they were still much higher than Q1 of last year.

Higher input costs period-versus-period also reflect the timing of changes in other raw material and manufacturing costs.

While we do not experience any increases in our aerosol can costs during the Q1 of this year, our results reflect can cost increases that began to pass through our supply chain and into our cost of goods during the second quarter of fiscal 2011.

We also experienced higher raw material costs related to our home care and cleaning products, as well as some higher manufacturing costs in some segments beginning in the third quarter of last fiscal year.

These impacts combined negatively to impact our gross margin by 70 basis points compared to the Q1 of last year.

Sales price increases had a favorable impact on gross margin by 220 basis points.

The impact is driven by price increases implemented in the back half of fiscal 2011, as well as price increases implemented during the current quarter.

Further price increases are planned during the current fiscal year and will be implemented country by country to help offset the impact of these increased input costs.

Other impacts on gross margin negatively combined to affect our gross margin by 140 basis points.

These include higher promotional discounts, changes in sales mix and expenses related to the transition phase of the North American supply chain project.

Higher advertising and promotional discounts negatively affected our gross margin by 30 basis points, as a higher percentage of our sales during the current quarter was subject to promotional allowances compared to the prior year quarter.

The timing of advertising, promotion and other discounts, which are recorded as a reduction to sales, may cause fluctuations in gross margin period-to-period.

Changes in sales mix negatively impacted our global gross margin by 50 basis points in the quarter.

As Garry noted earlier, we experienced strong sales growth in our distributor markets, both in Asia, as well as Europe.

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

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

Finally, expenses related to the redesign of our North American supply chain negatively impacted our gross margin by 60 basis points during the quarter.

The activities related to this project started in the first quarter and will continue throughout the remainder of fiscal 2012.

This project includes consolidation of our third party packaging facilities and restructuring of our distribution center network across North America with the goal of improving service delivery to our customers and reducing the overall cost associated with our supply chain network.

Expenses we incurred during the first quarter for this initiative include higher warehousing and handling fees, as well as higher freight cost.

We incurred expenses to ship inventory to our distribution centers and paid higher warehousing fees due to the higher level of inventory we're carrying during the transition.

We expect to incur some additional expenses of this nature over the next few months in advance of the ultimate savings we expect to gain once the new structure is fully implemented and complete.

That completes the discussion on gross margin.

Now let's take a look at the 30, or our cost of doing business.

In the first quarter, cost of doing business was 35% of net sales compared to 34% in Q1 of the prior year.

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

The increase in the cost of doing business percentage in Q1 was primarily attributed to our increased investment in advertising and promotional costs during the quarter.

SG&A expense in Q1 was $22.6 million, versus the $21.6 million in the prior fiscal year quarter.

As a percentage of net sales, it was 26.6% in Q1 versus 26.8% in the prior year quarter.

Excluding the impact from foreign currency exchange rates, the SG&A increase would have been $0.7 million versus $1 million.

The increase in SG&A expense is primarily due to higher employee-related costs of $0.6 million, due to higher staffing levels and annual merit increases.

Freight expense increased by $0.4 million, primarily due to higher fuel costs, higher sales volumes and the higher cost of shipments related to smaller, more frequent orders being placed by our customers.

There was also an increase of $0.2 million in professional services, which was offset by lower travel and meeting expenses, as well as other miscellaneous expenses.

Advertising and sales promotion expense in Q1 increased to $7.8 million compared to the $6.1 million in the prior year period.

As a percentage of sales, our A&P investment increased to 9.2% in Q1 versus the 7.5% last year.

Increase in advertising and sales promotion expenses was primarily due to a higher level of activities in our Americas and Europe segment, impact from changes in foreign currency exchange rates was not material on the A&P expenses.

While we experience a significant level of A&P investment in Q1, we still expect our total advertising and sales promotion expense to be within our guidance range of 6.5% to 8% of net sales by the end of the year.

Amortization of intangible assets was $0.6 million in Q1, compared to $0.2 million in the prior year period.

The increase in amortization is related to our decision to change our 2000 Flushes, Spot Shot and 1001 trade names from indefinite-lived intangible assets to definite-lived intangible assets.

The change was effective February 28, 2011, and the amortization of these trade names began March 1 of 2011.

The prior year quarter only included amortization of Carpet Fresh and [export teamed] trade names, and the customer lists acquired in the 1001 acquisition.

Total operating expenses in the quarter were $31 million versus the $27.9 million in Q1 of the last fiscal year.

Operating income in Q1 was $10.3 million, compared to $13.3 million in the prior year quarter.

EBITDA, the last of our 50/30/20 measures, was 13% of net sales in Q1 compared to 18% in the prior year.

We target EBITDA of 20%, but expect variations from time to time, as sales, advertising and promotional expense and other expenses fluctuate with the timing and the level of our activities.

Our EBITDA percentage is also affected by investments we make in our business.

In the current quarter, we started to make investments in the transition phase of our North America supply chain project, as well as advertising and sales promotional activities to support the launch of our WD-40 Specialist line.

Interest income for both periods was under $0.1 million.

Interest expense in Q1 was $0.2 million, down $0.1 million from the same period last year due to our lower principal balance of our long-term debt.

We made the final principal payment of $10.7 million on our long-term debt in October of this -- in October.

We experienced slight foreign currency exchange losses in the current period, compared to having foreign currency exchange gains in the first quarter of last year.

As a result, other expense in the current fiscal year quarter was $0.2 million, versus $0.2 million of other income in the prior year period.

The provision for income taxes in Q1 was $31.6 million, versus -- excuse me.

31.6% versus 31.5% in the prior fiscal year quarter.

The tax rate was effectively unchanged period-versus-period.

However, the tax rate in Q1 of last fiscal year was primarily driven by a one-time benefit from provision adjustments related to our tax return filings.

While the rate in the current year was driven by a higher percentage of the Company's net income from foreign operations, which are taxed at lower tax rates.

Net income in Q1 was $6.8 million versus $9.1 million in the prior fiscal year quarter.

Changes in foreign currency exchange rates had a favorable impact on net income of $0.2 million.

Our first quarter results on a constant currency basis would have produced net income of $6.6 million.

Diluted earnings per common share were $0.42 in Q1 compared to $0.53 in the prior quarter.

Diluted shares outstanding decreased from 17 million shares to 16.2 million shares.

Regarding the dividend, on December 13 the Board of Directors declared a 7% increase in the quarterly cash dividend, increasing the dividend from $0.27 per share to $0.29 per share.

The dividend will be payable on January 31, 2012, to shareholders of record on January 6, 2012.

And based on today's closing price of $41.08, the annualized dividend yield would be 2.9%.

About our balance sheet; on November 30, 2011, cash and cash equivalents were $66.6 million, up from the $56.4 million at the end of the fiscal 2011.

Net cash provided by operating activities was $12.8 million and was partially offset by the negative impact from changes in foreign currency exchange rates of $2.2 million period-versus-period.

While the net impact of investing and financing activities on cash was less than $0.5 million, there were some notable cash inflows and outflows during the quarter.

Major inflows and outflows are as follows -- $0.8 million in proceeds from the sale of our warehouse facility in Memphis, Tennessee; we invested $0.7 million in capital equipment; we had $32 million of net borrowings from our revolving line of credit and also received $0.9 million in proceeds from the issuance of common stock on the exercise of stock options.

These cash inflows were offset by the following cash outflows -- $18.6 million in share repurchases; dividends paid of $4.3 million; and our final principal payment of $10.7 million, which retired our debt.

Other items to note regarding our balance sheet include inventory and share repurchases.

Our new supply chain structure will result in higher levels of inventory than we've held in the past.

During the quarter, inventory increased by $5.4 million from $17.6 million at the end of fiscal year 2011, to $23 million at the end of Q1.

The increase in inventory is primarily attributable to increased purchases of product from our third party manufacturers in support of our North American supply chain project.

Also contributing to the increase in inventory were purchases to support the launch of our Specialist product line.

While we may experience some additional fluctuations in inventory during the transition phase of our supply chain project, we anticipate inventory to be close to the current levels at the end of the fiscal year.

As for share repurchases, we completed the remaining purchases under the Company's $60 million share buyback plan during Q1.

We repurchased nearly 470,000 shares at a total cost of $18.6 million during the quarter.

On Tuesday, December 13, 2011, the Board of Directors voted to authorize a new share buyback plan, giving the Company authorization to acquire up to $50 million of additional -- $50 million of the Company's additional share -- of the Company's outstanding shares.

The new authorization extends through December 13, 2011 (sic).

The Company's strong financial foundation will enable us to fund operations, invest in opportunities to grow sales and profits, and create long-term returns for our shareholders.

We're supported by consistent cash flows, a strong balance sheet, significant net cash balance and access to additional liquidity if needed.

While we paid off and retired our long-term debt in October, we have additional liquidity available from our $75 million revolving line of credit.

This concludes the financial overview.

As I mentioned earlier, make sure to take a look at our Form 10-Q which we're filing today.

Thanks, and now back to Garry.

Thanks, Jay.

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

We still anticipate fiscal year 2012 will be a great year.

We expect our international markets to continue to grow, and for the sales in the US to gain speed with a national launch of our WD-40 Specialist product line this month.

We also expect to complete the North American supply chain architecture project by the end of the year, which will reduce costs in the supply chain while further improving service to our customers.

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

I'm quite pleased with our tribe for their hard work and initiatives to develop our new market opportunities and to implement this gross margin protection strategies.

The following fiscal 2012 guidance does not include any acquisition activity and assumes foreign currency exchange rates will remain close to recent levels.

We expect our fiscal year net sales results to be in the range of $353 million to $370 million, or growth of between 5% and 10% versus fiscal year 2011.

We project our gross margin will be close to 50%.

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

We expect net income of between $37.2 million and $39.2 million, which would achieve a diluted EPS of $2.28 to $2.40, assuming 16.3 million weighted average shares outstanding.

So, let's recap.

In summary, what did you hear from us in this call today?

You heard we grew global sales by 5% versus the prior year period.

You heard that US sales are on a positive trajectory supported by the WD-40 Specialist product line, as well as increased distribution on our core multi-use products.

You heard sales in our European direct markets were tempered by the Euro crisis, as well as from the impact of our strong fourth quarter promotional period.

You heard that we had double-digit sales growth in our distributor markets.

You heard that we continue to have strong growth in China.

You heard that we begin the implementation of our North American supply chain architecture project, and while we incurred expenses for the initial period during the quarter, we expect it to yield savings in the long-term.

And while inventory increased during the quarter due to this initiative and may continue to increase during the implementation period, we expect inventory to be close to the current levels by the end of the fiscal year.

You heard that our gross margin was below our target of 50%, partly due to expenses associated with the supply project and also due to the heavy sales mix in the quarter of our distributor markets.

You heard that further price increases will be implemented during the fiscal year to offset higher raw material and manufacturing costs.

You heard that we continue to make progress in our strategic initiatives, particularly geographic expansion, being a leader in the multi-purpose maintenance products category and driving long-term innovation to support our profitable growth.

You heard that we shipped the first three products of the WD-40 Specialist product line to a key customer in Q1 with early success and with the US national launch this month.

You heard that we invested in new tribe members, research and development, advertising and promotional investments to support the product launches and international growth.

You heard that we completed our previous $60 million share buyback plan and recently received Board approval for another $50 million share buyback plan.

You heard that we're sharing our success with the shareholders by the increasing of our regular quarterly dividend by 7% to $0.29 per share.

You heard that we are maintaining our guidance that we anticipated for 2012.

You heard that these are really very exciting times at WD-40 Company.

In closing, I would like to share with you, as I often do, a quote.

If a window of opportunity appears, don't pull down the shades.

And that was from Tom Peters.

Thank you for joining us today.

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

Ladies and gentlemen, a question-and-answer session will be conducted electronically.

(Operator Instructions) From Janney Capital Markets, your first question will come from Liam Burke.

Garry, you had high as a percent of sales, high advertising and promotion.

You also had promotion expense in the gross margin line.

Is there a particular product launch or is it related to the Specialist brand that created both the pressure on margins and the higher promotion?

On the advertising promotional line in the P&L, it was the majority of it was the WD-40 brand and the WD-40 Specialist brand launch activities.

Jay, in the reduction in the --

In the gross margin line, a lot of that was driven by the home care and cleaning products segment, so there were timing of our promotional around that product line.

Okay.

And Liam, our A&P expenses were over 9% for the quarter, which is above our annual guidance run rate.

But we expect it to be back in line with that as we move through the year.

Well, you've always said that from quarter-to-quarter they may come out of line just based on individual products.

Yes.

I'm not dumb enough to run our business by quarter-to-quarter.

Okay.

If I'm looking at the Specialist launch, you're pretty excited about it, how does that compare to the BLUE WORKS that had been put out a couple of years ago?

Completely different execution, Liam.

The difference primarily is we're shipping Specialist on to retail shelves.

So, we were extremely pleased with the takeoff of the product from the shelf.

You never really know even the amount of research we do.

You never really know how a consumer will react to a new product.

And that's why we kind of piloted the launch.

And movement was above our expectation.

So, we will now be shipping, this month, Specialist into a number of customers who have been on our wait list and we'll also be shipping Specialist now into the UK, Germany and France later in this quarter.

So, we're delighted with Specialist thus far.

Okay.

And then, Jay, you added $32 million in debt.

You sort of went through the uses of the dividend payments, repurchases and then the payment of the last slug of the original debt you had.

If you looked at the cash on hand and then you generated about $12 million before that, what was the need to add to raise your debt again?

Well, some of our cash on hand is -- a large majority of our cash on hand is off shore.

So, as we look to just facilitate the ease of transaction of the transactions that you highlighted, which is really the pay down of debt of $10 million, as well as another $18 million of share repurchase, essentially that's what we use that $30 million for.

Great.

Thank you.

Thanks.

Jay, on the share repurchase program, you mentioned -- we gave a date there.

Yes.

Yes.

I had indicated that the new share repurchase plan was through December 15, 2011.

It was really through December 13, 2013.

All right.

And we'll take our next question from Joe Altobello from Oppenheimer.

Hi, this is Kristina in for Joe.

Hi.

I was wondering if you could tell me a little bit more in detail about what you're expecting for commodity cost this year.

Jay.

Well, I think that if we talk about where -- how we look at commodity costs, and we talked about with respect to commodity cost oil, petroleum based, we see it in the kind of current band that we've experienced or that we've had which says from the 85 to 100 as we're kind of expecting costs in that range.

If we look at our cost of cans, which is another big factor, we see a little lift in that as we get through the year.

You'll notice that US can manufacturers have announced about a 5% can increase.

We're trying to do a little bit better than that, and we've also seen can decrease opportunities in our international market.

So, we see something in the neighborhood of 2%, 2% to 3% maybe of impact of can costs.

Great.

Thank you so much.

Thank you.

Next we'll go to Eric Hollowaty with Stephens Incorporated.

Good day.

On the Specialist launch, glad to hear it's going well, is it reasonable to assume that there is going to be some risk of unit cannibalization at retail from the sale of this product given it's targeted towards the retail consumer?

And if so, is that a cannibalization of the type that we should welcome?

Well, two things there.

Early indications in our early research was that we would see very little cannibalization of our multi-use product.

Yes.

That's why it's called WD-40 Specialist.

There are products out there now that are performing some of these functions.

But we're also introducing a number of new products that are really new category areas.

One in particular is a long-term corrosion inhibitor that is being shipped at the moment.

The others are in the area of rust prevention.

So, the Specialist is a platform.

So, our early research told us we would see very little cannibalization.

And then in our pilot that we've just been through for the last four months, we've been tracking unit movement of the multi-use product against the Specialist product, and that played out to also be true, but it's early day.

Now, if we do get cannibalization, we will be okay with it because Specialist has a margin that's equal to or better than our multi-use product over time.

So, I think the other area we may well see some expansion of WD-40 because we are -- we now have a much bigger footprint in our customer's -- on our customer's shelves than ever before.

On our Web site, we list Lowe's as being one of the customers that are stocking our product.

If you were to go into a Lowe's store now, and you'll see this duplicated in a lot of stores as we roll out, our footprint of brand dominance is much, much more visible.

And we think that has had a lot to do with supporting of the multi-purpose brand as well.

That's great.

Thanks for that color, Garry.

Regarding price increases, also, I think you guys said you saw 220 basis points improvement to gross margin from price increases specifically in the quarter.

Is there a way to give us a sense of what inning you're in, in terms of implementing that?

How should we think about how much left there is to go this fiscal year on implementation on those increases?

Well, there are two.

There is one.

The flow through of increases that have already been implemented that were light in Q4.

So, there is still more to come from that.

And then, we're still looking at, as Jay mentioned in the call, other increases that have yet to be announced that may well be announced depending on how the year turns out with commodity pricing.

But be under no misunderstanding, we understand completely the importance of getting our gross margin back to over 50%.

A lot of the work we're doing on the supply chain architecture is around that.

We anticipate that there are seven figure savings in supply chain costs from this architecture project.

It'll take a little while to come.

Hopefully we'll get positive flow through from it or it won't just be eaten up by commodities.

But we know what good gross margin brings to this business, and it is an absolute focus for us.

Great.

Thanks so much, Garry.

Good luck, guys.

Thank you.

From JPMorgan, we'll hear from Jeff Zekauskas.

Okay.

Good.

It's nice to hear your voice likewise.

A few things.

Your Asian sales were pretty strong in the quarter and Europe was flat.

Yes.

If you read the newspapers, it sounds like Asia is going to continue to be strong, though.

Maybe a little bit less so.

And Europe is likely to weaken further from an economic point of view.

So, do you think you can sustain that level of growth in your Asian business and are you expecting some further weakness in Europe in the coming quarter?

Jeff, firstly as far as Europe is concerned, we expect to grow Europe this year.

We expect it to grow for a couple of reasons.

One, the continued development of our multi-use product.

We did have -- we are seeing some choppiness because of the Europe economic conditions, but we still have growth in areas of eastern Europe and Russia which are not as necessarily impacted so much as the Euro zone countries.

We also expect to see growth in Europe in the full year because of our introduction of Specialist product.

So, even though we had -- the first quarter in a long time that we didn't grow in Europe, we expect to see growth in the second quarter and through the full year.

So, we see Europe as a bit of bad weather, not necessarily a change in climate.

As far as Asia is concerned, we're excited about China and continue to be.

Our business in China has grown from a couple of million five years ago to just over $10 million or $12 million last year.

We're getting -- even if China starts to throttle back a little bit, there are so many new uses for WD-40 over there that don't know us yet.

We have nearly 50 people on the ground in China now.

Every day a new user is introduced to our brand.

Our management team and leadership team now embedded in well.

We have good sales execution.

We have now just completed some very robust market research that is going to help us -- that will help us better focus our execution.

So, we're very excited that we've got a new market that we've done there as well.

We also expect to see our distributor markets in Asia continue to grow.

Markets like Indonesia and then also into India where we've been developing.

So I think, Jeff, it's Asia-Pacific's time to be the growth vehicle for us.

On top of that, I think that back on the growth track in the US with Specialist and I think Europe now being the size it is and a meaningful market will continue to grow.

May not grow at the double digit rates year-on-year that we've seen in the past, but it's certainly there.

So, I think this is a special time.

Okay.

In terms of the Specialist product line, are there five products?

Is it a penetrate, a silicone, a white lithium, a rust preventer and a corrosion inhibitor.

Are those the five?

The current product range is five.

There is a white lithium, a silicon, a penetrate, a corrosion inhibitor and then a rust soak.

A product that you soak -- it comes in a 4-liter bottle.

You put rusty parts in it and it just eats the rust off.

Okay.

Now, that's just the beginning.

We have a number of other products on the drawing board.

Okay.

And a question for Jay.

Thank you for publishing the 10-Q before the conference call.

It's really -- it's nice to see the extra detail.

Jeff, you're welcome.

Thank you.

There was two items in the Q.

The first was an other cost item that was separate from raw materials in the European operation.

Can you describe what happened there?

We saw some additional manufacturing cost increases come through from some of our suppliers.

We've had a variety of long-term relationships that we press hard, they press hard, we press hard, they press hard and we ended up having some additional costs that we were part and parcel to our suppliers that we have agreed to.

Okay.

And then I notice you don't seem to be disclosing your Wal-Mart sales anymore.

What is the reason for that?

Well, they've really fallen below the level of where we would have been required to disclose them because of the nature -- at one point in time, they were a very significant customer, not that they're not today.

But as far as their level of sales were, I think combined over 10%.

As we've continued to grow throughout our international business and we've seen the overall impact of Wal-Mart has become less and less.

So, what's the threshold at which you have to disclose?

10%.

All right.

Maybe what I can do is I can follow up on that.

And then, lastly, what magnitude of price -- is this an across the board price increase that you have in WD-40 in the United States, or is it also in Europe or in Asia and sort of what is the magnitude of it?

We haven't raised our prices on WD-40 in the United States.

Most in the last quarter.

I think the last price rise for WD-40 in the US was November of last year.

So, that would be flowing through.

And I think it was in the range of 5% ballpark.

But we are looking at and have implemented price rises in all markets around the world.

It's just the timing of them changes due to either contractual arrangements that we have with customers, buying periods, different events that happened that chooses to pick different dates.

So, we don't do it everywhere at the same amount at the same time.

Okay.

Thank you very much.

Thanks, Jeff.

(Operator Instructions) It appears all questions have been answered.

At this time I would like to turn the conference back over to Garry Ridge for any additional or concluding remarks.

Okay.

Thank you.

We thank you for joining us on the call today.

We invite you to, wherever you are, seek out some of our new Specialist product line and we will be back with you again at the end of the second quarter which will be on April 5.

Thank you and good afternoon.

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

We do thank everyone for your participation.