WD-40 Co (WDFC) 2014 Q3 法說會逐字稿

Good day and welcome to the WD-40 Company Third Quarter FY14 Earnings Conference Call.

Today's call is being recorded.

At this time, all participants are in a listen-only mode.

At the end of the prepared remarks, we will conduct a question-and-answer session.

(Operator Instructions)

I would now like to turn the presentation over to the host for today's call, Ms. Wendy Kelley, Director of Investor Relations and Corporate Communications.

Please proceed.

Thank you.

Good afternoon and thanks to everyone for joining us today.

My name is Wendy Kelley, and I'm very happy to be here today as one of WD-40 Company's newest tribe members.

I look forward to interacting with many of you in my role as Director of Investor Relations and Corporate Communications.

On the call today are WD-40 Company's President and Chief Executive Officer Garry Ridge, and Vice President and Chief Financial Officer Jay Rembolt.

Following their prepared remarks, the operator will come back on the line for the Q&A portion of the call.

Before we get started, let me remind you that our earnings press release and current quarter corporate presentation are available on our Investor Relations website at www.Investor.

WD40Company.com.

A replay of today's webcast will also be made available at that location shortly after this call.

As a reminder, today's call includes forward-looking statements about our expectations for the Company's future performance.

Of course, actual results could vary materially.

The Company's expectations, beliefs, and projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished.

Please refer to the risk factors detailed in our SEC filings for further discussion.

Finally, for anyone listening to a taped or webcast replay, or reviewing a written transcript of this call, please note that all the information presented is current only as of today's date, July 9, 2014.

The Company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future events, or otherwise.

With that, I'd now like to turn the call over to Garry.

Good day.

Thanks Wendy, and thanks for joining us on today's conference call.

Today we reported net sales of $95.7 million for the third quarter of FY14, an increase of 3% over last year, and the highest revenue quarter in our Company history.

Year to date, net sales were $285.4 million, an increase of 4% over the prior year.

Net income for the third quarter was $10.4 million, compared to $10.3 million last year.

Diluted earnings per share for the third quarter was $0.69, compared to $0.66 last year.

Year to date, net income was $32.2 million, an increase of 2% over the prior year period; and year-to-date diluted earnings per share were $2.10, up 4% from $2.01 in the prior fiscal year.

Before we focus on the sales results, let's take a moment to review the progress we've made towards our strategic initiatives.

Strategic initiative number one is to grow WD-40 Multi-Use Product.

Our goal under this first initiative is to take the WD-40 Multi-Use Product to more places for more people with more uses.

In line with this initiative, sales of WD-40 Multi-Use Product increased 3% in the third quarter compared to last year.

We grew Multi-Use Product sales 14% in the EMEA segment, and 11% in our Asia-Pacific segment.

Multi-Use Product sales decreased 8% in the Americas segment, primarily due to lower sales activity in Canada and the US.

Sales of our Multi-Use Product were down by 9% in the US and [17%] in Canada.

I'll discuss the drivers of these changes in sales when I review the segment results later.

Strategic driver number two is to grow the WD-40 Specialist product line.

Our goal under this initiative is to leverage the power of the shield to develop new products and categories with their identified geographies and platforms.

The WD-40 Specialist product line continued to perform well, with greater than double-digit growth across all three segments, and with a global growth rate of 27% over the prior year third quarter.

We continue to work on new formulations and delivery systems for future WD-40 Specialist products.

We see WD-40 Specialist as a sustainable revenue and earnings growth engine for many years to come.

Strategic driver number three is to broaden our product and revenue base.

Our goal under this initiative is to leverage the strengths within our Company to derive revenues from new sources outside our flagship WD-40 brand.

We continue to make excellent progress with the new SKUs we launched earlier this year under our 3-IN-ONE brand.

We have been promoting the new products throughout many trade shows, sponsorships, media coverage, and print and media online.

Strategic driver number four is to attract, develop, and retain outstanding tribe members.

We welcomed 10 new tribe members during the third quarter, and 36 year to date.

During the quarter, we conducted our biannual employee engagement survey, and we are delighted with the results.

Our employee engagement score is a reflection of our tribe's dedication to the Company, and is the envy of many organizations at 93.7%.

I would like to share details from a couple of the questions we asked in our survey.

97.6% of our global tribe members answered the question they love to tell people they work at WD-40 Company; and 99.7% of our global tribe members told us they understand how their job contributes to achieving WD-40 Company's goals.

When I see results like these, it's clear to me why our tribe consistently excels at achieving what we have set out to accomplish.

It's so true that it's all about our people.

In addition, our organization was recently recognized for the fourth consecutive year by World Blue as one of the most democratic workplaces for high levels of innovation, accountability, and transparency.

Finally, we conducted our third year of our leadership lab in June.

This program was developed in support of our bench-building initiatives, and to assist the next generation of leaders within the organization to develop talents and skills for both professional growth and the Company's performance.

To all our tribe members listening to us all around the world today, thank you for your commitment to our values.

Strategic driver number five is operational excellence.

This initiative includes continuous improvement of optimizing resources, systems, and processes in order to help offset rising costs and protect our gross margin.

Operational excellence is also important to meet the ever-increasing customer and regulatory requirements.

During the third quarter, we completed our initial transition of a major upgrade of our ERP system in EMEA.

The operational enhancements associated with this upgraded ERP system are expected to significantly improve back-office operations within the segment.

We also continue to make progress on the new global human resource information system, which we expect to go live by the end of this fiscal year.

That completes the update on strategic drivers, so let's move on to the details of the third quarter year-to-date results, starting with sales.

Sales in the multi-purpose maintenance product category accounted for 89% of our global sales in the third quarter, with the category sales up 3% in the third quarter, and up 6% year to date.

Products under this category include the brands of WD-40 and 3-IN-ONE, as well as sales of the WD-40 Bike product line.

By trading bloc, sales of multi-purpose maintenance products in the third quarter were down 7% in the Americas, up 13% in EMEA, and up 11% in Asia-Pacific, compared to the prior-year period.

Year-to-date sales of multi-purpose maintenance products are up 3% in the Americas, up 11% in EMEA, and down 2% in Asia-Pacific.

Home care and cleaning products category accounted for 11% of global net sales in the third quarter, with sales down just 1% in the third quarter, and are down 8% year to date.

Brands under this category include Spot Shot, 2000 Flushes, Carpet Fresh, and No Vac, 1001, X-14, and Lava and Solvol.

By trading bloc, sales of home care and cleaning products in the third quarter were up 1% in the Americas, down 9% in EMEA, and down 1% in Asia-Pacific.

Year-to-date sales of our home care and cleaning products were down 10% in the Americas, down 5% in EMEA, and down 5% in Asia-Pacific.

Now on to our results by segment, starting with the Americas.

Sales in the Americas segment decreased 5% in the quarter, but were up 1% year to date.

The segment accounted for 47% of global sales in the third quarter, as compared to 51% in the prior year.

Total US sales were down 5% in the quarter, and up 2% year to date.

Multi-purpose maintenance product sales in the US decreased 7% in the third quarter.

This was primarily due to timing of promotional activities.

Home care and cleaning product sales in the US increased 4% in the third quarter, driven by increased sales of 2000 Flushes and Spot Shot, which each increased by 5%.

Year to date, home care and cleaning product sales declined 8%.

As a reminder, home care and cleaning products, particularly those in the US, are considered harvest brands that continue to generate positive cash flows, but are becoming a smaller part of the business, as net sales of multi-purpose maintenance products grow through the execution of our strategic initiatives.

Sales in Latin America were up 3% in the third quarter and are up 7% year to date, driven by the higher Multi-Use Product sales throughout the region.

Now to Canada.

Sales in Canada decreased 22% in the third quarter, and 17% year to date.

These declines are primarily due to some unusual short-term factors that negatively impacted sales, including Canada encountering the coldest winter in 35 years, as well as some challenges to distribution in the mass retail channels.

Let's now go over the ocean and visit EMEA segment, which includes Europe, the Middle East, and Africa.

Sales in the EMEA segment were up 12% in the third quarter, and are up 10% year to date.

These sales increases in the third quarter were primarily driven by favorable impact of changes in foreign currency exchange rates.

In order to remove these foreign currency impacts on sales, we also calculate sales on a constant-currency basis.

This means that we calculate sales for the current period using the exchange rates that were in effect for the corresponding period of the prior fiscal year.

On a constant-currency basis, sales in the EMEA segment would have increased 2% in the third quarter, and are up 6% year to date.

This segment accounted for 38% of global sales in the third quarter, compared to 35% in the prior-year quarter.

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

Sales in our EMEA direct market were up 13% in the third quarter and are up 6% year to date.

The sales growth in both periods was primarily due to the favorable impact of foreign currency exchange rates.

In local currencies, sales in the direct markets increased 3% in the third quarter due to increased sales of the WD-40 Specialist product line, stemming from new distribution and the continued growth also of the WD-40 Multi-Use Product.

The direct markets accounted for 59% of EMEA's total sales in the third quarter, which is essentially flat compared to the prior-year period.

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

Our distributor markets in total were up 11% in the third quarter, and are up 16% year to date.

The sales growth in the third quarter was primarily due to the favorable impact of changes in foreign currency exchange rates.

In local currency sales, the distributor markets increased 1% for the third quarter.

The distributor markets accounted for 41% of EMEA's total sales in the third quarter, which was essentially flat compared to the prior-year period.

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

Sales in the Asia-Pacific segment were up 10% in the third quarter, and down 2% in the year to date.

Changes in foreign currency exchange rates this time had an unfavorable impact on sales in the third quarter and year to date.

On a constant- currency basis, sales in the Asia-Pacific segment were up 13% in the third quarter and 2% year to date.

The segment accounted for 15% of global sales in the third quarter, and 14% year to date.

Sales in Australia decreased 7% in the third quarter and were down 3% year to date.

Although reported sales decreased period to period, sales increased on a constant-currency basis due to the ongoing growth of our base business.

Sales in China increased 24% in the third quarter and 7% year to date.

The sales increase in the third quarter was attributed to the continued increase in promotional activity.

We continue to focus on the long-term opportunities in China, but we expect to experience a lot of volatility on the way, due to the timing of promotional programs, the building of ongoing distribution, and shifting economic patterns and varying industrial activities.

Sales throughout the rest of Asia increased 17% in the third quarter, and are down 6% year to date.

The increased sales in the third quarter were primarily driven by the backlog of customer orders at the end of the second quarter that we were able to ship early in the third quarter.

Year to date sales in this region have been negatively impacted this year during the transition period of our marketing distributor in Indonesia.

That's it for the sales update.

I'm going to take a break and I'm going to hand over to Jay, who will review the financials.

Garry, thank you.

In addition to the information presented on the call, we suggest that you review our Form 10-Q for the period ended May 31, which we will file tomorrow.

First, let's review our 50/30/20 rule.

Those are the measures we use to guide our business.

As you may recall, 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 for that is 30% or less.

Finally the 20, which 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%.

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 presentation.

Now let's look at the gross margin, or the 50 in our 50/30/20 rule.

Gross margin in the third quarter was essentially flat, coming in a 51.4%, compared to 51.3% in the prior year.

The slight increase of 10 basis points in gross margin was driven by lower input cost, as well as the impact of price increases and lower promotional discounts.

These positive impacts were partially offset by unfavorable impacts from foreign currency exchange rates and increased warehousing and transportation costs.

Our cost of products sold, looking at our input costs, we experienced a favorable impact of 110 basis points from our major input cost changes.

This was driven by changes in the cost of petroleum-based materials, along with the lower cost of cans in our EMEA and Americas segments.

Changes in other input costs negatively impacted gross margin by 10 basis points.

We consider and implement price increases on a country-by-country basis to help offset the impact from input cost increases.

Period over period, our gross margin improved by 30 basis points as a result of price increases implemented over the past 12 months in both EMEA and Asia-Pacific regions.

We also saw gross margin improvement of 30 basis points, driven by our reduced advertising and promotional discounts, primarily associated with our home care and cleaning products in the Americas.

The cost of promotional activities, such as sales incentives, trade promotions, and cash discounts that we give to our customers, are recorded as a reduction to sales.

The timing and magnitude of these may cause fluctuations in our gross margin period to period.

Changes in foreign currency exchange rates within our EMEA segment negatively impacted our gross margin by 70 basis points.

In EMEA, our cost of goods are sourced in pounds sterling, while revenues are generated in sterling, euros, and the US dollar.

The value of the euro and the US dollar both deteriorated versus the pound sterling.

This caused revenue sourced in those currencies to be worth less in pounds sterling, thus resulting in a decrease in the gross margin.

A look at our warehousing and transportation costs, primarily within our Americas segment, had a negative impact on our gross margin of 50 basis points.

This was driven in part by a specific promotion in the US that started in the third quarter and will continue into the fourth quarter.

That promotion includes a display configuration that has higher storage and transportation costs.

In addition, transportation costs were also increased, due to higher fees associated with transportation disruptions caused by adverse weather conditions during the quarter.

Other impacts to gross margin for the quarter includes sales mix and all other miscellaneous items.

Combined, these factors had an unfavorable impact of 30 basis points.

The themes discussed for the quarter gross margin are similar to those for the year-to-date results.

Gross margin year to date was 51.6%, compared to 50.8% in the prior year.

The increase of 80 basis points in gross margin was primarily attributable to the lower input costs, along with the impact of price increases and lower promotional discounts.

Again, these items were partially offset by the unfavorable impacts of warehouse and transportation costs, foreign currency exchange rate impacts, and unfavorable sales mix.

That concludes the gross margin discussion.

Now on to the 30, or our cost of doing business.

In both the third quarter of this fiscal year and last year, the cost of doing business remained at 34%.

Year to date, the cost of doing business was 34% this fiscal year, up slightly from the 33% last year.

While our goal is to have our cost of doing business at or below 30% of net sales, that percentage may fluctuate due to changes in the timing of sales, the timing of expenses, as well as investments we elect to make for our future.

Year to date, 71% of our cost of doing business came from three areas: 39% related to people costs, or the investments we make in our tribe; 19% from our investments in marketing, advertising, and promotion; and 13% in freight cost, the cost to get our product to our customers.

Now more details on our SG&A expenses.

In the third quarter, SG&A expense increased 5% to $26.9 million.

As a percentage of net sales, SG&A expense was 28.1% in the third quarter, compared to 27.6% in the prior year.

The increase in SG&A was primarily driven by higher professional service costs, increased freight costs, and the impacts from foreign currency exchange rate fluctuations.

Professional service costs increased by $0.8 million, due to legal fees associated with certain litigation matters, along with various regulatory compliance items, and additional investments we have made to protect our intellectual property.

When you are in 188 countries around the world, all with unique and different laws, intellectual property protection can become a bit challenging.

Brand protection is always a high priority, and an investment that the Company will continue to make in order to safeguard one of its most valuable assets, the blue and yellow can with the little red top.

Also contributing to the higher professional service fees during the quarter were some general consulting service costs associated with bringing on line a new third-party contract manufacturer, and operational support for the system upgrade, both occurring in EMEA.

Freight expense was up $0.3 million versus the prior period, due to higher sales volumes and the shift in the size of customer shipments.

In our third quarter last year, we had a higher volume of large shipments compared to this year.

We gain efficiencies and realize savings when we can ship larger-volume orders.

Finally, changes in foreign currency exchange rates had an unfavorable impact period to period, increasing our SG&A costs by about $0.6 million.

These increases were partially offset by a $0.8 million decline in employee-related costs, primarily associated with lower bonus expense compared to the prior year.

Year to date, SG&A was $80.2 million, versus $74.9 million last year.

As a percentage of net sales, SG&A was 28.1% year to date, compared to 27.2% in the prior-year period.

The year-to-date increase in SG&A was primarily driven by increased employee-related expenses, higher professional service costs, increased freight, a higher level of travel and entertainment expenses, and the negative impact from foreign currency.

Advertising and sales promotions decreased 3% in the third quarter to $6.5 million compared to the prior year.

As a percent of sales, A&P investment was 6.8% in the third quarter, compared to 7.1% in the prior year.

The decrease in advertising and sales promotional expense was primarily associated with a lower level of promotional programs in the Americas.

The lower advertising and sales promotion expense in the Americas was significantly offset by increased expenses in EMEA and Asia-Pacific, due to the increase promotional activities in both these regions.

Year to date, advertising and sales expense was essentially flat at $18.1 million, compared to $18 million in the prior year.

Advertising and sales promotion expense as a percent of sales decreased to 6.3%, from 6.5%.

The slight change in advertising and sales promotion expense year to date was primarily due to the higher level of promotional activities in EMEA.

As a reminder, it is common for advertising and sales promotion expense to fluctuate period to period, based on the type of marketing activity or the promotion we employ within any given period.

Amortization of our intangible assets increased to $0.7 million in the third quarter, compared to $0.5 million in the prior-year period.

Year to date, amortization was $1.9 million, compared to $1.5 million last year.

The increase in amortization is primarily due to the change in the remaining useful life of the 2000 Flushes trade name, which was made in Q3 of last year.

Total operating expenses in the current-year quarter were $34 million, versus $32.8 million last year, and operating income in the third quarter was $15.1 million, compared to $15 million last year.

Year to date, total operating expenses were $100.2 million, versus $94.4 million last year.

Operating income year to date was $47.1 million, up from the $45.3 million last year.

EBITDA, the last of our 50/30/20 measures, was 17% of net sales in both the current and prior-year quarter.

Year to date, EBITDA was 18% of net sales in both the current and prior-year period.

We target EBITDA at 20% of net sales, but expect variations from time to time as sales, A&P investment, and other expenses fluctuate.

Our EBITDA percentage again is also affected by investments we make for future growth.

Our interest income and interest expense remained constant in the third quarter as compared to the prior fiscal year period.

Net interest expense increased to $0.3 million year to date as a result of our increased borrowings on our line of credit.

Other net expense remained constant in the third quarter, but increased $0.9 million year to date.

The change was primarily due to the fluctuations in exchange rates for the pound sterling against the euro and the US dollar.

We recorded foreign currency exchange losses of $0.4 million in the current year, compared to foreign currency exchange gains of $0.5 million last year.

The provision for income taxes in the third quarter was $30.4 million, versus $30.6 million in the prior year.

The slight decrease in rate was driven by an increase in the domestic production deduction in the current-year quarter.

Year to date, the provision for net income taxes was 30.6% in both the current and prior-year periods.

Net income in the third quarter was $10.4 million, versus $10.3 million in the prior-year quarter.

Changes in foreign currency exchange rates favorably impacted the translation of our results by $0.3 million.

Our third-quarter results translated at last year's exchange rates, or what we would term constant currency basis, would have produced net income of $10.1 million, versus the $10.4 million this year.

Diluted earnings per common share were $0.69 in the third quarter, compared to $0.66 in the prior fiscal quarter.

Diluted shares outstanding decreased from 15.6 million shares to 15.1 million shares.

Year to date, net income was $32.2 million, versus $31.7 million in the prior year.

Changes in foreign currency exchange rates did not have a material effect on the translation of our results year over year.

Diluted earnings per common share were $2.10 year to date, compared to $2.01 in the prior fiscal year period, with diluted shares outstanding decreasing from 15.7 million to 15.2 million shares this year.

A look at our balance sheet at May 31.

Our balance sheet continues to remain solid, as our cash and term deposits exceed our debt.

As of May 31, our cash and cash equivalents were $44.9 million, and we had $45.4 million in short-term investments, which consist of term deposits and callable time deposits held at money center banks.

The current portion of debt under our existing line of credit was $83 million, up from the $73 million in the second quarter of this year.

The $10-million increase in the line of credit balance during the third quarter was primarily used for share repurchase activity.

A word about our capital allocation.

We continue to focus on returning capital to shareholders through regular dividends and share repurchases.

Regarding the dividend on June 24, the Board of Directors declared a quarterly cash dividend of $0.34 per share, payable July 31, 2014, to stockholders of record at the close of business on July 11, 2014.

Based on today's closing price of $76.11, the annualized dividend yield would be 1.8%.

As for our share repurchases, we acquired approximately 111,000 shares of our stock at a total cost of a $8.2 million during the third quarter.

These shares were acquired under our latest share repurchase plan approved by the Board of Directors in June of 2013.

It provides authorization to acquire up to $60 million of the Company's outstanding shares through the plans end date of August 2015.

To date, we have repurchased approximately 474,000 shares, at a total cost of $33.2 million under this share repurchase plan.

We continue to expect to be executing on this program throughout the remainder of the year.

That includes a financial overview.

More information will be available on Form 10-Q which we will file tomorrow.

Thanks so much, and now back to Garry.

Thank you, Jay.

We remain cautiously optimistic about several macroeconomic factors.

We expect to see continued growth driven by our strategic initiatives, which should help drive a solid end to this fiscal year.

We hope that we will continue to see relatively stable input costs, and that our efforts to improve operations and sourcing will continue to benefit our gross margin and operating results.

Given this outlook and the proximity to the year end, we have upgraded our guidance from that we shared with you in April.

The following fiscal year 2014 guidance does not include any acquisitions or divestitures, and assumes that the foreign currency exchange rate will remain close to their recent levels.

For the year, we expect our fiscal year net sales results to be in the range of $380 million to $387 million, or a growth of between 3% and 5%.

We now project our gross margin to be close to 51.5%.

We expect our global advertising and promotional investment to be in the range of 6% and 7% of net sales.

We therefore expect net income of between $41 million and $43 million, which will achieve a diluted EPS of between $2.70 and $2.83, assuming 15.2 million weighted average shares outstanding.

In summary, what did you hear from us today?

You heard we increased sales by 3% in the third quarter.

You heard that consistent with our strategic initiative, we saw double-digit growth of sales of our WD-40 Specialist product line within all three of our trading blocs.

You heard that we grew gross margin by 10 basis points.

You heard that we grew diluted earnings per share to $0.69, and returned capital to shareholders through the purchase of approximately 111,000 shares at a cost of a $8.2 million, and you heard that our outlook is cautiously optimistic, and then that we're updating our full-year guidance.

In closing, as I do, I'd like to share a quote with you, this time from Walter Bowie -- the mightiest works have been accomplished by men who have kept their ability to dream great dreams.

Thank you for joining us today.

We will be pleased to now open the conference call to any questions.

(Operator Instructions)

Liam Burke.

Garry, you talked about timing of promotional activity in the Americas and how it effected third-quarter sales, and then Jay alluded to the additional inventory carry on these -- related to these promotions.

Are these in traditional WD-40 brands, or are they in Specialist, or are they both?

The majority of them, Liam, would be in traditional WD-40 brand of the Multi-Use Product.

We're seeing that promotional activity spread over both the third and the fourth quarter.

More so --

Okay, and -- I'm sorry.

More so in the fourth than in the third.

Okay.

You mentioned an ERP implementation in Asia-Pacific.

Do you anticipate any kind of expense lag or any kind of operational setbacks there?

It was actually in EMEA, Liam.

I'm sorry, EMEA.

It's the -- it was the planned first stage of the execution of the new ERP system that we've been working on there for a couple of years now.

We're phasing in the actual implementation.

We are in Phase I, it went as planned.

No, we don't expect any additional material cost from that.

It will take us about nine months to have it completely embedded, but so far so good.

Thank you.

Jay, on the cash flow statement it was down year over year on the working capital line -- specifically, current liabilities.

Is there anything unusual in there, or is it just timing?

It's really just timing.

We would expect to see it normalize kind of at our average.

Okay, great.

Thank you.

Thank you.

Linda Bolton Weiser, B. Riley.

Hi.

I'm sorry if you explained this with the last question, but I'm not sure I understand about the promotional activity in the Americas; because on the one hand you said that displays or transporting them or something hurt your gross margin, and yet there was no promotional activity that really drove your sales.

I'm a little confused about that.

Do you expect that sales up-tick to happen next quarter as a result of that cost to have those promotions, or can you explain a little bit more?

Linda, yes, the answer is yes.

What Jay was speaking about was the transport and warehousing activities to get the product into our distribution centers, not the transport and warehouse activities to get it to our customers.

Also, some of the product that we're building there has a higher cost because of the display configurations that we have, some of which expenses are expensed earlier than later.

Yes, we would expect that, as in line with our guidance, we would have a reasonably solid fourth-quarter, particularly in the US.

Great, thank you.

Then can you just explain a little bit more about Canada?

Can you clarify, did you say Canada MP sales were down 78% in the quarter?

Is that correct?

No, no.

I think it was 17%.

Oh, 17%, okay.

So Canada is about, I don't know, $16 million a year, or $4 million a quarter of sales.

I guess I'm just wondering, so if it was down 17% in the quarter, that's not a huge variance on sales because of Canada.

It affected the quarter but not in a large way?

Yes, it's event driven.

Canada just had the worst winter in 35 years.

Without pushing the random excuse generator and blaming weather, that did cause some distribution issues and people weren't just going to stores.

In fact in the quarter it was down 22%, and down 17% year-to-date.

The other thing that impacted us in Canada, and this is been out there for some time now -- in the retail trade channel we did a voluntary recall of our Smart Straw delivery system due to some regulations in Canada.

That happened earlier on this year.

We are missing the sales of Smart Straw in the retail channel.

We're still selling it through the industrial trade channel, so it will take us a little time to lap that.

That's really the two main impacts that happened in Canada.

Okay, great.

Then if I look at your change in the guidance for the year with the raising of the EPS guidance, and I guess the gross margin guidance, I actually had -- I think the consensus had the gross margin around $51.5 million already for the year.

When we look at our models, to raise EPS we would lower maybe the A&P and/or the SG&A expense in the fourth quarter.

Am I thinking of that the right way?

Well, I think two things will happen.

Where we end up with sales -- and we've kind of narrowed that a little bit -- but correct, we would hope that gross margin would have a positive impact.

We would therefore -- we expect, if you look at the trending of A&P, that may come down a little bit.

But I think those are the levers.

We feel like we'll have a reasonably solid year-on-year sales growth.

We see margin improving, and we see good management of our A&P expenses.

We think we're well-positioned to step off next year in a pretty fine way.

Okay, great.

Just one final question on WD-40 Specialist line.

You said strong growth.

I think you said up 27% in the quarter.

Is that right?

That is accurate.

That's strong, but I think last quarter you said it had doubled year over year.

That's accurate also.

Okay, so it's kind of slowing, or is that just a quarter-by-quarter fluctuation?

Oh, this is going to bounce around for a while, and it's no way it's slowing.

We get sell-in, then we get new customers.

Of course as we introduce new categories we're going to get spurts.

But we're very happy with Specialist.

As I said in my remarks, we're confident that Specialist will be a solid revenue and earnings machine for us for many years to come, as we execute the program in a deliberate way across the markets of the world at a time that it's appropriate.

Okay, thank you very much.

Thank you, Linda.

Daniel Rizzo, Sidoti and Company

Just one quick follow-up on the Specialist.

It was up 27% in the quarter.

Was there any one reason it's out-performing the others, or maybe you've already said this.

Specifically how is it doing in the Americas?

Doing fine.

We're comfortable that it's doing fine in all areas that we've launched it.

The growth depends too on what we launch into what areas and what regions at what time.

But overall we're very comfortable.

In the quarter was there any one reason it out-performed the others?

No, not necessarily.

Again, it's off the basis -- or the base that it's performing off differs from region to region.

We think overall that we're going to get fluctuations region to region.

We don't talk about what's going on in each region.

We're looking at the overall growth, and we're very happy with 27% growth quarter over quarter.

One more quick question.

You indicated on a call and in a press release that there's higher expenses related to protecting intellectual property rights.

Is that -- I would assume that's not something new, that's an ongoing thing that's been happening?

For many years.

We have a robust intellectual property protection program that's been put in place for many years.

There hasn't been really any changes to it, other than we've just got more activity.

Intellectual property protection to us is a real and focused activity.

As I said, we just continue to do it.

When you're in 188 countries around the world, as Jay mentioned, with different laws and different regulations, it takes some work.

The fact that you mentioned it for this quarter -- does that mean it's up-ticked -- it's been more of an issue recently versus in the past, or has it pretty much been the same?

Run rate is about the same.

We mention it because it's a very important part of our business.

We actually want people to know that we are investing in protecting one of, if not the most important asset we have in the Company.

All right.

Thank you very much.

You're welcome.

Jeff Zekauskas, JPMorgan

Hi, good afternoon.

Did volumes grow in the quarter?

Overall, not much.

So they were slightly positive?

Slightly positive, yes.

We haven't had any pricing, really.

But the other impact was exchange rates.

But certainly volumes are growing year over year.

We expect that we will have volume growth for the full year, definitely.

I thought that there was a positive price benefit.

I thought there was a positive price benefit.

I thought that the sales not adjusted for currency were flat.

That's why I would have thought that volumes were down a little bit?

Jay?

There might be a slight decrease in volumes.

You're right, there was a slight impact from the price increases.

You're right, adjusted for currency we were flat period on period on the quarter.

Year to date, we are up quite a bit, so I think yes, that's --

But the other side of that too, Jeff, is we actually measured consumable ounces.

Depending on where those ounces are sold, that tells us -- reflects our volume growth.

Volume growth for the year is definitely up in ounces across the globe.

Right.

In the fourth quarter of last year -- all right, let me try this a different way.

Does your Management compensation in the fourth quarter change a lot as to whether you report $2.70 or $2.83, or does it not matter in terms of bonus compensation?

Depending on where we end up according to our targets, we will have an impact in the fourth quarter, either positive or negative, if we exceed or miss our targets in any significant way.

Right, because last year in the fourth quarter you really had a step up in SG&A expense, right?

Yes, we did, as we hit those higher targets at last year's growth rate.

Yes.

Do you expect your SG&A expenses in the fourth quarter to be up or down year over year?

We haven't shared that.

Okay.

I would -- just to add to that, Jeff.

We wouldn't expect the change in compensation to be as dramatic this year as it was last year.

Right.

Are you selling your home care business or are you not selling it?

At this stage we're not selling it.

We are selling the products, but it's not a long-term part of our business.

We looked at -- about a year and a half ago we did quite an in-depth valuation of what we should do with it.

The outcome was we can generate more cash from it over time.

If we sold anything, it would primarily be that in the US and only some of the brands.

We're quite happy with what we're doing with 1001 in the UK at this time, and also in Australia.

We've stabilize that business now.

As our other part of our business grows, it becomes less and less.

The other thing is we made a very deliberate decision some time ago to redirect all of the R&D and product development away from that group and pour it into Specialist and Bike, which is now paying benefits as we continue to grow Specialist.

Will Canada come back in the fourth quarter?

Canada will have a disappointing year, only because of the events so far.

But Canada will come --it will be a reasonable quarter, we think.

But we will see Canada bounce back next year as we start to launch some more new product and we get over some of the challenges they've had this year.

Because of the timing of promotions, do you expect the US business to come back in the fourth quarter?

Yes.

Okay.

Thank you very much.

Thanks, Jeff.

Nice to hear you.

Likewise.

(Operator Instructions)

Joe Altobello, Oppenheimer

I just wanted to kind of dive into the top line.

Obviously you guys don't give quarterly guidance, but it was a little bit lighter than we were looking for in the quarter.

It sounds like based on the commentary, Garry, that by and large the quarter was as expected in terms of where you guys were at but for Canada.

Obviously Canada is not a big piece of your business.

I'm just curious.

One, is that a fair way to look at how the quarter played out?

Two, obviously you're now looking for 3% to 5% top-line growth versus 4% to 8%.

It sounds like something changed in the quarter and we're trying to figure out is it the US?

It sounds like it was more of a timing issue this quarter, but it sounds like there are other underlying issues there.

Well, let me back up a little bit.

You asked me a lot of questions there rolled into one.

I think that we would have liked a little stronger quarter in revenue.

It kind of pattered out a little bit towards the end.

It's not -- really, it was sales falling from quarter to quarter as they do.

It's nothing we're really worried about.

I think if things would have come into the third quarter we would have had a stronger one, and we might have had a little higher overall expectation.

I think just as we've got through the year we're fine.

I think also we're still flipping through some of the changes we made in Asia.

We've also had that little upset in Canada.

If you roll those things together, yes, I think we could have expected a little higher overall revenue growth in the full year than we're going to get now -- although it's going to be a great year.

The quarter was the largest quarter in the sales history of the Company.

We're very much looking forward to our first $100-million quarter, and we'll publicly open a bottle of lemonade when we do that.

I think overall we're okay.

Okay, but it wasn't just timing because you did lower the full-year guidance.

It wasn't just pushing revenue from 3Q to 4Q, for example.

It pushes it out the other end, as well.

Okay, in 1Q.

Yes.

I think that's really where it sits at the moment.

Once you get through three quarters, you have got a better feel of what the whole year is going to be.

Again, we're not dumb enough to run our business in 90-day intervals.

(laughter) Good to hear.

Two other questions on new products.

Any update on Bike, number one?

Number two, what's your thoughts on rolling out additional products beyond Bike?

Do you want to see how Bike does first, or are you going to be more aggressive in FY15 on that front?

Bike -- we will be launching Bike in Europe at Interbike coming up in a couple of weeks time.

We're very happy with the Motorbike business that we've launched in Europe.

We'll be expanding distribution of our overall Bike products as we move further into this fourth quarter and next year.

We're in the bike business to stay.

It's got a lot of positives in that it helps us engage a very large group of passionate end users, particularly helping us get into the youth area.

We think any of that recreational area where lubrication and protection and cleaning is important --helps us replace that connection you had, Joe, when you were first introduced to WD-40 when you had your head under the bonnet of the car with your dad.

That doesn't happen any more, and we are -- at least not in the US.

It certainly does happen in some of the more emerging markets.

But we believe this is a very strategic and important step in continuing to enhance the relevance of the brand across many generations.

We've seen that evidence already.

The bike activity has been very positive towards the brand.

Okay.

In terms of the cadence of new products?

In the Bike range of products it will probably remain fairly stable, but in Specialist, which is really the other side, we will be continuing for many years to come to introduce categories of products.

We're just shipping WD-40 Specialist Lawn and Garden in Australia in the next month or so.

We're testing that down there, as you know.

We're happy so far with the response we're getting.

We've done Motorbike in the UK.

We've extended the range of products in Specialist in the US.

But this is deliberate.

We're not going to be like a blind dog in a meat house here.

This is a very valuable shield, and we will not slap it on anything.

It will be deliberate and controlled and ensuring that we continue to keep our promise to our end users, which is delivering above-expectation performance at great value.

When could we see Lawn and Garden in the US, do you think?

I don't know.

It depends how it proves out in Australia.

Okay, great.

Thank you guys.

See you, Joe.

Ladies and gentlemen, that does conclude our allotted time for questions, as well as our conference call for today.

We thank you for your participation, and ask that you please disconnect your line.

Thank you.