WD-40 Co (WDFC) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company's third fiscal quarter 2016 earnings conference call. Today's call is being recorded.

(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. On our call today are WD-40 Company's President and Chief Executive Officer, Garry Ridge, and Vice President and Chief Financial Officer, Jay Rembolt. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release and Form 10-Q for the period ending May 31, 2016.

These documents are available on our investor relations website at investor.wd40company.com. A replay and transcript of today's call will also be made available at that location shortly after this call. On today's call, we will discuss certain non-GAAP measures. Descriptions and reconciliations of these non-GAAP measures are available in our SEC filings as well as our earnings presentation.

As a reminder, today's call includes forward-looking statements about our expectation for the Company's future performance. Of course, actual results could differ 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 webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, July 7, 2016. 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.

Thanks, Wendy. Good day, and thanks for joining us on today's conference call. Today, we reported net sales of $96.4 million for the third quarter of FY16, which was an increase of 4% from Q3 of last fiscal year. Net income for the third quarter was $12.7 million compared to $11 million in Q3 last year, an increase of 16%. Diluted earnings per share for the third quarter were $0.88 compared to $0.75 per the same period last fiscal year.

As we review our results for the third quarter, we will be doing so under the umbrella of our 55/30/25 rule and our strategic initiatives. So before we dive into the sales results, let me take a moment to review our strategic initiatives as well as our long-term targets. Strategic initiative number one is to grow WD-40 Multi-Use product. Our most important strategic initiative is to take the blue and yellow can with the little red top to more places for more people who will find more uses more frequently.

We believe we can grow WD-40 Multi-Use product to approximately $600 million globally in revenue over the next 10 years. Global sales of Multi-Use product were up 7% this quarter compared to last year. This increase was due to solid sales growth of the Multi-Use product in all three trading blocks.

This growth was primarily attributed to the successful promotional programs we ran in our Asian distributor markets, a change we made to our distribution model in our Germanics region and sales of WD-40 EZ Reach in the United States which continues to exceed our original expectation.

Strategic initiative 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 within identified geographies and platforms. We believe we can grow WD-40 Specialist to approximately $125 million in revenue over the next 10 years. In the third quarter, sales of WD-40 Specialist were $5.6 million, which represents an 8% increase over the third quarter of last year.

We are optimistic about the long-term opportunities for WD-40 Specialist product line. However, there will be some volatility in sales levels along the way due to the timing of promotional programs, the launch of new product offerings and the building of new distribution.

Strategic initiative number three is to broaden the product and revenue base. Our goal under this initiative is to leverage the recognized strengths of WD-40 Company to derive revenue from new sources and brands. During the third quarter, we continued to broaden the distribution of products like 3-IN-ONE and WD-40 BIKE and GT85 and we expect over time that will continue to contribute to our long-term goals. We are excited about some new initiatives coming soon for the 3-IN-ONE brand and we look forward to sharing those with you in future quarters.

Strategic initiative number four is to attract, develop and retain outstanding tribe members. Our long-term target under this initiative is to grow employee engagement to greater than 95%. At the end of the third quarter, we had 440 tribe members globally. Recently, we made an important decision that we believe will help us reach our long-term employee engagement goal.

Let me take you back in time for a moment. 1973 was a big year for WD-40 Company. Two things happened. We completed our IPO and we moved into our current global headquarters in San Diego. Since that time, we've grown the San Diego corporate tribe from just a handful of people to roughly 20 employees.

In addition to our corporate employees, our San Diego facility also houses about 100 tribe members from our Americas trading block. For 40 years, we've attempted to make our current facility work by adding on additional square footage and leasing extra office space nearby. This has resulted in a work environment that limits collaboration, has inadequate meeting spaces, and quite frankly, is not the best work environment.

That's why we have decided it's time to invest in a new facility for both our corporate and Americas tribe members. We have identified a property in San Diego area which we intended to purchase and we expect to make a capital investment associated with the purchase of about $15 million in the next year. We look forward to keeping you updated on this exciting project in the coming months.

Strategic initiative number five is operational excellence. Our goal under this initiative is best summarized by one of our core values here at WD-40 Company: Make it better than it is today. We are continuously focused on optimizing resources, systems and processes, as well as applying rigorous commitment to quality assurance, regulatory compliance and intellectual property protection.

During the third quarter, we successfully completed the transition of all 50 US states to the lower BOC formula we launched in California in FY14. We also made some distribution changes in our German market. Historically in this market, we had a large wholesale customer who distributed our products to many to the DIY retailers in the region. We've made a change in this market which now enables us to sell to some of those retailers directly.

The tribe in Germany is doing just a great job managing the transition, and as a result, has seen a 22% increase in sales this quarter. That completes the update on strategic initiatives, so let's move on to the details of our third-quarter results, starting with sales.

As I mentioned before, consolidated net sales were $96.4 million in the third quarter, up $3.9 million or 4% versus last year. As you know, we focus all our time, talent, treasure and technology on growing our maintenance products. In the third quarter, sales of maintenance products were nearly $87 million, which represents a 6% increase from last year.

In the third quarter, we generated approximately 38% of our sales in currencies other than the US dollar. Changing foreign currency exchange rates continue to be a headwind for us, albeit a smaller one in the current quarter. We were able to remove all foreign currency exchange impacts. Our consolidated revenue would have been $97.6 million, up 6% compared to the third quarter last year.

Consolidated net sales were reduced by about $2.8 million due to the impact of the strengthening of the US dollar against functional currencies of our subsidiaries. This is what we refer to as translational related exposure, or constant currency, and it impacts reported results from Canada, Australia, China and the EMEA segment.

However, due to changing foreign currency exchange rates, our consolidated net sales were actually improved this quarter by about $1.6 million in transaction related exposure. This currency exposure impacts reported results in our EMEA segment and was primarily due to the impact of the strengthening of the euro and the US dollar against the pound sterling.

Now, let's take a closer look at what is happening in the individual segments. We will start with the Americas. Consolidated net sales in the Americas, which includes the United States, Latin America and Canada, remained relatively constant at $49.9 million in the third quarter. Changes in foreign currency did not have a material impact on sales in the Americas from period to period.

Sales of maintenance products increased by 3% in the Americas, primarily due to the strong sales in the US where maintenance product sales increased about 5%, benefiting from added distribution of WD-40 EZ Reach. These increases were partially offset by declines in maintenance product sales in Canada, which were down 16% during the quarter. These declines were primarily due to lower sales associated with unstable market and economic conditions in Western Canada as a result of suppressed activity in the oil industry.

Maintenance product sales in Latin America were flat compared to last year. Our maintenance products exclude our home care and cleaning products. We continue to consider our home care and cleaning products, particularly those in the US, as harvest brands that continue to generate meaningful contributions in cash flows, but are generally expected to become a smaller part of the business over time. Sales of our home care and cleaning products in the Americas during the third quarter decreased about 13% from last year.

Now over to EMEA. Consolidated net sales in EMEA, which includes Europe, the Middle East, Africa and India, increased to $32.9 million in the third quarter, up about 9% from last year. On a constant currency basis, sales in EMEA would have increased $4.8 million, or 16% compared to the prior year.

As you know, we sell into EMEA through a combination of direct operations as well as through marketing distributors. And reported consolidated sales in our EMEA direct markets, which accounted for 68% of the region's sales, increased 9% during the quarter to $22.3 million. However, it's also helpful to look at the results in local currencies in which we conduct transactions in the direct markets.

In the United Kingdom, our pound-sterling-based market total sales increased 1% in the quarter. In local currencies, pound sterling-based market saw a 3% increase in sales of the maintenance products. However, these increases were almost entirely offset by a 6% decline in home care and cleaning products. In euro-based direct markets, the sales in euros increased by 15% in the quarter.

Now let's turn to our EMEA distributor markets, which account for 32% of EMEA sales during the quarter. Distributor market sales increased 7% in the third quarter to $10.6 million, primarily due to improved market conditions in Eastern Europe. Although market conditions have begun to stabilize in Russia, we'd like to remind investors that the political and economic instability in the region makes it difficult for us to predict what level of sales we will have in the near future.

Now let's take a look at Asia-Pacific. Consolidated net sales in Asia-Pacific, which includes Australia, China and other countries in the Asian region, increased to $13.6 million in the third quarter, up 10% from last year. Changes in foreign currency exchange rates had an unfavorable impact on sales. On a constant currency basis, sales in Asia-Pacific would have been $14.1 million, an increase of 14% compared to last year.

In Australia, net sales in US dollars were $4.3 million in the third quarter, flat compared to last year. In its functional currency, the Australian dollar, sales increased 6% for the quarter. This growth was primarily due to a higher level of promotional programs. In China, net sales in US dollars were $3.4 million in the third quarter, down 5% compared to last year. In its functional currency, the Chinese RMB sales were up 1% for the quarter.

We remain optimistic about the long-term opportunities in the China region, although we expect a lot of volatility along the way, due to the timing of promotional programs, the building of distribution, shifting economic patents and varying industrial activities. In our Asian distributor markets, net sales were $5.9 million in the quarter, up 32% compared to last year. This increase in sales was driven by our successful promotional programs for WD-40 Multi-Use product.

However, the significant increase is also due to the fact that in the comparable period last year, we encountered a quality issue linked to a defective aerosol can component that required us to record an allowance of $900,000 during that quarter. Our Asian distributor markets are not impacted by currency translations since we sell in US dollars in those markets. So I'm going to take a break, and now I'm going to hand over to Jay, who will continue the review of the financials. Thanks, Jay.

Garry, thank you. First, let's review our 55/30/25 rule. Those are the long-term horizon targets that we use to guide our business. As you may recall, the 55 represents gross margin, which we target to be at 55% of net sales. The 30 represents our cost of doing business, which is our total operating expenses excluding depreciation and amortization. Our target is to be at 30% of net sales.

Finally, the 25 represents EBITDA. Well, if our gross margin is at 55% and our cost of businesses is at 30%, our EBITDA will be awfully close to 25%. First, the 55, or gross margin. In the third quarter, our gross margin was 56.8% compared to the 53.3% last year. Our gross margin was positively impacted by 200 basis points from major input costs and 160 basis points from various other items.

Let's begin with the major input costs, which influence our petroleum-based specialty chemicals and aerosol cans. Crude oil is one of the primary feed stocks of our petroleum-based chemicals. Our gross margin this quarter reflects the lowest cost we've seen in well over a decade. As you may recall, and we've shared with you in the past, it takes considerable time, approximately 90 to 120 days for changing commodity prices to impact our cost of goods sold.

The cost of crude declined sharply in the second quarter of this fiscal year, and this significantly benefited our gross margin in our third quarter. Since the beginning of the third quarter, however, the price of oil has risen by more than 60%, and as a result of this recent trend, we do not expect to realize the same level of benefit to gross margin in future quarters.

As a reminder, our long-term gross margin target of 55% is not contingent upon oil staying at any particular price point. We cannot control global market dynamics such as the price of crude or fluctuating currencies, but we can continue to be focused and deliver in managing the rest of our business so that we can maintain gross margin at a level close to our target over the long term.

Well, let's briefly talk about some of the other items that impacted gross margin in the third quarter. Advertising, promotional and other discounts that we give to our customers decreased compared to last year, positively affecting our gross margin by 100 basis points. Changes in foreign currency exchange rates positively impacted our gross margin by 60 basis points.

This is because, in EMEA, our cost of goods are sourced primarily in pounds sterling, while approximately 45% of our revenues are generated in euros, with 30% in pounds sterling and the remaining 25% in US dollars. The combined effect of the strengthening of both the euro and the US dollar against the pound sterling caused revenues in total to be worth more in pounds sterling this quarter, thus improving our gross margin. These improvements to gross margin were partially offset by some sales mix changes and other miscellaneous costs which combined, had a negative impact on gross margin of 10 basis points.

Now, I'll address the 30, or our cost of doing business. In the third quarter, our cost of doing business was approximately 36% compared to 34% last year. SG&A increased 10% compared to last year, which negatively impacted our cost of doing business percentage. This increase is primarily attributable to higher employee-related costs associated with higher accruals for earned incentive compensation compared to last year.

While our target is to have our cost of doing business at 30% of net sales, we plan to continue to make investments in support of our fifth strategic initiative, operational excellence, and that includes investments in quality assurance, regulatory compliance and intellectual property protection in order to safeguard the blue and yellow can with the little red top. We expect to move closer to our long-term target of 30% over time as revenues grow.

For the third quarter, 77% of our cost of doing business came from three areas: people costs, or the investments we make in our tribe; the investments we make in marketing, advertising and promotion as a percentage of our sales, our A&P expense investment this quarter was 6.4%; and finally, freight costs, the cost to get our products to our customers.

That brings us to EBITDA, the last of our 55/30/25 measures. EBITDA was 20% of net sales for the third quarter compared to 19% in the third quarter last year. This increase was primarily driven by the improvements to gross margin I discussed earlier. That concludes our discussion of our 55/30/25 business model for the current quarter.

I'll now discuss a couple of other items worth noting. The provision for income taxes was 28.1% in the third quarter compared to 30.2% last year. The lower tax rate was driven by increased taxable earnings generated from foreign operations, which are being taxed at lower rates. Net income for the third quarter was $12.7 million versus $11 million in the prior year. Changes in foreign currency exchange rates had an unfavorable impact of about $300,000 on the translation of our consolidated results this quarter.

Diluted earnings per common share were $0.88 in the quarter compared to $0.75 for the same period last year. Diluted weighted shares outstanding decreased to 14.3 million shares from 14.6 million shares a year ago.

Now, a word about capital allocation. Our capital allocation strategy includes a comprehensive approach to balancing both investing in long-term growth and providing strong returns to our shareholders. We target maintenance CapEx of between 1% and 2% of net sales for our fiscal year. However, as Garry discussed earlier, we are planning to buy a new office building to house our San Diego based tribe members.

Therefore, in addition to our maintenance CapEx, we anticipate making a one-time investment of approximately $15 million next fiscal year. On a personal note, I'm very excited about this project. It will enable us to put an additional $10 million in long-term debt on our balance sheet and it is investment we are making in the future of our tribe.

In addition, we continue to return capital to our shareholders through regular dividends and share repurchases. On June 21, our Board of Directors approved a regular quarterly dividend of $0.42 per share payable July 29 to stockholders of record at the close of business on July 15. Based on today's closing price of $115.89, the annualized dividend yield is 1.45%. During the third quarter, we repurchased nearly 91,000 shares of our stock at a total cost of approximately $9.6 million under our share repurchase plan.

Our March 2015 repurchase plan provides authorization to acquire up to $75 million of the Company's outstanding shares through the plan's expiration date of August 31, 2016. As of the end of the third quarter, we had $34.6 million remaining under the plan. In order for the Company to continue our share repurchase activities, our Board of Directors approved a new share buyback plan on June 21, 2016, which authorizes the Company to acquire up to $75 million of its outstanding shares following the expiration of the current plan and through an end date of August 31, 2018.

Now, let's briefly talk about our current affairs in the United Kingdom. As a US-based Company, generating approximately 38% of our revenue in currencies other than the US dollar, dramatic shifts in foreign currency exchange rates can have a significant impact on our reported results. Clearly, the vote in Britain last month has put a lot of uncertainty into the markets.

We don't know what the future holds, but we will share with you in a moment how we think shifting currency exchange rates, and in particular, a significantly lower pound sterling will impact our FY16 guidance. Aside from volatility in the foreign currency exchange rates, there's so many moving pieces and unknowns and so much that has to happen in order for Britain to exit the European Union.

The good news is that we have a very geographically diverse business. We have weathered a variety of economic crisis over the last 60 years and we've always come out fine. Brexit is another event for us to navigate through.

So with that, let's turn to FY16 guidance. We've updated some of our guidance to reflect our current view of the business. As a reminder, this guidance does not include any future acquisitions or divestitures and assumes that crude oil prices will remain close to current levels for the remainder of the year. The assumptions used in this guidance have been adjusted as it relates to foreign currency exchange rates to accommodate the current events in the UK.

Net sales are projected to be slightly above FY15, or between $378 million and $383 million. Gross margin for the full fiscal year is expected to be about 55%. Advertising and promotional investments are projected to be near 6%. Net income is projected to be between $49 million and $50 million. And diluted earnings per share is expected to be between $3.40 and $3.47 based on an estimated 14.4 million weighted average shares outstanding. Now that completes the financial overview. I'll turn it back to Garry.

Thank you, Jay. Let me sum up with what we hope you heard on the call today. You have heard that foreign currency exchange rates continue to be a headwind, albeit a weaker one, and they reduced our net sales by about $1.2 million in the third quarter. You heard that, globally, maintenance product sales grew 6% this quarter. You heard that the Americas segment is performing well and in-line with our expectations with a 3% growth of maintenance product sales this quarter.

You heard that third-quarter global sales of WD-40 Specialist were $5.6 million, which represents an 8% increase over the third quarter of last year. You heard that most of our EMEA direct markets reported solid double-digit sales growth and that we are seeing some recovery of market conditions in Eastern Europe. You heard that crude oil prices have trended up from recent lows, and therefore, we expect some pressure on gross margin in the coming quarters.

You heard that we'll be making a capital investment of approximately $15 million in order to purchase a new office building for our San Diego based tribe members to call home. You heard that our Board of Directors approved a new share buyback plan that authorizes the Company to acquire up to 75 million of its outstanding shares through 2018. You heard that there's a lot of uncertainty around the British exit from the EU.

Despite some currency-related headwinds that we are likely to encounter, the underlying business will endure because we still see that there are squeaks in the United Kingdom and in another countries in the European Union. You heard that we have revised our FY00 guidance to reflect our current view of market conditions in the business.

In closing, I'd like to share a quote with you from a famous San Diegan, Dr. Seuss. Sometimes you'll never know the value of a moment until it becomes a memory. Let's wish the memory of the UK a good one. Thanks for joining us on the call today. And being an Aussie, I can say God save the Queen. We will now be pleased to open the conference for questions.

(Operator Instructions)

Liam Burke, Wunderlich.

Thank you good afternoon, Garry.

Good afternoon, Liam.

Garry, could you give us a sense how the emerging markets are doing, particularly China? You talked a bit about Asia-Pacific, you talked about currency, but how is the, generally, how is the market doing in China?

We continue to build distribution in China. In fact, Liam, after this call today, I'm headed to LA and I'll be on a flight to Shanghai and I'll have a fresh view. But we are still comfortable and confident that we will build the business in China over time; that's going to be worth about $100 million as we see it today.

So we don't see anything that would tell us it's any different other than events that we unaware of. So China, to us, continues to be a focused growth market and the thing that gives me goosebumps is this morning, someone in China woke up and met WD-40 for the first time and if that continues to happen, we will be fine.

Great. And in terms of the product, innovation is a big push for your incremental revenue growth. How is the new product pipeline looking, without being specific, but a lot of these things you'd like to wait until the last minute before announcing, but how does the pipeline look?

It looks very solid. I just attended our 12-month rolling planning meeting a week ago and was witness to some of the very exciting products that are getting ready for launch later this year and early next year. So the pipeline is solid and we are optimistic.

The other thing we are really happy about, Liam, is even with all the noise and everything that's going on in the world, our multi-purpose maintenance products year-to-date are up 4% globally and that takes into account all these other of events that have happened when you strip out the impact of currency.

So our strategy is to drive our focus of time, talent, and treasure and technology on activity that we see to be the most opportunity and that's growing the blue and yellow can and then using the power of the shield to grow Specialist and we know what our circle of competence is and we're not going to get outside that. We feel good in the world and we'll deal with events as they come.

Great. Thank you, Garry.

Linda Bolden Weiser, B. Riley.

Hello. How are you?

Great.

In terms of the UK and the devaluation of the British pound, I know that that has a couple of different effects on your income statement, top-line affects as well as, I think it's going to be a positive, a favorable gross margin effect because of the cost side. Can you maybe just go over what those affects our just so we're all clear on the nature of those impacts?

I will let Jay handle that.

You are exactly right that as the pound weakens against the dollar and the euro, what happens is the result, the sterling results, which all of our European business is denominated in sterling results, they get translated over at lower rates, so that affects top-line, middle-line and bottom-line. However, in sterling, you are right that the weakening sterling results in higher sales in non-sterling currencies in that market and that does impact and benefit gross margin. So there is a little offset.

So in that net, is the British pound devaluation a positive or a negative to net income for your Company?

It would be a net net negative, although a small one.

Okay, got you. And then of course, we don't know what's going to happen with aftereffects on the economy in Europe, but is it safe to say that if the economy were to soften, that your product, I mean it's an industrial-type product, I mean, your business would be somewhat impacted by that if that were to happen. Is that the way to think about it?

We don't know, Linda. He who runs business by the crystal ball learns to eat glass. I would say we've been through different economic and whatever periods over time. I think it's a shambolic condition in Europe right now and I'm not smart enough to predict it. Right now, early indications are we are not seeing evidence of that, but who knows? Time will tell and we will know more in a little time.

We've grown in past years through most financial crisises that there are and it's because of our global diversity and the diversity of our business across multiple trade channels. Sure, industrial is a big part of our business, but DIY is a huge part of our business, so is automotive, so is marine, so is farming. So we feel blessed to have that shield, if you will. Excuse the pun, but we will see what happens.

Okay. And then just in terms of the gross margin pressure that you mentioned in your press release that we shouldn't expect this high level to continue. So when you talk about pressure, I assume you mean coming down off this high gross margin level, but doesn't that mean though you still could be up year-over-year for a couple more quarters? I'm picturing first half 2017 maybe up but then second half down year-over-year. Am I thinking of that correctly?

Yes, certainly we could be up for another couple of quarters on a year-over-year basis. And we would expect that, given the current cost in the current market. What we saw, however, though in our third quarter was some very unusually low prices that were in the market in our second quarter and when that's flowed into our cost of goods this quarter. We don't see those likely repeating. However, if we do see oil fall back to that point, we would see similar opportunities in the future.

There was a period of time, Linda, as you probably may remember, in the January, February, March time, when oil was in the high $20s, low $30s. It's now up around $40 to $50, a little bit high $40s to $50s, so we could see some of that impact in this quarter.

Okay. And then you had mentioned that you adopted a new model or something in the Germanics. I didn't quite catch what that was. You're not using distributors there, I don't think. Can you explain if that strong growth was a one-time channel fill or is that strong growth going to continue do you think?

Basically it's a evolution of the market. In the Germanics, and it's happened elsewhere, as we build markets, for some time, we use wholesalers to sell into major retail chains. It's a direct market, but we sell to a feeder or a wholesaler who would then sell into a retail chain.

The reason being you have to have a certain velocity within a retail chain for to be economical for us to service that retail chain directly, and in some cases, they didn't have their own internal distribution that was aligned to the way we sell. So in the DIY trade channel in Germany, we are converting to direct supply to people like Bauhaus and the OB and whatever.

And in doing that, we get closer to the customer, we're able to expand the product offering and take in more sizes and more product, like Specialist and BIKE, and we've been in the early stages of doing that all this year.

So we're going to continue, we think, to see some pretty good growth in that channel in Germany for a while to come and its part of our strategy in that we've identified for a while now that Germany is the second biggest DIY market in the world and we are only about 65% of our potential in that trade channel. So this was a strategic move to start to accelerate our expansion in that trade channel.

Okay, thanks. That sounds good. And then just the Canada weakness. I know you kind of mentioned that again. I guess that's related to the oil industry weakness. Does the trend there, is it looking like it's getting worse or better or what (multiple speakers)?

Well, Canada has been a basket case this year and I feel for our tribe members up there. They've done a lot of hard work and they've fought a hard battle. We see it kind of stabilizing, but is the oil going to regenerate activity in the west? I don't know. But we are going to lap a bad year, so hopefully it won't look so bad next year. It's been a tough year for our folks up in Canada and we are hopeful that we will get through this and next year will be better.

Right. Okay. And then I guess the distributor markets in the EMEA, like the Russia and all that, that was up about what, mid-single-digit in the quarter? Is that, do you consider that then a recovered level of business activity so we could see modest growth then going forward do you think?

As far as Russia is concerned, I don't think Russia is out of where it should be now. The sales remain depressed. The economic sanctions and lower oil prices have led Russia into a deep recession.

Some experts believe the economy in Russia will start to grow in calendar year 2017, but even with the growth rate being relatively low, maybe 1% to 2%, in third quarter, our sales were up nearly 31% in Russia over the last year, but this was less to do with the Russian market improving dramatically, Linda, and more to do with the fact that we have been experiencing, in our Russian distributor markets from Q3 2015, because that's when the economic crisis began.

I think it will take us a while to get back to where we were in Russia. I think as we've seen as of two quarters now a flattening out of the downtrend, if you will, so hopefully we will just have to take it step by step as that economy gets better over time.

Okay. And then just lastly, you made it clear that you will have this $15 million CapEx investment next year for the new headquarters and you are adding some debt, so does that imply that your usual share repurchase level could be expected to remain as expected? You wouldn't change it just because of that?

That would be our expectation. We see the activity that has taken place over the last five years to continue And we see the, and our dividend policy is unchanged, and as Jay said, he's personally happy with this because he can put a bit of long-term debt on the balance sheet and put the balance sheet to work for a good purpose.

Okay. That's all for me. Thank you very much.

Thank you.

Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your line.