Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company First Fiscal Quarter 2016 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'd now like to turn the presentation over to the host for today's call, Ms. Wendy Kelley, Director 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 earning's presentation, earning's press release and Form 10-Q for the period ending November 30, 2015. These documents are available on our Investor Relations website at investor.wd40company.com. A replay and transcript of today's webcast will also be made available at that location shortly after this call. On today's call, we will discuss certain non-GAAP measures. The 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 expectations 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 of today's date, January 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.

Thank you, Wendy, and good afternoon everyone and thanks for joining us. Today we reported net sales of $92.5 million for the first fiscal quarter of 2016, which was a decrease of 4% from Q1 of last fiscal year. Net income for the first quarter was $12.1 million compared to $10.8 million in Q1 last fiscal year, an increase of 12% year-over-year. Diluted earnings per share for the first quarter were $0.83, compared to $0.73 for the same period last fiscal year. As we review our results for this quarter, we will be doing so under the umbrella of our 55/30/25 rule and our strategic initiatives. While global sales continue to be negatively impacted by changing foreign currency exchange rates our gross margin has increased to nearly 56% which has resulted in record net income and diluted earnings per share for the first quarter. Before we dive into the financials, I'd like to take a few moments to update you on our strategic initiatives. Its' a New Year and a great time to get off to a fresh start. In this world, we only have a few things, we have time, we have talent, we have treasure and we have technology. None are abundant. So it's really important for us as an organization to focus on where we see the biggest opportunities. I'd like to take just a few minutes today to remind you of what those opportunities are for WD-40 Company and what our long-term targets look like. Strategic initiative number one is to grow WD-40 Multi-Use Product. Everyday our tried members wake up with one thing on their minds, take the blue and yellow can with a little red top to more places for more people that will find more uses more frequently. We ended fiscal year 2015…

Thanks, Garry, and Happy New Year to everyone else on the call today. First, let's review our newly revised 55/30/25 rule. That’s the measure we used 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. And finally, the 25 EBITDA, if our gross margin is 55% and our cost of business is at 30%, our gross margin will be 25%, excuse me, our EBITDA will be 25%. First, the 55% or our gross margin. In the first quarter, our gross margin was 55.6% compared to the 51.6% last year. Gross was positively impacted by 260 basis points from major input cost changes, and a 160 basis points from various other items. These gross margin improvements were partially offset by changing foreign currency exchange rates which adversely impacted our gross margin by 20 basis points. Let's start with the major input cost which include petroleum-based specialty chemicals and aerosol cans. Crude oil is one of the primary feed stocks of our petroleum-based specialty chemicals. And in the first quarter of last year crude oil was priced at roughly $85 a barrel, which compares to roughly $45 a barrel during the first quarter of this year. Though it takes time for the changes in the cost of crude oil to make its way into our supply chain and multiply into our financials, we're now seeing more of the benefit of continued lower crude oil cost in our gross margin. It is impossible to predict when crude oil – what crude oil will cost tomorrow or next year. The falling oil…

Thanks, Jay. I had said it before, but it warrants repeating, I believe the vision crushing ritual of the pressure of quarterly earnings is not the measure of success. A company must have a clear and compelling vision, a set of core values that drive the culture. Values must be clearly acted upon, a clear set of strategic drivers must determine how time, talent, treasure and technology are invested to achieve the stated outcomes. So in summary, what did you hear from us on this call today? You heard that foreign currency exchange rates continue to be a headwind and reduced their net sales results by approximately $4.3 million in the quarter. You heard that the U.S. is performing well and is in line with our expectations with a 4% growth of maintenance product sales of the first quarter. You heard that our EMEA direct markets continue to grow in their local transaction currencies by 13% in the quarter. You heard that falling crude oil prices continue to be a tailwind and that way I think positive impacts in their gross margin. You heard that our net income and earnings per share both set new records in the first quarter. You heard that we increased our dividend by 11% last month and that we have increased our dividend over the last five years. You heard that we are raising our gross margin and net income and EPS guidance for our fiscal year 2016. So today, instead of a quote, I've thought I'd end the call in a different way. I'd like to share this thought with you, at WD-40 Company, every single one of us comes to work every day to do something we love. We get to inspire people and to create positive lasting memories. It's the most wonderful thing in the world, in fact, the fun part is trying to figure out all the different ways we can do that. Thank you for joining us on today's call. And we'll now turn it back to the operator.

[Operator Instructions] Our first question comes from the line of Linda Bolton Weiser with B. Riley. Please proceed with your question.

Hi guys, Happy New Year.

Happy New Year, Linda.

So, I guess my first question is, I mean obviously you're finally kind of showing the big benefit of the lower petroleum-based input cost in your gross margin. And it looks like to me you are reinvesting as you mentioned your SG&A ratio was a little bit higher than I would have thought. I guess my question is, when oil if it ever does kind of go back up then your gross margin may come down some. How do you reverse or I mean, how do you make up for the fact that the SG&A additions, I assume it's like people, you can't really reverse that. So I guess I'm a little concerned that you're kind of adding lot of cost structure because you do have this tailwind but later on when it reverses you can't reverse the cost side. So can you kind of explain that a little bit?

Sure. Two things, the SG&A ratio to revenue is impacted by one, the revenue. And currently, our revenue rate, particularly because of exchange rates is down. So that is having an impact on us. Secondly, the investments we are making in fact are not in people and as Jay shared with you, they are around things like quality assurance, regulatory compliance, intellectual property investment. So, we are very focused and we are very, very determined around our goal of 55%, as you saw in the quarter we are above that. Certainly about 2.6% of that 55% is around the benefit of oil. So if you really think about it our underlying gross margin against our goal of 55% is currently, if oil was 80% at about 53% or above. So, well you know what we are and you know how we think about our cost in this company. We're not on some wild man's dream here of spending before we earn it, we will meet our goal of 55/30/25 over time and we're very focused on doing that. So I appreciate your concern but I wouldn’t be too concerned.

Okay. And can I also ask just about the sales growth. I think you acknowledge that it wasn’t quite up to what you would have hoped and even excluding all the currency and quite frankly, I think at least relative to my modeling work it's been like that for the last year, year and half. And it's hard for me to really dissect, is it the non-strategic home care piece or is the maintenance products piece also a little bit below where you would like it to be. And why is that? I mean is it competition, is it failure to be able - or inability to price more or why do you think it's not – I mean the economies are still relatively strong around the world. So what do you think is going on?

Well, in the U.S., our core business grew 4% in the quarter and we're very delighted with that. The home care and cleaning products were down $1.7 million in the quarter, so certainly they are down, they were flat, globally down $1.7 million. If you go to Europe, where we're seeing growth in the domestic markets, direct markets in the quarter of about 13% that got wiped out by exchange rates. Where the softness is, we are still seeing a softness in Eastern Europe around the distributor markets and then we've got the normal timing thing that’s going on. I would have liked to seen a little bit of volume globally in the first quarter, mainly stuffs moved around. So I'm not really concerned about it, we still believe in our 4% to 6% for the year ex-currency, that’s what were the update was in the guidance. So when you're operating in a 176 countries and 62 trade channels around the world you're going to have things move around from time-to-time, but our underlying business in our maintenance products area is very, very solid. And we continue to move along to our goal to double our Multi-Use Product business and to take Specialist to a $125 million over time.

Okay. And of that, like a half a point roughly of sales growth excluding all the currency, can you break that down between volume and price in the quarter?

Well, there wasn’t really much price at all.

Okay.

Because the only price rise we had was a little bit of a GT85 in the UK, this is volume, it's not price.

Okay. And then can you just talk about in terms of the EZ-REACH launch in the U.S., have you gotten more distribution since we talked about it last quarter or how is that progressing exactly with the launch?

Yeah, thanks for the question. We – the initial point of sale results for the EZ-REACH remain encouraging, they've actually exceeded our original assumptions. At this time the product is only being distributed in the United States. We have not yet made the decision of when we will take it globally. We’ve shipped the products in the United States to Home Depot in August, AutoZone in September and Lowe’s in October. We will ship the rest of the EZ-REACH product to Wal-Mart this month and we have several additional customers we expect to ship in the second quarter of 2016. And by the end of the second quarter of fiscal year, we should have EZ-REACH opened up to all U.S. customers and be able to fill the orders for the products for all of U.S. customers.

Okay. And then do you think that means in FY17 you might be able to start selling it abroad?

Certainly we believe that EZ-REACH has global potential. And once we've feel comfortable that we have production and any other bugs that we could find, not that we found any yet, we'll then take it to the more developed markets around the world. I know my friends in Australia are very anxious to get it and I know that our friends in the UK and in Germany are very anxious to get it, and we would think that that would be the first sort of areas we'll go.

Okay. And I mean are you able to say how much it contributed to U.S. growth, I mean is it measurable, is it even half a percent or is it just too small?

We do know, but we're not sharing that at this time.

Okay. And then you mentioned the Specialist growth in the quarter…

Yeah.

I think it was a single digit number, is that…

2.3%.

Okay. That seems a little low, is that including FX?

Yes, well that’s net of the FX. So we had the impact of FX, brought it down to 2.3%.

Do you know what it was prior to the impact of FX?

I don’t have that, I don’t think we've disclosed that, but I guess if you think FX was $4 million and I know it's probably 5% to 6% more, I'm not sure, to take FX over the [total] [ph].

Okay.

But you know, the thing that’s going to happen with this Linda, and everybody listening to this should hear this, we're not going to – you cannot, you can but there is no value in poking at us quarter-to-quarter about Specialist growth. It's going to like China and everything else. We did – we shared that our sales last year are about $20 million so we took it from zero to 20 from launch and it's going to bubble around over time as we take to new places. This is not an overnight sensation, this is a build the brand day-by-day, market-by-market, we are very happy with Specialist, we see $125 million with it over time, there is nothing but green lights around it and it's just a matter of us now being deliberate and solid in our execution around it.

Okay. Maybe if I could just turn to a couple of questions for Jay, just on the tax rate in the quarter was a little bit lower than I had modeled in. Should I be modeling 30.5% for the year or something a little bit lower?

We had some changes in activities at the end of last year which suggest that we should – we're seeing it'd be under 30%. So 29% - slightly above 29%.

Okay. And then your operating cash flow was actually pretty strong in the quarter. I know it probably moves around by quarter, but was there was anything unusual, it looks like the accounts receivable and – or accounts payable on accrued liabilities line maybe was very positive. Is that unusual or what's going on there?

No, I mean I think that it really has a lot to do with just the timing of sales in the quarter. You'll see a variety of activities on the AR line that will change. There is really nothing significant that’s been happening, in some ways, we did have an increase in inventories over the period which was an offset. So, but nothing of note.

Okay. And then finally, can you just remind me, I know you mentioned this before but like if you took the EMEA distributor markets, what percent of Russia, Ukraine of that, is it like half or?

No.

It's a good size, but it's not quite half.

No. It was about $10 million in one year I think, last year. But Jay…

Somewhere – it's about 40 – 35%, 40%...

40%, okay.

Is when it is tracking.

And the difference is that, we hadn't yet – in the first quarter of last year Linda, we hadn't yet seen the massive drop in Russia, so we had a very – we haven't – we're not kind of lapping the decline yet. The decline in Russia started in the second and third quarter. So we had a pretty reasonable first quarter last year in the distributor markets in Europe because Russia hadn't started the impact that really yet.

Yeah, no I realize that, I think it's probably going to be not until the second half of the fiscal that it may grow, but I want to – you said it was nearly stabilized and that’s not the same as stabilized. So it sounds like it's still going down or something.

No, it won't, only if you compare – if we look at it now, if we looked it's last quarter four against quarter one it's stabilized, but if you look at quarter one against quarter one it doesn’t look good. So we are not seeing any further deterioration in the market in Russia subsequent quarters. If you look year-over-year, yes there is a difference.

And some of that comment was just the general market condition – the general economic condition of Russia, just a little bit – still a little bit unstable.

Yeah, okay, it does make sense.

Because of the dramatic depreciation of the…

I could sarcastically say I'll push the random excuse generator here and we'll talk about Asia because we think that the bomb went off in Korea and we'll push another – the world is full of events and we just got to manage through these events.

Right, yeah. Okay, well I guess that’s pretty good for me now. Thank you so much for answering all the questions.

You're welcome.

Bye, Linda.

Our next question comes from the line of Liam Burke with Wunderlich. Please proceed with your question.

Thank you, good afternoon Garry, good afternoon Jay.

Good afternoon, Liam.

Hi Liam.

Garry, could you give us some sense on how some of the other non-specialist brand extensions are doing and then how the pipeline is for some of these new products?

Well, we don’t really have any non-specialist brand extensions other than GT85.

Right.

Or 3 and 1. And 3 and 1 for example, we've completed the extension of the product range that you'll now see in distribution places like lows. The brand extensions are really coming in specialists. We're just about to ship I think our new specialist spray and stick gel I think that goes into market right now as we speak. There is a couple of specialist lines going in this year, we're still working on the development of specialist motorcycle for the U.S., we expect that later in the year. We've got some other line extensions as specialist plan in Asia Pacific that'll come during the year. So it'll be a progressive thing but other than those 3 and 1s pretty well set now and some work on GT85, there is nothing outside of that. We're really concentrating on the call.

Okay. And Jay, CapEx was lower year-over-year. Could you give us a sense as to what the CapEx level will be this year or do you have any additional projects?

Yeah, we're in the $6 million to $7 million.

$6 million to $7 million, okay. Thanks, Jay.

You're welcome.

Our next question comes from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.

Good afternoon, everyone.

Hello.

I was just wondering how long it takes before a new hire contributes to the bottom line as you are adding training and so on?

Wow! What a wide question, I guess it depends where they work. If they're a sales person, they're going to start contributing pretty quickly, and I don’t know – the thing that we measure is revenue per employee. And we have a target of a $1 million of revenue per employee. We're about 890,000 at the end of last year, you'll see that start to track back to towards our $1 million this year. But our horizon Jay, what's your…

Well, the $1 million per employee is kind of our interim target but really look at a $1 million to $1.50 for kind of our horizon target.

Yeah, as we grow revenue will see that. So I don’t know I could tell you exactly whether it depend where they go, but certainly our revenue per employee ratio is enviable.

Yeah, so there is quite a high number actually. And what I was wondering is that in order to maintain your margin targets, do you get there when an employee is that at $1 million in revenues or does it take longer than that, that’s one point two, they kind of cover all of the cost going into training them and so on?

Well it depends, if you look at somewhere like China, we've got 53 employees in China with revenue of about $12.5 million in the year. We expect China to eventually be a $100 million revenue, so we'll gain the leverage there but again I think the point is that our revenue per employee at somewhere between $900,000 and a $1 million is something that we're focused for as many years as I've been here.

Okay, thank you, that is helpful. And I was also wondering if – it looks as though you are growing your direct sales faster than you are growing the distribution sales and I am guessing and I maybe wrong, but I'm guessing that the profitability of your direct sales is higher and you'll have more control. Any thought of going direct in the larger fashion in the areas where you are currently pushing the distribution?

In fact our distribution business is more profitable than our direct business in some cases. It's not a profitability question, it's a matter of market potential and size. And we converted a number of markets from distributor markets to direct markets where we believe that a higher level of investment and focus will bring growth – more meaningful growth overtime. We're not planning at the moment to convert any other distributed markets, we are pretty happy with most of our network but we review that every year, but it's not really based on the profitability of the business in the distributor markets, which is very profitable.

Okay, so it is if I understood properly it is more because you can invest and then growth with that particular market faster.

Correct. For example in China, when we opened our business in China in a direct way seven years or eight years ago, we were doing a couple of million dollars in China. We knew that China long-term would be – was a good opportunity for us. Now, it would be unreasonable for us to ask a distributor who is doing $2 million in sales to employee 53 people to start to build a business. So we went in and opened the business and then in that period of time we've grown it to about a $12 million business and we'll continue to grow it through the investment of people at the time.

And you are not concerned in China of losing your intellectual property?

I'm concerned about losing our intellectual property everywhere in the world, we're counterfeited in China but that’s just part of doing business. That’s why we invest rigorously in intellectual property protection. What is counterfeited actually is the trade dress, not the product. So, and we're not just counterfeited in China, we're counterfeited in Russia, we're counterfeited in Eastern Europe, it's an ongoing investment that we've done for many years and it's just – it's part of the – the price should pay to be a global brand that people love.

Okay, great. Thank you very much, and I appreciate it.

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. Thank you.