Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Second 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 February 29, 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. 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 discussions. 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, April 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 would now like to turn the call over to Garry.

Thanks, Wendy. Good day and good afternoon from, believe it or not, a wet and rainy day in San Diego. Today, we reported net sales of $94.6 million for the second quarter of fiscal year 2016, which was a decrease of 3% from Q2 of last fiscal year. Net income for the second quarter was $13.7 million compared to $11.3 million in Q2 last fiscal year, an increase of 21% year-over-year. Diluted earnings per share for the second quarter were $0.94 compared to $0.76 for the same period last fiscal year. As we review our results for the second 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 over 55% in the second quarter, which has contributed to the record net earnings and diluted earnings per share. Before we dive into the sales results, let’s 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. It will find more uses more frequently. We believe we can grow WD-40 Multi-Use Product to approximately $600 million revenue over the next 10 years. Although global sales of Multi-Use Product were down 4% in this quarter compared to last year, we saw growth of the Multi-Use Product sales in the Americas. The declines we saw in our other trade blocks were primarily due to the unfavorable impacts of foreign currency exchange rates, unstable market conditions in Russia and the timing of customer orders in the company’s Asian distributor…

Thank you, Garry. First, let’s take a moment to review that 55/30/25 Rule, the long-term horizon targets 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, if our gross margin is 55% then our cost of business is 30%, our EBITDA will vary close to 25%. First, the 55, in the second quarter our gross margin was 55.4% compared to 52.6% last year. Gross margin was positively impacted by 300 basis points from major input costs and another positive 70 basis point impact from various other items. These gross margin improvements were partially offset by changing foreign currency exchange rates and higher advertising and promotional discounts, which had an adverse impact on our gross margin of about 90 basis points. Starting with our major inputs costs, which include petroleum-based specialty chemicals and aerosol cans, crude oil is really one of the primary feedstocks of our petroleum-based specialty chemicals and falling oil prices had been a net positive for our gross margin. However, as we have seen it’s quite impossible to predict what crude oil prices will be tomorrow or the next year. When the positive our crude oil goes up in the future, we will most likely see some pressure on our gross margin. Although as we have said, our long-term gross margin target of 55% is not contingent upon oil staying at any particular price point. We cannot control the global market dynamics such as the price of crude oil or fluctuating currencies, but we will continue to be focused…

Thanks, Jay. Let’s summarize what you heard on the call today from us. You heard that foreign currency exchange rates continue to be a headwind and reduced our net sales results by approximately $3.4 million. You heard that our second quarter results are a true reflection of the diversity of our business across geographies, trade channels and economies. You heard that the Americas segment is performing well and in line with our expectations, with a 3% growth of maintenance products sales in the second quarter. You heard that our second quarter sales for WD-40 Specialist were $5.4 million, which represents a 20% increase over the second quarter of last year. You heard that most of our direct markets in EMEA continue to grow in their local currency transaction currencies. You heard that crude oil prices continue to be a tailwind. You heard that net income and earnings per share both set new records in the second quarter. And you heard that we revised our fiscal year 2016 guidance to reflect our current view of market conditions and the business environment. In closing, I would like to share a quote with you from Ralph Marston. Start strong, stay strong and finish strong, while always remembering why you are doing it in the first place. Thank you for joining us today. We would be pleased to now open the conference to your questions. Back to the operator.

[Operator Instructions] Our first question comes from the line of Liam Burke with Wunderlich. Please proceed with your question.

Thank you. Good afternoon, Garry. Good afternoon, Jay.

Hi, Liam.

Hey, Liam.

Garry, the sales in the Americas were pretty strong, particularly in the U.S., up 3%. Was there any particular strength in the – I mean, was there any promotional benefit you had or was there anything in the MRO industrial channel that was particularly strong or did you just see the across the board strength?

There is nothing we would necessarily call out, Liam. I think that business in hardware home improvements is doing reasonably well. We certainly had some benefit from EZ-REACH and of course, Specialist was up across all trading blocks which included the U.S. We launched the new Specialist product, called spray gel in the quarter, which was well received. So I think overall, our development of our maintenance product strategy in the U.S. is meeting our goal at the moment.

So I mean do products introductions or the brand extensions had provided a little less this quarter, I mean is that…?

Not – I wouldn’t say, given that the total sales of Specialist were only $5.4 million across the globe, but certainly they have delivered incrementally to our business in the U.S.

Okay. And Jay, for the first half of the year, the cash flows were down year-over-year, is there anything that you would anticipate you not reaching your free cash flow objective for the full year?

Not at this time. We have had a strong second quarter and the timing of the sales in the second quarter pushed our AR up. We also had some increases in our inventories to help facilitate the transition to the new 50 state, a California formula. So some of it’s, I would say, just a timing and event driven.

Okay. And on the inventory front, the investment – the incremental investment you made as you redid your distribution channel, are you through that series of investment?

As far as the impact on costs, yes.

Okay, great. Thanks Gary. Thanks Jay.

About a couple of years ago, we kind of got beyond that.

Okay. Thanks, Jay.

Our next question comes from the line of Linda Bolton-Weiser with B. Riley. Please proceed with your question.

Hi. Thanks. So it was raining here today in New York as well.

Right.

But anyways, so it was interesting what you said about the impact on your Canadian business of the oil industry downturn, I am just curious would that be something that would appear in some other regions of the world or is that Canada has the biggest exposures, but what about like the U.S., is the oil industry impact there?

There has been a little, but I think the extent of it in Canada was much larger, in the western regions of Canada. We did see a reasonable impact on our business in supplying the oil industry there that was much more material for the Canadian business than it is to the U.S. business. Jay, do you have a comment on that?

Yes. I think that if you just look at the Canadian economy in total, they are much more dependent on the natural resources than the U.S. economy at this time.

Okay. And then you mentioned something in the UK business about, I think losing some distribution or is that in the B2B kind of business, or is that at retail and if you actually lost some distribution, is that a negative impact now for a couple of quarters until we anniversary that affect?

No, I think it’s just more event driven. We were talking about primarily the UK in pounds in the quarter. It’s not anything that we would be alarmed about. I think we will just see it – we have about if it’s in the remaining part of the year. So it’s not a trend, it was more of an event driven, but it’s – we won’t be listed from anybody.

Okay, got it. And then on the sales, pace in your sales guidance, I mean if you kind of really analyze the FX changes since you last reported, I really think there hasn’t been that many real material changes?

Correct.

Okay. So the reduction in your guidance is then kind of more just on excluding all the currency impacts you are expecting less growth?

Well, what we would have hoped is we would have picked up a little from the first quarter. But it’s really the impacts, if you look at where - its Canada and its Russia are the two biggest areas, currency flowing through. So we are expecting to have more volume growth in the third and fourth quarter than we had in the first and second. We just won’t make up a little bit we would have liked to have made up.

Okay. And on the topic of Russia, just starting over the comparisons for that piece of your business, I mean I think next quarter, in the third fiscal quarter you start to come up against the easy comparisons?

Absolutely correct, this quarter was the worst comparison. It dropped off substantially in the third quarter.

Right. So I was actually thinking – I mean I was kind of modeling that, that EMEA distributor market would actually be up a little bit in the third and fourth quarters, is that a reasonable assumption or not?

We think it should be leveling out. Now, I think the impact is – we are about to lap the major impact, but Q2 last year we started to see a revival in the business in Russia. And then it just went in the basket again. And it really dropped off in the third quarter. So we would think that it’s going to start to stabilize now.

Okay. So it sounds like maybe flattish rather than up as I...?

Yes. I would be more comfortable with flattish.

Okay, got it. And then just in terms of the low petroleum based input costs that we are seeing that’s been helping your gross margins, are you starting to see any kind of pricing come down competitively, are competitors reacting to that and starting to see lower pricing or less ability to price up, I guess?

It’s also what are we seeing and it’s actually reflected in our results when we talk about the reduction in gross margin due to discounts and allowances. What we are doing is supporting our customers somewhat with promotional events to offset the unpredictable nature of oil. Some others are probably doing that as well, I don’t think we look at that as a competitive threat really, Linda. But we certainly want to make sure that we are doing the right thing and passing any sustainable value through to our end users, but the challenge we continue to have is this oil thing is really hard to manage. So we are running some promotional activities in different markets to support parsing through to the end user, not necessarily to offset any competitor activity.

Right, okay. Alright. And then so it sounds like EZ-REACH is going quite well and I think you had said maybe by the end of the fiscal year, it would have pretty full distribution in the U.S., is that still the case?

We hope so. We are certainly now in a position to be able to supply the whole U.S. market. Initially, our reduced distribution was due to our ability to ramp up automation to make one of the critical components. We are now through that and we are able to get full distribution or supply the market. We will then be looking at our need to take it to some of the other appropriate markets around the world. Australia and Europe were some or some the European countries will be the first ones.

Do you think international sales could occur as early as the first quarter of FY ‘17?

May be, but more likely the second quarter, I would think.

Okay.

They are just – our Europe – we are just in the middle of our business planning process right now for fiscal year 2017. So I know a number of markets are looking at their opportunities to include EZ-REACH in their launch plans. Those business planning activities won’t be completed for a few weeks and then they have to be all signed off. So that will be compared against available volumes to make sure that we can meet our promises. So – but we will be taking EZ-REACH to the appropriate markets around the world in a deliberate and planned manner.

Okay. And then just in the Asia distributor markets, this come up is mentioned, a couple of times I know there was a transition issue like a year ago or so, is the issues that you keep mentioning there, is that like a macro thing or is it just your execution with distributors?

It’s just timing. At – currently, we ship most of the distributor market business for Asia or out of Long Beach in California. Because most distributors buy in large volumes, you can have sales flop around quarter to quarter. We are going to see growth in the Asian distributors in the full year just as we did last year, but it’s just a timing issue. So, it’s nothing we are really overly – sorry, it’s nothing we are concerned at all about. We are happy with the way the Asian distributor markets are tracking and what you will see as you would realize is not unusual. That’s why you remember that the different events that we talk about, we bring them up, so we make everybody aware of them. But then when you look year-over-year, you see the growth. So, it’s just fewer customers being shipped larger quantities and that can impact recording revenues.

Okay. And then just finally in terms of the tax rate, I guess I was putting in 29.5 for the next two quarters. It sounds like it’s 28 more of a better estimate for the tax rate?

I think 29 is probably closer on an ongoing effective rate.

Okay. And then the other item – the other income that was related to FX that was pretty big in the quarter, is that able to be projected and it’s probably not easy to project in the next couple of quarters, are you expecting another big amount coming up or?

It would really depend on the movement of currencies. And our forecast really envisions currency is remaining stable. Now, that won’t happen. But when they – it depends on which way they move and how much. So at the moment, we have envisioned it flat. Do I believe that to be the right answer or no, but there is no right answer.

Right. I got it. Okay. Well, thank you very much guys. Take care.

Thank you.

Thanks, Linda.

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.