WD-40 Company (WDFC) Q4 2017 Earnings Report, Transcript and Summary

Good day and welcome to the WD-40 Company Fourth Quarter Fiscal Year 2017 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 your 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-K for the period ending September 30, 2017. 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 on 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, October 19, 2017. 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. Good day and thanks for joining us for today’s conference call. Today, we reported net sales of $96.6 million for the fourth quarter of fiscal year 2017, which was a decrease of 1% from the fourth quarter of last year. Net income was $14.4 million compared to $14.2 million in the fourth quarter of last fiscal year, an increase of 1%. Diluted earnings per share for the fourth quarter were $1.01 compared to $0.99 for the same period last year. For the full fiscal year net sales were $380.5 million which is essentially flat over last fiscal year. On a constant currency basis, total net sales would have been $399.6 million for the full fiscal year, up 5% over last year. This is what we refer to as translational related exposure and impacts reported results from Canada, Australia, China, and the EMEA segment. However, we also experienced transaction related impacts from their foreign currency exchange rates, exclusively from our EMEA segment which resulted in a favourable impact on our consolidated net sales. So if we removed all currency related impacts from our fiscal year results, net sales would have increased 2%. Net income was $52.9 million in fiscal year 2017 reflecting an increase of 1% and diluted earnings per share for the full year set a new record for the company at $3.72 compared to $3.64 in the prior fiscal year. I believe today’s results demonstrate that our robust to business model and global diversification can deliver record earnings even in times of currency exchange headwinds. For the purpose of this call, after discussing our strategic initiatives we’ll be focussing primarily on financial and operational results for the fourth fiscal quarter. For a complete discussion of our full year’s results for 2017, please refer to the press release we issued earlier today or our annual report on Form-10K which we expect to file with the SEC on Monday, October 23. Let’s start with a discussion about our strategic initiatives. Today, we will share with investors a revised view of our strategic initiatives and the 2025 revenue targets associated with them. These revisions take into consideration the impact of foreign currency exchange rates and the resulting reduction in sales that we have experienced over the last couple of years. As we embark into fiscal year 2018, we believe that the most significant foreign currency exchange headwinds are now behind us and therefore believe it is an appropriate time to review our long term revenue targets and how we are going to accomplish them. Our new long term revenue target is to drive consolidated net sales to approximately 700 million in revenue by the end of fiscal 2025. I’ll break down how we intend to get there in just a moment. If an event occurs that causes significant shifts in foreign currency exchange rates, these targets may once again become a risk. With that, where are we going and how are we going to get there? Strategic initiative number one is to grow the WD-40 multi use product. Now most important strategic initiative continues to would be to take the blue and yellow can with a little red top to more places for more people who will find more uses more frequently. In the fourth quarter, global sales of multi use product declined 2%, the decline came from our America segments specifically the United States and was partially offset by stronger sales in both Asia Pacific and the EMEA segments. Despite these mixed results, we are optimistic about the long term prospects for our flagship product. We believe there are many opportunities in front of us that will enable us to achieve our new long term revenue target which is to grow WD-40 multi used product to approximately 530 million in revenue by the end of fiscal 2025. In our developed markets we will continue to drive the revenue growth through innovation with products like WD-40 EZ-REACH Flexible Straw and through the continued conversion of end users to our more innovative Smart Straw delivery system. In our developing and emerging markets we will continue to build the brand awareness among end users and make our products easy to buy through the building of new distribution. This is a winning formula that we followed for 64 years and we know it works. Strategic initiative number two is to grow the WD-40 Specialist Product line. Our goal under this initiative is to leverage the WD-40 specialist line and create growth through continued geographic expansion as well as by developing new products and product categories within identified platforms. In the fourth quarter, sales of WD-40 Specialist was $7.3 million bringing specialist sales to $25.8 million for the full fiscal year which represents a 20% increase compared to last year. In fiscal 2017, we launched our lines of WD-40 Specialist industrial strength to Greases, Greases, and Speciality automotive products. We also expanded WD-40 Specialist Motorcycle and WD-40 Specialist Lawn & Garden products into new geographies. We are optimistic about the long term opportunities for specialists and now believe we can grow the product line to approximately $100 million in revenues by the end of fiscal 2025. To accomplish this, we will continue at geographic expansion and will develop products and product categories within our identified platforms. Keep in mind there may be some volatility of sales along the way due to the timing of promotional programs, the launch of these new product offerings and the building of new distribution. Strategic initiative number three is to broaden the product base – the product and revenue base. Our revised goal under this initiative is to leverage the recognized strengths of WD-40 Company to derive revenue from existing brands as well as new sources and products. Strategic initiative number three includes maintenance products like three in one, WD-40 bike, GT85 that has been expanded to include brands such as Spot Shot, Lava in the Americas 1001 in [EMEA and Novak] and Solvol in Asia Pacific. In fiscal year 2017 we saw solid growth from our maintenance products under this initiative we launched a new line of products under the three in one brand in the United States designed for recreational vehicles and we saw solid growth of WD-40 Bike. Both product lines demonstrate our ability to appeal to passionate hobbyist and we expect to continue growth from these maintenance products into the future. We continue to consider our home care and cleaning products particularly those in the U.S. as harvest brands which are expected to become a smaller part of their business overtime. We’ve spent the last several years better understanding how each of these brands perform in their own unique channel and geography. Many of these generate sizeable revenues and they all generate meaningful profitable contributions and cash flows. Ultimately, we believe we can continue to nurture the products included under this initiative and expect their contributed combined revenue to reach approximately $70 million by the end of fiscal 2025. So if you add all those up, I think it comes to 700. Strategic initiative number four is to attract, develop and retain outstanding tribe members. Our long term target under this initiative is to grow our employee engagement to greater than 95% from its current 93%. At the end of the fiscal year we had 448 tribe members globally. In August, we successfully relocated our San Diego base tribe members to a new office building. Our new offices were specifically designed to increase engagement and collaboration and I’m delighted to report that after only two months in our new space I’ve witnessed the tribe collaborating more and more in new ways. 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 focussed on optimizing resources, systems and processes as well as applying rigorous commitment to quality assurance, regulatory compliance and intellectual property protection. We measure ourselves against this operational excellence initiative by executing against our 55/30/25 business model and by making improvements to the processes and systems while still safeguarding the blue and yellow can with a little red top. That completes the update of our strategic initiatives, so now let’s move onto more of the details of our fourth quarter results starting with sales. Consolidated net sales were $96.6 million in the fourth quarter, down $600,000 versus last year. In the fourth quarter we generated approximately 40% of our sales in currencies other than in U.S. dollar. The translation of foreign subsidiary results from their functional currency to the U.S. dollar had an unfavourable impact of $1.9 million. In sales, on a constant currency basis, net sales would have been $98.5 million in the fourth quarter an increase of 1% compared to last year; this is what we refer to as translation related exposure and 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 $2.1million due to the transaction related impacts. This currency exposure only impacts our reported results from EMEA, and was primarily due to the impact of the strengthening of the euro and the U.S. dollar against the pound, sterling. The fourth quarter of 2017 is the first time in a very long time that foreign currency exchange rates in total have benefitted our reporting results. Net, net changes in foreign currency exchange rates had a favourable impact of about $200,000 on consolidated net sales in the fourth quarter of 2017. We hope to see stability in foreign currency exchange rates and look forward to being out of the foreign currency exchange headwinds we have been navigating for the last couple of years. Now, let’s take a closer look at what’s happened in individual segments during the fourth quarter. We will start with the Americas. Consolidated net sales in the Americas, which includes the United States, Latin America, and Canada decreased by 7% in the fourth quarter to $48 million. Sales of maintenance products decreased by 7% in the Americas, primarily due to the weak sales in the U.S. In the U.S. maintenance product sales decreased 11% due to the phasing of promotional activities at some of our larger customers. This decline was magnified because in the prior year we saw a high level of sales linked to the close out volumes of the SKUs of WD-40 Multiuse products associated with our transition of all 50 U.S. states to lower VOC formula. These sales were not repeated this year. In Canada, maintenance product sales were up 5% during the quarter due to the timing of promotional activities increased sales of WD-40 Specialist and WD-40 bike products and maintenance product sales in Latin America were up 24% in the fourth quarter when compared to the last year driven by increased sales of WD-40 Multiuse product particularly in Central America, Ecuador, Peru and Puerto Rico. Sales of Home, Care and Cleaning products in the Americas during the fourth quarter decreased 8% compared to the same period last year. Now we’ll go over to EMEA. Consolidated net sales in EMEA which includes Europe, the Middle East, Africa and India increased to $35.9 million in the fourth quartet up about 4% from last year. The net foreign currency exchange impacts from translation and transaction were offsetting this quarter and had a minimal impact on the regions reported results. As you know we sell into EMEA through a combination of direct operations as well as through marketing distributors. Net sales in our EMEA direct markets which accounted for 66% of the regions sales increased 7% during the quarter to $23.9 million in U.S. dollars. The strength was driven by the timing of promotional activities and the on-going conversion of end users in the U.K. to the more innovative Smart store delivery system. Now let’s turn to the EMEA Distributor markets which accounted to 34% of the EMEAs sales during the quarter. Distributor market sales decreased by 2% in the fourth quarter to $12.1 million, even though we saw increased sales of WD-40 Multiuse products in Eastern Europe, particularly in Russia as a result of more stable market condition n the region. These increases were entirely offset by some softness we experienced due to some promotional phasing in other parts of the region. We’d like to remind investors that the political and economical instability in many of these regions in Europe and other parts of the world make it difficult for us to predict what levels of sales we will have in these types of markets in the future. Now, on to Asia-Pacific, consolidated net sales in Asia-Pacific which includes Australia, China and other countries in the Asian region increased to $12.7 million in the fourth quarter, up 15% from last year. Changes in foreign currency exchange rate had a minimal impact on sales on a constant currency basis sales in Asia-Pacific would've been $12.6 million, an increase of 14% compared to last year. In Australia, net sales in U.S. dollars were $4.5 million in the fourth quarter, up 6% compared to last year and its functional currency, the Australian dollar, sales increase 1% for the quarter. In China, net sales in U.S dollars were $4.7 million in the quarter, up 13% compared to last year and its functional currency, the Chinese R&D, sales were up 16% in the quarter. This growth was driven primarily by increased promotional activities. Over the last 10 years we've sold over $100 million of maintenance products in China and we continue to believe there is significant opportunity in this country for many years to come. We remain optimistic about the long-term opportunities in the 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 Asia distributor markets net sales were $3.1 million for the quarter, up 39% compared to last year, the increase was primarily due to the timing of promotional activities and increased distribution primarily in South Korea, Malaysia and Thailand, our Asian distributor markets are not impacted by currency translation since we will sell our products in U.S. dollars in these markets. I'll take a break. And now hand over to Jay who will continue to review the results from the financial side.

Thank you, Garry. First let's start with a discussion about how we performed against our most recent issued fiscal year 2017 guidance. We’d expected our fiscal year 2017 net sales to be between $382 million and $388 million. Today, we reported fiscal year revenue of $380.5 million, flat to prior year. We expected gross margin to be above 56% and today we reported gross margin of 56.2%. We expected our global advertising and promotion investment to be below 6% of net sales and today we reported A&P investment of 5.4%. We expected net income to be between $51.3 million and $52.3 million resulting in diluted EPS of $3.64 and $3.71 assuming 14.1 million weighted average shares outstanding. Today we reported net income of $52.9 million and a diluted EPS of $3.72 based on 14.1 million weighted average shares outstanding. Overall, we delivered full fiscal year results in line with our most recent guidance. As Garry has mentioned returning to topline growth continues to be a top priority for us. However we believe that our bottom-line results are solid and demonstrate the strength of our business model. Now let's turn to our 50/30/25 business model and review the long-term 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 and that leaves us finally with EBITDA at 25%. First, the 55 our gross margin, in the fourth quarter our gross margin was 56% compared to 57.4% last year. Net changes in major input costs which include petroleum-based specialty chemicals and aerosol cans, negatively impacted our margin by 170 basis points in the current quarter primarily due to the increased cost of petroleum products. As you know, crude oil is one of the primary feedstocks of our petroleum-based specialty chemicals. This impact is even more pronounced in our EMEA segment where the cost of petroleum based specialty chemicals are sourced in pound sterling yet the underlying inputs are denominated in U.S. dollars. The strengthening of the U.S. dollar against the pound sterling resulted in significant increase in cost of goods. Sales mix changes and other miscellaneous costs also negatively impacted our gross margin by 90 basis points, and primarily due to product mix shifts in the Americas. Gross margin was also negatively impacted by 10 basis points due to higher warehousing and inbound freight costs primarily in the Americas. These negative impacts to gross margin were partially offset by changes in foreign currency exchange rates which positively impacted our gross margin by 80 basis points. This is because in EMEA, our cost of goods are primarily sourced in pounds sterling, while approximately 45% of our revenues are generated in euros, 25% in U.S. dollars and only the remaining 30% are generated in pounds sterling. The combined effect of the strength in both euro and the U.S. dollar against the pound sterling cost revenues in total to be worth more in sterling, thus improving the gross margin. Advertising promotional and other discounts decreased compared to last year, positively impacting gross margin by 40 basis points. Gross margin was also positively impacted by another 10 basis points due to select sales price increases which we implemented in EMEA over the last 12 months. As a reminder, our long-term growth margin target of 55% is not contingent on oil staying at any particular price point. We can't control global market dynamics such as the price of crude oil or fluctuating currencies, but we can continue to be focused and delivered in managing the rest of our business so that we will be able to maintain gross margin at a level close to our target of 55% over the long-term. Now I’ll direct 30 or our cost of doing business. In the fourth quarter our cost of doing business was approximately 34% compared to 38% last year. Our goal is to have the cost of doing business be near 30%. The decline this year over last is primarily due to the decreased employee related costs and lower A&P investments in the fourth quarter compared to that last year. SG&A expense was $28.2 million in the fourth quarter versus $32 million in the prior year. This decrease was driven by lower employee costs which decreased year-over-year primarily due to lower earned incentive accruals associated primarily in the U.S. While our target is to have our cost of doing business at 30% of net sales we plan to continue to make thoughtful and deliberate investments in support of ours to strategic initiative number five that of operational excellence and to support our long-term growth objectives of the business. This includes investments in quality assurance, regulatory compliance and intellectual property protection in order to safeguard our 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 fourth quarter 73% of the cost of doing business came from three areas, people costs or the investments we make in our tribe, along with the investments we make in marketing, advertising and promotion, as a percentage of sales our A&P investment was 5.5% in the fourth quarter. And then finally freight costs, the cost to get our products to our customers. And that brings us to EBITDA, the last of our 55/30/25 measures. EBITDA was 23% of net sales for the fourth quarter compared to 22% in the fourth quarter last year. This increase was the result of a variety of factors, but the primary driver was a decreased in employee related costs I discussed earlier. These decreases employee-related costs were substantially offset by the impacts of lower gross margin and a much lower level of other income related to foreign currency exchange gains from period to period. The provision for income taxes was 26.4% in the fourth quarter essentially unchanged compared to the 26.3% in the fourth quarter of last year. Net income for the fourth quarter was $14.4 million versus $14.2 million in the prior year. Changes in foreign currency exchange rates had an unfavorable impact on the translation of our consolidated results. On a constant currency basis net income would've been $14.7 million in the fourth quarter. Diluted earnings per common share were $1 and $0.01 in the fourth quarter compared to $0.99 for the same period last year. Diluted weighted average shares outstanding decreased to 14.0 million shares from 14.3 million shares a year ago. For the full year results it's also worth noting that we experienced in non-operating items related to foreign currency exchange gains that favorably impacted fiscal 2016 income before taxes by $2.4 million. This level of gain was not repeated in fiscal 2017. In addition net interest expense unfavorably impacted results year-over-year by $1.1 million. This is primarily due to higher balances and higher interest rates associated with our line of credit. Now a word about our capital allocation. Our capital allocation strategy includes a comprehensive approach to balance investing for long-term growth while providing strong returns for our stockholders. We typically target maintenance CapEx of between 1% and 2% of net sales and we expected to return to these levels in fiscal 2018. As a reminder our CapEx as a percent of sales was higher than normal in fiscal 2017, due to the investment we made during the year to buy and renovate a new office building to house our San Diego-based tribe members. We understand the importance of regular dividends to our stockholders and we targeted dividend payout of 50% of net income and have continued and consistently increased our dividend over the past seven years. On October 10th our Board of Directors approved a regular quarterly cash dividend of $0.49 per share payable October 31st to stockholders of record at the close of business on October 20th. Based on today's closing price of $112.65, the annualized dividend yield is 1.74%. During the fiscal year we repurchased approximately 290,000 shares at a total cost of $31.1 million under the current $75 million share repurchase plan, which was approved by the board in June 2016. As of the end of the fiscal year we had $43.9 million remaining under the plan. Now, look at guidance. For 2018 net sales is projected to be between 4% and 6% with net sales expected to be between $396 million and $403 million. Gross margin for the full year is expected to be near 56%, advertising and promotion investment is expected to be near 6% of net sales. And net income is projected to be between $52.9 million and $53.8 million. Diluted earnings per share is expected to be between $3.81 and $3.87 based on 13.9 million weighted average shares outstanding. Now that completes the financial overview, I’ll turn it back to Garry.

Great. Thanks, Jay. So let me sum up and share what you may have heard on the call. You heard that our results demonstrate that our robust business model and global diversification can deliver record earnings even in time of currency exchange headwinds. You heard that for the fist time in a long time foreign currency exchange rates slightly benefit our reported quarterly results. You heard that for the full fiscal year we achieve EPS of $3.72 which is a new company record and above the top end of our most recently issued guidance. You heard that global sales of WD-40 Specialist were almost $26 million in the fiscal year of 2017, which represents a 20% increase over the last year. You heard that we issued new guidance which projects the company will return to top line growth in fiscal year 2018, hoping that exchange rights stabilize. You heard that we have refreshed our strategic initiatives and that a new long-term revenue target is to drive consolidated net sales to approximately $700 million in revenue by the end of fiscal year 2025. So in closing, I'd like to share a quote with you from John Maxwell “sometimes you win sometimes you learn”. Thank you for joining us today and a special thank to our WD-40 global tribe members for their passion and dedication to our great company again in 2017. We’d be please now to open the conference call to your questions.

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

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

Good afternoon, Liam.

Garry, you talked about U.S. maintenance sales being down due to tough comps where you had the different formula. How did Specialist perform underneath that and facing tough comps there?

Our Specialist performed very well. Specialist was up by I think 20% in the quarter and 20% in the year. So we are very, very pleased with our progress on Specialist and we continue to gain distribution of the already launched products. And this year we launched two new Specialist lines in our degreasers and greasers which were continue to gain distribution on. So, I would say, Specialist is doing what we wanted to do. And Jay is just saying -- showing me, it was -- what is it, Jay?

16% in the quarter.

16% in the quarter and 20% in the year.

Okay. And that was U.S. or U.S. alone and North America?

In the U.S. Specialist sales in the U.S. were up 12% in the quarter.

Okay. So Specialist pulled this on. This was straight tough comps through the anomaly from a year ago. Is that right, U.S. maintenance sales? sire where I would say I'm specialist is doing what we wanted to do. Jay is just saying, show me. What is it Jay?

16% in the quarter.

16% in the quarter and 20% in the EU.

Okay. And that was U.S. alone and North America.

In the U.S. specialist up and the U.S. were up 12% in the quarter.

Okay. So specialist pulled us on this restraint tough comps through the anomaly from a year ago, is it right in U.S. maintenance sales?

That’s correct. And just as an add to that, we’re encouraged by early results this fiscal year. From what we see so far the United States market in the first quarter is back in the growth.

Okay, great. You have your long term plans reset. Is there any additional investment that needs to be made either in your recent – over the past two years you restructured your distribution, you’ve invested in manufacturing. And I know your headquarters had nothing to do with operations, but is there any – are there any big capital projects or anything that needs to be done structurally to accomplish these $700 million in 2025?

Liam, there’s no sight of any major capital investments other than the ones that would be ongoing which would be continued tooling around our Smart Straw. The main operational change that we’re looking at is increasing the amount of product that we actually manufacture in China and that ships into the rest of the Asian markets. So we’re doing some supply chain architectural work there that'll happen over the next 18 months or so. But it shouldn’t be that visible. It's just a matter of moving some product into China and then shipping product out of there into some countries that we’re not necessarily shipping into out of China.

Great. Thank you, Garry, thank you Jay.

Thank you, Liam.

Our next question comes from the line of Daniel Rizzo from Jeffries. Please proceed with your question.

Hey, guys. How are you?

Good Daniel.

Good. If we think about your long term goals and the growth in Specialist I think from 26 million to 100 million. Would that suggest that just the improved product mix would drive or fuel margin expansion beyond what your current projections are or what the current 55/30 is –30/20 plan is? I mean, longer term could we go much higher than that just with the improved product mix?

We would like to think so, but the issue we’ve got is oil. And right now, where we are projecting our forward margin based on oil sort of staying where it is. So oil is the big play in the middle of that. Of course a lot of Specialist products do have higher margins. So naturally margins may strengthen over time, but I think right now we’re very comfortable in that 56 range that we’re in and we'll see how it pans out as oil settles over the next year or so.

And given the long-term, I guess, the need for longer-term international growth and introducing your product elsewhere, would that also – just that promotional activity will also be somewhat of a headwind for again just improvement from product mix?

Not quite sure I understand your question. Are you asking me what?

Well, I’m just wondering if promotional activity and rebates and then discounts are necessary over the long-term to continue to grow or to meet that topline revenue growth that you’re looking for?

I don't think that will change much from historical levels. We will still be investing around near 6% in marketing and I don't believe that we have -- we will be changing our pricing structure to drive revenue. It will be about the same as it's been.

Okay. Thanks. And then one final question. I was listening to another call today with a coating company suggesting that changing demographics in the U.S. because the less do-it-yourself product might be a less strategic headwind over the long-term or such structural change because people doing less by themselves as basically the baby boomers age. I was wondering that something that could affect you with something you're seeing or anticipate or just any color can provide around that thought?

Of course, we continue look at future proofing our business. If we were just in the United States, yes, people may be moving to from do-it-yourself to do it for me, but then someone's going to do that. For example you if you look at the electromechanical industry there is a bulging number of new trades people coming into that industry as we go forward as trades are moving more from just mechanical to electromechanical. Those changes happening of course with motor vehicles, if we were a company that was dependent on what I would call commodities in motor vehicles i.e. oil and fan belts and things like that. I think we’d be more concerned, but not -- but some of the new products that we’re bringing out over time I think will also take advantage of some of the changes. We’ve been working with a company in Boston for a number of years looking at future proofing or looking at where opportunities may be. So it's a dynamic world out there which is a lot of fun whether it would be the impact of e-commerce or digital, whether it would be the change in usage patterns of our end users. All of these are things that we think about and we dive into on an ongoing basis.

Thank you very much.

Thanks.

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

Thank you and good afternoon everyone.

Good afternoon.

Just following up on the last – on Garry’s answer about e-commerce, are you benefiting from e-commerce, do you have a special program that is going to actually get people -- allow people to buy more online than they are doing currently. And what will that do to your results?

Well, e-commerce to us is just like a new distribution channel of the past. And yes we partner with our current customers to ensure that we’re supplying them with all of the tools they need to ensure that we upfront when consumers and end-users choose to buy online and not go direct to brick-and-mortar stores. We also have a whole e-commerce group within the company globally that is ensuring that we are optimized on search engines that we are there when people are searching to stop a squeak. It's WD-40 that they find. So e-commerce is changing fast. We’re paying a lot of attention to it and we are partnering with people like Amazon and eBay and our other customers to ensure that we’re in front from in China which is a huge e-commerce market and we’ve got a big activity going on there. So we’re very much aware of e-commerce. We’re paying attention to it and it really gets back to the fundamental of our business, make the end-user aware and make it easy to buy and it's our job to make it easy for end-users to buy our products whether they go to a service station, a gas station, a hardware store and auto store or to their laptop.

Okay. And whatever you sale via Amazon, eBay and I’m assuming you are referring to Alibaba in China. Do you – is the margin different depending on how you sell the product lines outside of direct versus distribution?

No. The margin is very similar across all of our trade channels.

Okay. And then if you could help me a little bit on the U.S. I understand that last year there was a certain amount of inventory build of the low VOC type of blue can. Does that mean that there is excess inventory currently in the channels and this is why you didn’t have any promotional activity in 2017 or at least in the four quarter?

No. There’s no excess inventory in the channels now. When there was excess inventory in the channel in the first quarter or the fourth quarter of last year and the first quarter of this year as we cleansed out all of the VOC product that wasn't 50 state compliant. We are now 50 state compliant along – we have the VOC regulations. So we kind of washed through that. And as I mentioned I think when Liam was on the line we’re encouraged by early results in this fiscal year. What we seen so far as the United States market is back into the growth mode and our promotional activities are in place.

And so if you – I guess you did tell us that you are down 11% in the U.S. So could you talk about whether or not you had an impact from the Hurricanes and the earthquake in your fourth quarter? And if you not do you anticipate negative impact in the first and then positive people as people replenish their lost supply of WD-40?

Thank you. Yes, sure weather events of this nature have certainly impacted our company in the past. Some people won’t remember, but the first truckload order of WD-40 ever was filled to meet the disaster needs of victims of hurricane Carlo along the U.S. Gulf Coast many years ago. A short-term there will likely be some disruption in sales, in Latin America for example, hurricane Irma and Maria have had a major impact on sales activity. Impacted countries through that region in the Caribbean including of St. Martin, Puerto Rico, the Dominican and Puerto Rico have all had large disruptions in the first quarter. But when you will add it all up the largest of that being Puerto Rico. It won’t have a material impact on our consolidated sales. The other side of the coin is as recovery begins in these regions we would expect to see consumption increase. Our marketing and supply chain teams have been working on their disaster recovery plans to put in place, to make sure that areas of high need received the volumes of product they require to respond to natural disasters like the ones we've seen and this is similar to what we saw in the Philippines a couple of years ago after the flood WD-40 is a go to product for cleaning out moisture in wet engine. So the bottom line is we wouldn't expect it to have a material negative impact in the first quarter. And we may see some increase in consumption as we go through the year as construction starts to happen and people start to get somewhat back to normal lives, but that's how we see it.

And so, this is included in your 4% to 6% topline growth for 2018 versus 2017?

As of today and what we know, yes.

Okay. 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 lines.