Good day and welcome to the WD-40 Company First Quarter Fiscal Year 2018 Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I would now like to turn the presentation over to the host for today’s call, Ms. Wendy Kelley, Director of Investor Relations and Corporate Communications. Please proceed.

Thank you. Good afternoon and thanks to everyone for joining us today. 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 November 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 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, January 9, 2018. 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 on today's conference call. I'm delighted to report for the first time in a long time that the impact of foreign currency exchange rates are not diluting our top line growth results. Today, we reported net sales of 97.6 million for the first quarter of fiscal 2018, reflecting an increase of 9% from the first quarter of last fiscal year. Net income for the first quarter was 12.6 million compared to 11.8 million in the first quarter of last fiscal year, an increase of 7% period over period and diluted earnings per share for the first quarter were $0.90 compared to $0.82 for the same period last fiscal year. Now, let's start with the discussion about our strategic initiatives. As most of you will recall, at the end of last fiscal year, we shared with investors a revised view of our strategic initiatives and our 2025 revenue targets associated with 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. Strategic driver number one is to grow WD-40 multi-use products. Our most important strategic initiative is to take the blue and yellow can with a little red top to more places for more people. We’ll find more users more frequently. We believe there are many opportunities in front of us that will enable us to achieve our anticipated target of approximately 530 million in WD-40 multi-use product revenue by the end of fiscal year 2025. To achieve this target, we will maximize the product line through geographic expansion, increased market penetration and development of new and unique delivery systems. In the first quarter, global sales of WD-40 multi-use product was 74.5 million, reflecting an increase of…

Thank you, Garry. First, let's review our 55/30/25 business model, the long term targets we use to guide our business. As you may recall, 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 goal is to be closer to 30% of net sales. And finally, the 25 represents EBITDA. First, a look at the 55 or our gross margin. In the first quarter, gross margin was 55.5% compared to 57.2% last year. Net changes and major input costs, which include petroleum based specialty chemicals as well as aerosol cans negatively impacted our margin by 120 basis points in the current quarter, primarily due to increased costs of the specialty chemicals compared to last fiscal year in all three segments. As you know, crude oil is one of the primary feedstocks of our petroleum based specialty chemicals and the average cost of crude oil that flowed through our cost of goods sold this year was higher in the first quarter compared to the same period last year. So we had negative impacts to gross margin. Sales of exchanges and other miscellaneous costs also negatively impacted gross margin by approximately 50 basis points. Gross margin was also negatively impacted by 30 basis points due to higher warehousing and inbound freight costs in all three segments. These negative impacts to gross margin were partially offset by changes in foreign currency exchange rates, which had a slight positive impact to gross margin of 10 basis points. This is because in EMEA, our cost of goods are sourced primarily in pound sterling, while approximately 70% of our revenues are generated in currencies other than pound sterling. Advertising, promotion and other discounts…

Thanks, Jay. In closing, I’ll summarize what you heard from us on the call today. You heard that for the first time in a long time, the impact of foreign currency exchange rates are not diluting our top line growth results. You heard that MUP is up with 10% global growth in the first quarter. You heard that the Americas and EMEA both delivered double digit maintenance product sales growth. You heard that the global south of WD-40 specialist grew 29% in the quarter. You heard that we've increased our dividend 10% last month and that’s the increase that represents the eighth consecutive year the company has raised its annual dividend over which time the dividend has increased 116%. You heard that we updated our fiscal year 2018 guidance for net income and diluted earnings per share to reflect our recent adoption of a new accounting standard for stock based compensation. And you heard that we expect the new tax law to have some favorable impact on our annual effective tax rate in fiscal year 2018 and that once our tax team have completed their assessment, we will update our guidance accordingly. In closing, I'd like to share with you a quote from Richard Branson, “If your dreams don’t scare you, they are too small.” Thank you for joining us today. I’ll be pleased now to open the conference call to your questions. Back to the operator.

[Operator Instructions] And your first question comes from the line of Liam Burke from B. Riley FBR.

Garry, this isn't a big deal, but you had strong EZ Reach sales in the US. Specialist sales were pretty strong. Those are nice margin products. But you had a little bit of unfavorable product mix in the multipurpose category. What caused that?

What unfavorable product mix?

You had about 50 basis points in lower gross margins year-over-year on less favorable product mix. But during your prepared comments, you were saying EZ Reach in the US was strong. Specialist sales were good. What was in the mix that would cause that?

Just let me see here, Liam. There was nothing particular. When I look at the mix, there was about 1 percentage point in the US that was off and it may have been because of some of the promotional phasing of EZ Reach. We did have some major promotions going on in that area so that would probably be what I could point to.

Okay. And on the subject of tax reform, do you see any shift in the capital structure? You should be able to repatriate some of the cash you have overseas. Would you apply any of that to debt reduction or are you comfortable with your current capital structure?

Well, we’re generally comfortable with our current capital structure, but certainly, that's an option for our use of cash and we wouldn't -- it wouldn't surprise -- you shouldn’t be surprised if we do bring some back and pay down some debt.

Your next question comes from the line of Daniel Rizzo from Jefferies.

Just so in terms of the gross margin and your outlook for 2018 and for the 55%, I mean, given what oil has done, would that suggest that you’re going to raise prices to offset in the back half of the year if need be to keep the target and to kind of maintain what you’ve said as a long term goal.

Thanks, Daniel. Right now, we’re looking at the flow through of oil. As you may recall, it takes 90 to 120 days for oil to flow through. Currently, we're seeing oil at around the $62 mark. It was probably in the mid-50s or so prior to that. We have taken some pricing in some areas of the world where some of the oil impact is a little higher, particularly in Europe. But at this time, we’re really not anticipating any real pricing changes. What we are seeing is the ability to maintain margins through our premiumization, which is primarily the conversion of Smart Straw in Canada, sorry, in the EMEA segment and some of the other products that we're bringing and some of the specialist products. So we are very committed to our 55 or greater gross margin. We've been managing through oil at varying levels for many years. If oil does do something unexpectedly in spiking, then, we'll make a decision then and we may take a hit for a short period of time, but it will only be a short period of time. So right now, we've not changed our guidance and we feel comfortable where we are. We'll see what happens in the next 90 to 120 days.

And then with sales, you had a very strong quarter. It seems like things accelerated and you no longer have the FX headwind. Are you -- would that suggest that maybe towards the end of the year again that you might be -- not be raising guidance at this point, but that -- I mean it just seems like that would suggest that things aren’t going to continue at this path and this quarter was more of an outlier. I was just wondering if, given the sales growth you have, no longer the FX headwind, if perhaps sales could come in higher than what you’re currently anticipating.

If we thought that, we would change our guidance. So, we're comfortable where we are now. It's like a game of golf. It's not over till 18 holes are played and we feel the first part of our year was -- put us on a strong point and if we feel later in the year it continues then we will do what we should do and that's we'll update people with good knowledge and good information on the way the market is.

And then finally with the new building in the UK, is that I mean going to follow a similar path as the one in San Diego in terms of cost and timing? I mean I know you said you wanted to take care of everything this year, but I was wondering if we can expect a similar result as what we saw last year.

It'll be smaller than the building in San Diego. We think the total costs, I think, Jay mentioned was in the vicinity of 13 million US. So, it's about 5 or so million less than we invested here in San Diego. We haven't yet obviously found or made any moves on acquiring a building. We've been looking at a number of opportunities in the Milton Keynes area and we'll be working on that, but this will be somewhere in the vicinity of 18 months. As a project, we believe once we do find the building and we acquire it, we’ll be able to update our investors a little more on the exact total investment.

And your next question comes from the line of Rosemarie Morbelli from Gabelli and Company.

Just following up on the previous question, if sales are going to be lower for the -- sales growth are going to be lower for the full year than they were in the first quarter, is that due to seasonality or are there other reasons why you would expect slower rate for the full year?

We have very real consolidated seasonality and that's because we're spread across so many geographies. It's summer in Australia and it's winter here. One offsets the other. Southern Hemisphere, northern hemisphere, but these sales vary quarter to quarter really around our promotional activities, what -- where retailers and distributors are promoting and in what geographies. So if you've looked past -- back at our past, you’ll see that we do have some fluctuations quarter to quarter, but they're really not driven by season. They're more driven by events that we do have some influence over.

Okay. So that brings me to the question about China, the fact that your sales were down 9%. You talked about timing of promotions or timing of order, correctly. Or is it dependent on your promotional level? Do you expect those orders to show up in the second quarter or do you need to have additional promotions in order to have new orders?

No. We believe that you'll see a major part of those orders show up in the second quarter. We actually ran a fairly large dealer event in China, just near the end of the first quarter. A lot of those orders won't ship until the second quarter. So, we expect to deliver a pretty good top line growth in China over the year. So, I think that we’re fairly comfortable as we continue to build our business in China.

And then I was wondering regarding -- you said that you need to build up the distribution of some of your new specialist product lines. Why aren't they using the same distribution network as a multi-use? I guess I don't quite understand that.

I'm sorry. Yes. They are using the same distribution network. We just haven't released them through all that distribution. So, we don't take everything to every trade channel in every country at the same time. It's really a phasing of where it's appropriate and what other activities we have going on around at that time. So it's not taking them to new distribution. It's really executing distribution in trade channels that we currently sell our blue and yellow can in, but we make a deliberate decision on when to go in certain geographies.

And then lastly if I may, looking at your 2025 targets, I understand the WD-40 multi-use target. I understand the specialist for the client target. The other 70 million, is that expected to come from products that are not currently in your portfolio?

No. It's going to come from products that are currently in our portfolio. Those products currently add up to about $53 million worth of revenue and in our investor presentation, on page 5 that should be up on our website now, if it’s not, it will be soon, it shows that they are currently at that 63 million and moving on to 70 million by 2025. And the products in there are THREE-IN-ONE, WD-40 BIKE, GT85, Spot Shot, NoVac in Australia, Solvol and Lava and 1001 in the UK.

Okay. So the difference between this and the specialist product is that the specialist products are more or less the multi-use, but just aren’t different type of applications?

Different applications and different types, for example, in our specialist products, we have products that are -- our new line of greasers, we have a line of degreasers. Then, we have a line of specific maintenance products like our penetrant, our silicon, our white lithium grease, our spray gel. So the specialist products are aimed at the heavy end uses or the trades end uses and we already have a significant portfolio of products wearing the specialist uniform.

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