Good day and welcome to the WD-40 Company Second 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 February 28, 2018. These documents are available on our Investor Relations Web-site 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 could be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a Webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, April 5, 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 very much, Wendy. Good day everyone and welcome to our conference call. Today we reported net sales of $101.3 million for the second quarter of fiscal year 2018, reflecting an increase of 5% from the second quarter of last fiscal year and the first $100 million quarter in the Company's history. Net income for the second quarter was $14.8 million compared to $12.4 million in the second quarter of last fiscal year, an increase of 20% period-over-period. Diluted earnings per share for the second quarter were $1.05 compared to $0.87 for the same period last fiscal year, a new record for the Company. Foreign currency exchange rates favorably impacted our sales in the second quarter but we are seeing solid organic growth thus far this fiscal year. Our global net sales for the first half of the year have grown by 7% on a reported basis and by 4% on a constant currency basis. Now let's start with a discussion about our strategic initiatives. As most of you will recall, our long-term revenue target is to drive consolidated net sales to approximately $700 million in revenue by the end of fiscal year 2025. In support of this target and as a result of the savings that we are going to realize from the Tax Cuts and Jobs Act, we have decided to invest an additional $1 million in brand-building this fiscal year. In addition, we are currently evaluating additional brand building investments for next fiscal year. This investment will focus on two main areas of our core strategies of making the end-user aware and making our products easy to buy. It will first be used to fast-track our global digital presence and to increase the volume of Multi-Use Product sampling programs to targeted end-user groups in countries identified…

Thank you, Garry. First, let's review the 55/30/25 business model. These are the long-term 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 goal is to drive our cost of doing business over time toward that 30%. And then finally, the 25 represents EBITDA. First, we'll look at our gross margin, or the 55. In the second quarter, our gross margin was 55.1% compared to 56.4% last year. Changes in major input costs, which primarily include petroleum-based specialty chemicals and aerosol cans, negatively impacted our margin by 120 basis points. As you know, crude oil is one of the primary feedstocks of our petroleum-based specialty chemicals. Our gross margin was negatively impacted by 80 basis points because the average cost of crude oil that flowed through our cost of goods sold was higher in the second quarter compared to last year. Also contributing negatively to our margin by 40 basis points was the increased cost associated with our aerosol cans. In addition, there were a variety of other costs which combined to negatively impact gross margin by 30 basis points. These miscellaneous impacts include increases in other non-oil and can-related cost of goods sold and other impacts from sales mix changes. Gross margin was also negatively impacted by 20 basis points primarily due to higher warehousing and inbound freight costs, mostly in the Americas segment. These negative impacts to gross margin were partially offset by select sales price increases which we implemented in EMEA and Asia-Pacific over the last 12 months, which positively impacted gross margin by 40 basis points. I'd like to remind…

Thank you, Jay. In summary, what did you hear from us on this call today? You heard that today we reported record net sales of $101.3 million and the first ever $100 million quarter in the Company history. You heard that year-to-date we've seen solid net sales growth with a 7% growth on a reported basis and 4% growth on a constant currency basis. You heard that global sales of WD-40 Specialist grew 38% during the quarter. You heard that today we reported record EPS of $1.05. You heard that our reported results were favorably impacted by the Tax Cuts and Jobs Act and that we intend to invest an additional $1 million during this fiscal year and more next year in support of global brand development. You heard that the global employee engagement survey score increased 50 basis points from two years ago to 93.3%. You heard that we're making some proactive price adjustments to ensure our gross margin remains in line with our 55/30/25 business model, given the increase in commodity costs. And you heard that we've updated our fiscal year 2018 guidance to reflect updated foreign currency exchange rates, higher input cost, and revised effective tax rate, as well as the additional investments we are making to our advertising and promotional investments this year. So, as usual, in closing I'd like to share a quote with you today from Charles Schulz, and it is, 'In life, it's not where you go, it's who you travel with'. That's for our tribe. Thank you for joining us today and we'll be pleased now to open the conference call for your questions.

[Operator Instructions] Your first question comes from the line of Liam Burke with B. Riley FBR. Please proceed with your question.

Garry, could you give us some color on how EZ Reach has been doing domestically or in the Americas, however you want to catch it?

EZ Reach domestically has been meeting our expectation. We don't break out the individual sales, but certainly it's a new product that the end users have embraced, and currently in fact you'll see quite a number of displays of it in major stores around the U.S. as we enter our promotional period with it. And we're very comfortable that we've now rolled it out in Italy and France and we've also rolled it out in Australia. I think we talked about that last quarter. And it will be featured actually on TV in Australia around the next month or so during a big motor racing carnival.

Is that promotion tied to the incremental $1 million that you announced on the call or is the additional brand-building investment separate from EZ Reach?

It's separate. The $1 million this year and what we'll end up investing next year is very focused, Liam. We have done a very deep dive on the digital e-commerce space and just concluded about a month ago a global workshop on the opportunities, and the first place that this investment will go will be to enhance our global digital presence both in the 'make it easy to buy' and the 'make our end-user aware' categories that will include enhancement of education or information in assets with things like YouTube, optimizing our Web-sites globally, and optimizing our search engine optimization and program. So, the majority of it will go there. The other will go to targeted sampling programs in some of our larger opportunity markets, for example, Mexico China, India, et cetera.

Okay, great. Thank you, Garry. Jay, on the cost of doing business front, the SG&A piece of your business was down sequentially. Could you give us a little color on what happened there?

Some of that came from the lower incentive compensation. It was really the bigger impact on the lowering.

Okay, that's great. Thanks, Jay, and thanks, Garry.

Your next question comes from the line of Daniel Rizzo with Jefferies. Please proceed with your question.

You mentioned the weakness with distributors in EMEA was due to timing issues. Would that suggest that there is going to be kind of a snapback in the third quarter here, that it's just flow lumpiness from quarter to quarter?

I don't know whether it will be in the third quarter, but our distributor business over time has ebbs and flows. We would see that we will be on track for the year and we have no anticipation that distributor business will be off for the year. So, it's nothing that we are particularly concerned about.

Okay. And then you mentioned having the two price increases to offset the higher input cost. I was wondering, what the lag is between when that's realized versus what we're announcing today. I mean, it usually take 90 to 120 days or is it less than that, or just any color that you can provide?

Yes, the price increases, some of them have already gone into effect. In other markets like the United States, they go into effect on June 1. So we did announce them to our customers about a month ago. So, I think we should see the margin stabilize. I don't think we're going to have a huge tail or headwind. I think we should line up pretty well as we come through the third quarter.

Okay. And then just on the goals for 2025, you mentioned 70 million in net sales from initiative number three. And you did allude to M&A. But I was wondering if M&A is necessary to meet that goal or is it more about just developing new brands organically?

We have no M&A plans in our 2025 goal. That 70 million that we are talking about, in aggregate right now that group of products is doing I think in our chart 63 million. So it's not a huge growth. We will see some fall-off from some of the household products that are not included in there and that fall-off will be offset by the growth of the products that are in there. Particularly the 3-IN-ONE brand and WD-40 Bike are the two areas that will offset that.

Okay. Thank you very much.

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

I was wondering if Jay's answer to the previous question on SG&A was the reason why revenues in the second quarter were up 5%, but up 7% year to date, so the growth rate slowed in the second quarter, while net income was up 20% for the quarter but 14% year-to-date, so we have kind of a disconnect there.

No. Our incentive programs are an annualized incentive program, so it adjusts as we go through the year, but we don't pay quarterly commissions, if that's what you were alluding to. It's just a matter of us truing up as the year progresses to see what we think our annual cost of our growth reward program will be.

So then what helped the net income line, since it grew 20% in the second quarter?

A big portion of that came from the tax benefit.

Okay. Okay, totally missed that.

We got a significant benefit in the quarter that really had a big impact on earnings.

Okay, thanks. I should have figured that one out. You are anticipating the 2018 tax rate to be between 22% and 23%. Is that a good number to use for 2019 and the out years?

We haven't finalized the 2019 and the out years, but we would expect that it might drop a little bit lower than that.

And the reason being is this year is a blended rate. Our fiscal year is September to August. So we've got the period from September through to December at the old rate and the balance of the year at the new rate. So, that's why we would expect it to be a slightly different rate in the full fiscal, in our full fiscal year of 2019.

Okay, thanks. And looking at the gross margin, let me rephrase this, can you estimate the percent increase in raw material cost versus the percent increase you got on your selling prices for the first half of this year?

We didn't do the math on that, but we should be able to do it from the – we had the amount of impact on margin, so we had a positive benefit of 40 basis points from the price increases, offset by or partially offsetting that much more significant increase in the input costs.

Was that the 70 basis points?

Yes, the input costs in total were 120 basis points. So we had a negative impact of 120 basis points offset by a positive impact from the price increases of 40 basis points.

Okay, yes, I see. So you had the crude plus the cans, all right. And then, can you help me understand, what is the difference between your EZ Reach that you are introducing in the U.S. and the Flexible in Europe, and why aren't they the same?

They are exactly the same. We just call them a different name. Flexible translates better in Italian and Spanish than EZ Reach does. So it's exactly the same product with a slightly different description.

Okay. I thought that you had found something that worked better than the EZ Reach.

No, it's just the naming.

All right, okay. And then lastly, on the EMEA distribution sales down, you said was the timing. Was it also a question of inventory built at the distribution level that they needed to get to?

No. No, it wasn't. Our distributor business globally, whether it would be distributors in Asia-Pacific or in EMEA or in Latin America, because it's a few large distributors, it's not necessarily as smooth as in other areas. So, we do have some quarters where it's up, some quarters where it's down, but overall, the trend continues to be a growth trend, unless you have an unusual event, like we had a couple of years ago in Russia, and we would call that out and talk about that. But there is no unusual event, it's just a timing thing.

Okay.

And the market itself is up 5% year-to-date.

Yes.

Okay. Thank you very much.

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.