Good day, and welcome to the WD-40 Company Third 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 May 31, 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, July 10, 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.

Thanks, Wendy. Good day everyone and thanks for joining us for today’s conference call. Today, we reported net sales of 107 million for the third quarter of fiscal 2018 compared to 98.2 million in the third period last year. This reflects an increase of 9% year-over-year. Foreign currency exchange rates favorably impacted our sales in the third quarter. On a constant currency basis, we grew net sales by 5% year-over-year. Net income for the third quarter was 16.1 million compared to 14.4 million in the third quarter of last fiscal year, an increase of 12% period-over-period, and diluted earnings per share for the third quarter were $1.15 compared to $1.02 for the same period last fiscal year. Now let’s start our discussions 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 and to do so while following our 55/30/25 business model. We’d like to remind investors that those long-term targets are guideposts, not guidance. We acknowledge that our anticipated 2025 targets are aspirational, but we continue to believe if we keep our focus in the right places we can be successful in moving towards these targets. Our strategic driver number one is to grow WD-40 Multi-Use Product. Our most important strategic driver is 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 order to achieve our target of 530 million of Multi-Purpose Product revenue, we need to continue our steady building of the Multi-Purpose Product across all markets through both geographic expansion as well as through innovation. In the third quarter, global sales of WD-40 Multi-Use Product were 82.5…

Thanks, 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 30% of net sales. And finally, the 25 which represents EBITDA. Let’s look at the 55 or our gross margin. In the third quarter, our gross margin was 55.8% compared to 55.3% last year. This represents a decline of 50 basis points and for the first time in a few years that our gross margin has dipped below our long-term target of 55%. Changes in major input costs, which include petroleum-based specialty chemicals and aerosol cans, was the primary driver of this decline and negatively impacted our margin by 140 basis points. As you know, crude oil is one of the primary feedstocks of our petroleum-based specialty chemicals and recently we’ve experienced rising oil costs which have put pressure on our cost of goods in all three of our trading blocks. Rising petroleum-based specialty chemical costs negatively impacted our gross margin by 100 basis points in the quarter. Also contributing negatively to our gross margin by 40 basis points was the increased cost of aerosol cans. In addition, gross margin was also negatively impacted by 40% due to higher warehousing and inbound freight costs, mostly in the Americas segment and primarily due to the freight market in the U.S. Promotion and other discounts that we give our customers also negatively impacted gross margin by 30 basis points. Then finally we had changes in foreign currency exchange rates negatively impacted gross…

Thanks, Jay. In summary, here’s some of what you heard on this call today. You heard that we had a 9% net sales growth on a reported basis and a 5% net sales growth on a constant currency basis. You heard that our global sales of WD-40 Multi-Use Product grew 10% during the quarter. You heard that global sales of WD-40 Specialist grew 16% during the quarter. You heard that we reported record EPS of $1.15. You heard that price increases that have been or will be implemented this year are expected to help our gross margin remain in line with our 55/30/25 business model. You heard that we decided in May we will repatriate some of our earnings generated abroad and use these proceeds to pay down a portion of our line of credit. You heard that we’ll continue to return capital to our stockholders through regular dividends and share repurchases. And you heard that we have updated our fiscal 2018 guidance to only reflect updated foreign currency exchange rates. So today, I’d like to share with you in closing a quote from Nelson Mandela, “Education is the most powerful weapon which you can use to change the world.” Thank you for joining us today. We will be pleased now to open the conference call for questions and we’ll go back to the operator.

[Operator Instructions]. Your first question comes from the line of Liam Burke from B. Riley FBR. Please go ahead.

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

Good afternoon, Liam.

Good afternoon, Liam.

Garry, you had strong Specialist sales overall. Understanding that sales are variable from quarter-to-quarter, you did have lower sales in the Americas in Specialist. Is there something related to that or is it just timing of promotion or what was behind that?

Again, Liam, it’s just a continuation of the process of expansion of Specialist. I’ve shared in the past that you’re going to see it vary from quarter-to-quarter. We are 26% up year-to-date. Specialist sales are now pushing in, I think for the year in the $27 million, $28 million mark. We want to take that to $100 million by 2025, so it’s a journey. And no there’s nothing that concerns us. We continue to build more of that business on a day-to-day basis.

Okay. And EZ-REACH in the U.S. was up 12%. You’ve launched that product in Europe, WD-40 Flexible. How has the progress been or is it too early to tell?

We’ve launched it in Europe only in Italy and France, and the initial launch was successful. We’re now ramping up our plans to take it further into Europe next year, which is really a plan around production. We have capacity. So we’re now going to be expanding that across a number of other markets in Europe as we roll out our plans in the following fiscal year. So far, very pleased with EZ-REACH everywhere including Australia and France and Italy and the US.

Great. And Jay you mentioned that you’re going to allocate some of your cash to reducing the short-term debt. Can you give us a sense as to how much you plan on reducing that percentage wise or any way here?

Yes, we think it’s about 80 million.

So you’ll reduce that by $80 million.

Yes, that’s our expectation.

Great. That’s it for me. Thank you.

Thank you.

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

Hi, guys. How are you?

Good, Daniel. How are you?

Doing well. So what’s the range for petroleum prices before you would kind of feel the need to raise your own prices again? Do you have a goal or a range in mind for that?

We’re currently kind of at the top end of where we think oil was going to be when we raised our prices. So I think that we’ll be watching it closely. I would suggest that anywhere in the mid-80s is something that would be impactful. We’d need to wait until we see the flow through and the mix of what we’ve already done. I think oil is currently sitting around the $73, $74 mark, so we’ll see how the price rise is impacted as they flow through, but we would think that if it got closer to 85, we might have to do something differently.

Okay. And then you’ve kept adjusted guidance to account for FX changes or swings. I was just wondering what your assumptions are for FX for the remainder of the year.

Essentially that FX rates would remain the same as they are. So if we see much variance from where they are today that would have an impact.

Okay. And then finally, you indicated you’re expanding your online presence for WD-40 BIKE and doing your digital efforts, and I may [indiscernible] forward, does that include like working with retailers such as Amazon?

Yes. Amazon has been a customer, is a customer with us globally as is eBay, Taobao and most of the new digital players as well as the great work that we’re doing and getting support from our regular customers who are having expanded digital presence. So our investment in digital is to maximize search engine optimization to continue to have digital content that’s driving consumption through education and new uses. We’re very excited about the investment this year and next year and the year after. We have a true determined goal to own digital globally in our category. And the reason we can do that is we’re the only true global brand. So we’re excited about it and we’re pleased to be investing against it.

Okay. I’m sorry, just got one more. So you mentioned that – I think there was some disruption with three major marketing distributors I think in China or in Asia anyway. Does that just mean you’re shifting – you’re changing distributors, like you’re changing them out with somebody different, and I was wondering if that’s true, how often that happens?

Okay. To answer the first part of the question, no, it’s not China. It was in Singapore, Malaysia, and Indonesia. We already made the change a number of months ago. But when we changed marketing distributors, there’s a period of time where inventory transfers from the old distributor to the new distributor, and while the new distributor settles into distribution, we tend to have a hiatus in order flow. How often does it happen? When it needs to happen. If you look at our distributor markets globally, we have many, many, many that have been with us for many years, but if we feel that a market needs further development, we analyze that market, we determine whether we should be direct in that market or whether we need to find a new partner that has broader distribution and we make those changes. In Asia-Pacific, a number of years ago we changed out one of our distributors, and that was probably the only time for a while. But it’s not something that we do that regularly but we do it when we need to, when we feel that we need to increase the presence in the market.

Okay. Thank you very much.

You’re welcome.

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

Good afternoon, everyone.

Hi. Nice to hear you.

Just following up on the last question, what was the reason that you had to change? Were they too small distributors in order to be effective given how you are pushing your new products in the region or were they just not efficient?

It certainly wasn’t the second part. As we look at our 2025 goals we review the capabilities not only internally of our own organization and where we need to make changes but externally. So in one market it was because we believe that we needed to have a different partner to get us to that position in 2025. The second one was because the prior distributor was acquired by a new company. As the acquisition was closed, we didn’t feel that together that our future was one that would deliver the growth, so we decided to make a change.

I see. So it is not that at the onset when you get started in one particular region you first go with a small distributor in order to get your feel around the need in that particular region then?

No, not at all.

Okay. And then if we look at the pricing you have instituted and some that are coming up, are those catching up with 2017 inflation rate and how much more inflations have you seen so far here to-date and what are you expecting for the full year if you have a feel for that?

The only area we’re certainly seeing any movement in costs certainly are cans and we’ve shared the impact of that. The other variable really is oil and who knows. Most of the other input costs have been reasonably stable. Right, Jay?

Yes, it depends on the market and we’ve seen some price inflation in the European segments a while back, but most of it is already baked in.

Okay. And you gave us the FX impact on overall revenues and you may have given us that impact on maintenance and on Specialist, but I did not catch it. So of the 10% top line growth in maintenance products and the 16% top line growth on Specialist products, what was the FX contribution?

I don’t know we’ve got that broken out.

So I did not miss it.

You did not miss it.

Are you willing to share it so we get a feel?

We don’t have it with us right now, but I would suggest that the ratio would be the same across all of the product lines.

Okay, so just a little less than half then, right?

Yes.

And lastly, if I may, what was – still on the FX side, what was the impact on EPS?

I think we gave it on income I believe it was and I think we said that – I apologize. So our net income without currency – on a constant currency was up 6% versus the 12% reported.

Okay. And then one last one if I may. The tax rate for this year will be for the full year 22% to 23%. Do you have an estimate for 2019 and beyond assuming everything stays the same?

Yes, we think it will be a couple of percentage points lower.

So around 20?

20-ish is probably a number we can – we haven’t really fully tied it down, but that’s a number that’s in the range for the moment.

Okay, great. Thank you and congratulations.

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.