WD-40 Company (WDFC) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good day. And welcome to the WD-40 Company First Quarter Fiscal Year 2019 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, 2018. 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 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, January 9, 2019. 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 $101.3 million for the first quarter of fiscal 2019, which was an increase of 4% from the first quarter of last fiscal year. Net income for the first quarter was $13.3 million compared to $12.6 million in the first quarter of last fiscal year, an increase of 5% year-over-year. Diluted earnings per share for the first quarter were $0.95, compared to $0.90 for the same period last year. Now let’s start with a discussion about our strategic initiatives and the brands that support many of them. Our long-term revenue growth targets are aspirational, but we continue to believe that with enough sweat, determination, and hard work, they are achievable. We aspire to drive consolidated net sales to approximately $700 million in revenue by the end of fiscal 2025, and in doing so we will follow our 55/30/25 business model. We refer to the brands that are going to get us there as our 2025 brands. They are, WD-40 Multi-Use Product, WD-40 Specialist, 3-IN-ONE, WD-40 BIKE, GT85, 1001, Spot Shot, Solvol, Lava and Novick. Our 2025 brands are our core strategic focus for the primary growth engine for the company. Strategic initiative number one is to grow WD-40 Multi-Use Product. Our goal under this initiative is to make the blue and yellow can with the little red top available to more people, in more places who will find more uses more often. In the first quarter of fiscal 2019, sales of WD-40 Multi-Use Product was $78.3 million, up 5% compared to the first quarter of last year. This reflects excellent progress towards our most important strategic initiative to grow WD-40 Multi-Use Product to approximately $530 million in revenue by the end of fiscal 20 -- year 2025. Strategic initiative number two is to grow the WD-40 Specialist product line. In the first quarter of fiscal year 2019, sales of WD-40 Specialist were $8.4 million, up 13% compared to the first quarter of last year. This continues to move the company towards its goal for this initiative growing the product line to approximately $100 million in revenue by the end of fiscal 2025. We are optimistic about the long-term opportunities for WD-40 Specialist. However, there may be some volatility in sales levels along the way due to the timing of promotional programs, the building of distribution and various other factors that come with building out a new product line. Our tribe has delivered some best-in-class WD-40 Specialist products over the last several years. As a result, we now have an exceptional portfolio of products that we are proud to have in way of the WD-40 shield. It’s now time to maximize the pipeline of products we have developed by enhancing their distribution through focused and deliberate geographic expansion. Strategic initiative number three is to broaden product and revenue base. Strategic initiative number three includes maintenance products like 3-IN-ONE, WD-40 BIKE and GT85, but it also includes brands such as Spot Shot, Lava in the Americas, 1001 in EMEA, and Novick and Solvol in Australia-Pacific. We believe we are on track to reach a combined revenue of approximately $70 million by 2025. These sales under this strategic initiative were $12 million in the first quarter, up 1% compared to last year. We’ve spent the last several years better understanding how each of these brands perform in their own unique channels and geographies, and many of them generate sizable revenues and they all generate meaningful profit contribution and cash flows. Strategic initiative number four is to attract, develop, and retain outstanding tribe members. Our goal under this initiative is to attract, develop, and retain talented tribe members [Audio Gap] (6:46-7:06) and digital channel strategy. Our efforts under this initiative were recently acknowledged in the Wall Street Journal article written by Sue Shellenbarger. In the article she writes about how today’s employees seek the place of belonging and that companies which excel and engaging their employees posted profit gains through the last recession of 26%, compared with a 14% decline at comparable employees. At WD-40 Company I am certain that our financial success is linked directly to our outstanding tribe members and their exceptional motivation and dedication, nurturing and growing that engagement will continue to be a top priority for us in fiscal year and the years to come. Strategic initiative number five is operational excellence. At WD-40 Company, our cornerstone to operational excellence ties closely to one of our core values at WD-40 Company which is to make it better than it is today. With this as our guiding mantra, we continuously focus on optimizing resources, systems, and processes, while applying a rigorous commitment to quality assurance, regulatory compliance, and intellectual property protection. Using our 55/30/25 business model has a framework, we measure ourselves against this operational excellence initiative. I am really excited to share with you that this month we will be opening our brand new technology center in Pine Brook, New Jersey. Our technology center will house our New Jersey based tribe members and will provide them with a work environment to conduct laboratory tested -- base tested research and development in-house. Not only does this new facility provide our R&D staff with a modern and functional work environment, it also provides us with the opportunity to bring that work in-house as much of the scientific and testing work that was performed in the past was now going to be performed in our new laboratory, which had historically been outsourced. Our new tech center is a shining example of our continued focus on making it better than it is today. That completes the update on our strategic initiatives. So let’s move on to the details of our first quarter starting with sales. As I mentioned earlier, consolidated net sales were $101.3 million in the first quarter, up $3.7 million or 4% versus the first quarter of last year. Translation of foreign subsidiary results from their functional currencies to the U.S. dollar had an unfavorable impact on sales in the first quarter. On a constant currency basis, net sales would have been $102.4 million in the first quarter, up $4.8 million or 5% compared to last year. Before I discuss what’s happening in each of the individual segments, I’d like to take a moment to remind investors that though we do not consider our business to be a seasonal one, it’s common for our sales results to fluctuate one period to another due to various factors, including the level of promotional activities, specific programs being run at customer locations, the timing of customer orders or the impact of new product launches. This is all a normal part of our business and we are accustomed to these types of fluctuations and manage them as part of our normal business activities. It is when something a little out of the ordinary happens that we discuss it in much greater detail here with our investors. So, let’s start with the Americas. Net sales in the Americas, which includes the United States, Latin America and Canada increased to $47.8 million in the first quarter, up about 4% from last year. Sales of maintenance products increased 7% or $2.7 million in the Americas, primarily due to higher sales of WD-40 Multi-Use Product and WD-40 Specialists in the United States. Maintenance products sales in the United States increased 9% or $2.8 million in the first quarter, primarily due to strong sales of WD-40 EZ-REACH, the timing of promotional programs, as well as an expanded distribution in the online industrial and pharm channels. In the U.S. WD-40 Specialist sales were up 32% in the first quarter, primarily due to a successful holiday gift pack promotion we ran in the country, partially offsetting these increases with declines in sales of maintenance products in both Canada and Latin America. In both Canada and Latin America, maintenance products sales were down 2% during the quarter, primarily due to the timing of customer orders. As a reminder, our maintenance products exclude our homecare and cleaning products, sales of our homecare and cleaning products in the Americas decreased 17% in the first quarter compared to the prior year, largely due to lower sales of 2000 Flushes and Carpet Fresh in the U.S., which declined 35% and 46%, respectively. We continue to consider our homecare and cleaning products except for those listed as 2025 brands as half of those brands that continue to generate meaningful contributions and cash flows, but are generally expected to become a smaller part of the business over time. In total, our Americas segment made up 47% of our global sales. Over the long-term, we anticipate sales within this segment will grow between 2% to 5% annually. Now onto EMEA, net sales in EMEA, which includes Europe, the Middle East, Africa and India, increased to $38.7 million in the first quarter, up 11% from last year. EMEAs reported results in the first quarter were unfavorably impacted by foreign currency exchange rates on a constant currency basis sales in the EMEA would have increased to $39.3 million in the first quarter, up 12% from last year, transaction related impacts in EMEA were insignificant in this quarter. 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 64% of the region sales increased 10% during the first quarter to $24.8 million. This growth was a result of increased sales of WD-40 Multi-Use Product throughout most of the EMEA direct market due to our high level of promotional activities, increased distribution and the timing of customer orders. Net sales in EMEA are also positively impacted in the quarter by a 40% increase in sales in homecare and cleaning products during the quarter, which was due to a successful digital promotion, we ran in the United Kingdom for our 1001, Carpet Fresh product. Net sales in EMEA distributor markets, which accounted for 36% of the region’s sales increased 11% during the quarter to $14 million. This increase was primarily due to decreased sales of WD-40 Multi-Use Product in Eastern Europe because of the improved economic conditions in the region, as well as the timing of customer orders. Also contributing to the increase in sales were higher sales in Multi-Use Product in India due to the high level of distribution supported by an increase investment in branding activities. EMEA segment made up 38% of our global business. Over the long-term, we expect the segment will grow sales between 8% and 10% annually. Now down to Asia-Pacific, consolidated net sales in Asia-Pacific, which includes Australia, China and countries in -- other countries in the Asian region, decreased to $14.7 million in the first quarter down 10% from last year. Changes in foreign currency exchange rates had an unfavorable impact on sales in the region. On a constant currency basis, sales in Asia-Pacific would have decreased to $15.2 million in the first quarter, down 7% from last year. In Australia, net sales were $3.9 million in the first quarter, down 13% compared to last year. Changes in foreign currency exchange rates had a negative impact on sales in the region of Australia. At constant currency basis sales in Australia decreased 6% compared to last year. The decrease in sales during the first quarter was due primarily to the timing of customer orders and decrease promotional activities. In our Asia distributor market, net sales were $7.8 million in the first quarter, down 13% compared to the last year, primarily due to the timing of customer orders. We had a very strong fourth quarter and the first quarter is a reflection of a bit of a hangover from that activity. Our Asian distributor markets are not impacted by currency since we sell our product in U.S. dollars in the region. In China, net sales in the U.S. dollars were $3 million in the first quarter, up 4% compared to last year. On a constant currency basis sales in China increased 9% compared to last year, due to successful promotional programs that were conducted in the first quarter of this year. We remain optimistic about the long-term opportunities in China. Although, we expect a lot of volatility along the way due to the timing of promotional programs, the building of distribution, shifting economic condition -- economic patents and varying industrial activities. The Asia-Pacific segment made up 15% of our global business. Over the long-term, we expect sales within the segment will grow between 10% and 12% annually. That’s it for me for now. I will turn over to, Jay, who will continue with the review of the financials.

Thanks, Garry. First let’s start with a review of our 55/30/25 business model. The long-term targets we used 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 then, finally, the 25 represents our target for EBITDA. Well, first, the 55 or our gross margin. In the first quarter our gross margin was 55.1%, compared to 55.5% last year. This represents a decline of 40 basis points. Changes in major input costs, which include petroleum-based specialty chemicals and aerosol cans were the primary driver of this decline and negatively impacted our gross margin by 200 basis points. As a reminder, there’s often about a 90-day to 120 day lag or more before changes in raw material costs impact our cost of goods sold due to production and inventory life cycles. The average cost of raw materials that flow through our cost of goods in the first quarter was higher this year compared to the first quarter last year, which put pressure on gross margin in all three trading blocks. Petroleum-based specialty chemical costs negatively impacted our gross margin by 160 basis points period-over-period. Also contributing negatively to the gross margin of 40 basis points was the increased cost of aerosol cans. These negative impacts to gross margin were partially offset by the favorable effects of price increases, which we have implemented in all three trading blocks over the last 12 months and which positively impacted gross margin by 120 basis points in the first quarter. Sales mix changes and other miscellaneous costs also positively impacted our gross margin by 40 basis points. This is driven by lower inbound freight costs and favorable sales mix changes as we continue to increase sales of premium products like WD-40 Smart Straw, EZ-REACH and WD-40 Specialist. As a reminder, our long-term gross margin target of 55% is not contingent upon commodity prices staying at any particular price point. We cannot control global market dynamics, but we can continue to be focused and deliver in managing the rest of our business, so that we can maintain gross margin at or above our target of 55% over the long-term. Now I will look at the 30 or our cost of doing business. In the first quarter, our cost of doing business was approximately 37%, compared to 36% last year. The first quarter SG&A increased $1.5 million and our advertising and promotional investment increased $900,000, which negatively impacted our gross -- our cost of doing business percentage. Our SG&A increased 5% compared to last year, primarily due to higher employee related costs, increased expenses associated with travel, meetings and professional services. As we shared with investors, we have increased our investments in advertising and promotion to support both physical and digital brand building initiatives. In support of those initiatives, our A&P investment increased 17% year-over-year. As a percentage of sales, our A&P Investment was 5.9% in the first quarter, compared to 5.2% last year. For the first quarter, 75% of our cost of doing business came from three areas, people costs or the investments we make in our tribe, the investments we make in marketing, advertising and promotion, and finally, freight costs to get our products to our customers. While our long-term objective is to have a cost of doing business closer to our target of 30% of net sales, we will continue to make necessary investments in support of our brand building activities and our fifth strategic initiative operational Excellence. Ultimately, revenue growth is the most important factor in helping us achieve our long-term target of 30%. This will bring us now to EBITDA, the last of our 55/30/25 measures. EBITDA was 18% of net sales in the first quarter of this year, compared to 20% last year. Well, that completes the discussion of our 55/30/25 business model for the current quarter. Now, we will look at some other items below EBITDA. The provision for income tax was 17.6% in the first quarter, compared to 23.7% last year. The decrease in the effective income tax rate was due to the favorable impact from the Tax Cuts and Jobs Act in the U.S., which became effective for us in the second quarter of fiscal 2018. We expect that our effective tax rate for the full fiscal year 2019 will be in the 21% to 22% range. Net income for the first quarter was $13.3 million versus $12.6 billion in the prior year, reflecting an increase of 5%. This resulted in diluted earnings per common share of $0.95 in the first quarter, compared to $0.90 in the same period last year and deluded weighted average shares outstanding decreased to 13.9 million shares from 14 million shares a year ago. Now a word about capital allocation, our capital allocation strategy includes a comprehensive approach to balance investing in long-term growth, while providing strong returns to stockholders. Our maintenance CapEx is usually between 1% and 2% of net sales, but we are planning to make additional investments in fiscal 2019. In total, we expect to invest about $22 million in CapEx this fiscal year in support of our fifth strategic initiative operational excellence. This includes regular maintenance CapEx and costs associated with completing the development of our new facilities in the United Kingdom and New Jersey. Additionally, this investment will support an innovation that we -- that will enhance our end-user experience, lower our manufacturing costs and ultimately improve our gross margin. We look forward to updating investors on this exciting innovation in the near future. We understand the importance of regular dividends to our stockholders. We targeted dividend payout ratio of about 50% of net income. On December 11, 2018, our Board of Directors approved a quarterly cash dividend of $0.61 per share, reflecting an increase of 13% over the previous quarter’s dividend of $0.54 a share. This increase represents the ninth consecutive year the company has raised its dividend, over which time the dividend has increased 144%. Based on today’s closing price of $183.78, the annualized dividend yield is 1.3%. During the first quarter, we repurchase just over 41,000 shares of our stock at a total cost of $6.9 million under our current $75 million share repurchase plan, which was approved by the Board in June 2018. At the end of our first fiscal quarter, we had $68.1 billion remaining under the plan. So, with that, let’s turn to fiscal 2019 guidance. Our guidance remains unchanged from what we issued in October 2018. Uncertainty around foreign exchange rates, particularly the British pound and commodity prices are making it unusually challenge -- challenging to forecast certain elements of our business. If foreign exchange rates remain close to current levels for the remainder of fiscal 2019, we would expect net sales to be in the lower end of our guidance range. In addition, we have not updated our guidance to reflect today’s lower crude oil prices, because we have not yet determined if crude oil at less than $65 a barrel is an event or a trend. Additionally, it’s important to clarify that even though petroleum-based specialty chemicals make up a significant portion, approximately 35% of the input costs associated with the can of WD-40 Multi-Use Product, only a small portion of that is directly tied to the cost of crude oil. This is because we do not buy crude oil. We buy custom formulated specialty chemicals, which have complex cost drivers, including manufactured -- manufacturing region, fixed production costs, and distinctive supply and demand characteristics. So though the current price of crude could be a net positive on our gross margin in future periods, it’s too early to determine when and by how much, therefore our guidance remains unchanged. Sales growth is projected -- in our guidance sales growth is projected to be between 4% and 7%, with net sales expected to be between $425 million and $437 million. Gross margin for the full year expected to be near the 55%. Advertising and promotion investment is expected to be between 5.5% and 6% of net sales. The provision for income tax is expected to be between 21% and 22%. And net income projected to be between $62.2 million and $63.2 million. Diluted earnings per share is expected to be between $4.51 and $4.58 based on an estimated 13.8 million weighted average shares outstanding. And note that this guidance does not include any future acquisitions or divestitures. And that completes the financial review. Now I will turn it back to Garry.

Hey. Thanks, Jay. So, let’s sum up on what you heard from us on the call today. You heard that we had a 4% global sales growth in the first quarter. You heard that global sales of WD-40 Multi-Use Product grew 5% in the first quarter. You heard the global sales of WD-40 Specialist grew 13% in the first quarter. You heard that we continue to make progress towards our long-term revenue targets, which is to drive consolidated net sales for approximately $700 million in revenues by the end of fiscal year 2025. You heard that we have increased our A&P investment to support additional physical and digital brand building activities. You heard that we are making some additional capital investments to support the development of our new facilities in Milton Keynes and in Pine Brook, as well as development of our new initiatives. You heard that our Board of Directors increased our dividend by 13% last month and you heard that we have reiterated our fiscal year 2019 guidance. However, we acknowledge that there are some global dynamics which are entirely out of our control and may positively or negatively impact that guidance. So, in closing, I’d like to share with you a quote from Colin Powell. A dream doesn’t become reality through magic; it takes sweat, determination, and hard work. Thank you for joining us today. We’d be pleased to now open the conference to your calls for questions.

Operator? Ladies and gentlemen, please hold tight for one moment.

[Operator Instructions] Our first question comes from the line of Linda Bolton Weiser from D.A. Davidson. Please proceed with your questions.

Hi. Happy New Year.

Happy New Year.

Hi, Linda.

Hi. So, I guess…

[Inaudible]

I guess, first of all, can you just review, because I am just getting back on board here, so I don’t have a recent memory of when was the rough time period when you first started to take price increases and then when was the most recent price increase taken?

So, in the United States, our most recent price increase went into effect around the June and July period of last year, with the total impact of that increase, probably, not realizing until well into the fourth quarter. And then in other geographic locations, particularly EMEA and Asia-Pacific, they were staged during the year depending on the country. And then prior to that in the United States the price -- last price rise we took, I think, was six years ago.

Oh! Okay. Okay. So, then, I mean, the way things work here, I mean, though, that’s fairly recent then that you took these price increases. So you would expect to hang on to them for a while even as we see this oil price rollover here, we would expect the pricing to hold up a little bit longer I would think, is that case?

We are not planning on making any changes to our pricing at this time.

Okay. And what was the rough magnitude of the pricing in the U.S. that you took?

It was about 4%.

Okay. And then, so you did really well in the quarter on the sales line, but U.S. and EMEA looked really good and even though the comparison in the prior year period was quite difficult actually. So can you just give a little more color on that and just as a general strength in the business, anything in particular? And then the comparisons actually get easier in the second fiscal quarter, so should we be expecting even stronger growth?

We expect our growth for the year will be in line with our guidance overall. As you know, we don’t really forecast quarter-to-quarter. But in the first quarter, as I shared in the U.S., it was a very nice quarter. We saw growth in our core product WD-40 Multi-Use Product driven particularly around one of our new initiatives, which is EZ-REACH, and also growth in a Specialist product around a special holiday pack that we trialed in the U.S. that we feel was reasonably successful. In EMEA, it was really across the Board, both made up of new distribution and the continual conversion of our classic can to our Smart Straw can in Europe. And as you might remember, Linda, when we convert from classic to Smart Straw, we get a revenue list because of pricing. And then, of course, there was a rebound in Europe around our MD markets in Russia and Eastern Europe, and we are starting also now to see some really nice sustainable growth out of India. We have been investing in India and we are starting to see some traction there. And then overall, Linda, as you might know we have deliberately taken an investment opportunity in both digital and e-commerce and we have been seeing some good growth in our digital areas. In Asia-Pac, where we didn’t grow that well, it was primarily our distributor markets and it was really a hangover from last quarter. We had a very, very strong Q4, which was due to the distributors getting back on track after we have made some changes there. So we should see things in Asia-Pacific start to normalize over the next three quarters, and we now anticipate we will have revenue growth in Asia-Pac in line with our expectations for the full year.

Okay. And then, can you just, I mean, there’s been a lot of investor anxiety, I guess, over the potential for a recession in the U.S. at least. Can you just remind me how your business behaves in a recession? Is it actually a little bit counter cyclical or can you just give a little color about the nature of your business in that kind of environment?

We are not recession proof, but we have been called recession resistant. And past history, I have been around for 30 years in the business. We have come through. We continue to invest in our business through the recessions whether there will -- if there -- and the other thing that plays even more in our favor now is our geographic diversity. In 2008, when we had the quite financial crisis, our business was actually sideways. We actually grew a little and if it wasn’t for the -- collapse, if you will, of the pound, U.S. dollar exchange rate, we would have grown, but that impact was more in the U.S., not in Europe. So let’s hope that we don’t talk ourselves into a recession, and let’s hope that we continue to make large hot dogs and put them on good buns , and don’t actually find ourselves in that position. But we feel that our spread across geography and our spread across trade channels gives us the best chance we can possibly have to ride through different economic conditions in different countries at different times around the world.

Great. And then just finally, I know you have kind of alluded to another new product innovation that you are working on. Are you…

Yes.

Are you still thinking that that might -- you might be able to talk about it in March and then when will the potential launch be?

We will review all and reveal all in March. So please be with us then, because we are really excited.

And when do you think the launch would be of the product?

We will talk about that in March.

Okay. Okay. That’s all for me. Thanks very much.

Thanks, Linda.

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

Good afternoon, everyone. How are you?

Hi, Daniel.

Hey. You mentioned that in 2008 your business was sideways or just intact, I guess. Are you referring the volumes held in and that -- it was just really effect? I mean, how did, I guess, how did pricing in volumes act during such an environment, were they down a little bit, were they flat or how just -- just any color?

2008 it was really the major sideways it was because of exchange rates and it was the exchange of the British pound and the U.S. dollar, volumes were reasonably, as far as I can remember, now you are asking me to remember details 11 years ago, that’s pretty hard for me. But I do know that the majority of the impact was exchange. You remember that, Jay?

Yeah. The sterling collapsed by about 25%. There was a very deep decline from the year -- the prior year to the -- from 2007 to 2008 and so big, big chunk of it came from the currency. We start -- we saw growth in most of the European markets, U.S. was a little bit, U.S. was a little sideways, if I remember, specifically, the -- a couple of channels had maybe a little bit more destruction than most, but net-net, I think, volumes across the Board were about showed a little -- should showed a little growth.

Yeah. I think that’s what I recall.

Okay. And then, you guys are talking about your digitization efforts, which seemed to be going fairly well and I don’t know if I have asked in the past, but are you working with Amazon, I mean, is that a distribution channel of yours or…

Yes.

…is that your own? It is, right.

Yeah. Yeah. Yeah. We are very engaged with Amazon. Amazon is a direct customer of ours, and I think, they are in a top, I don’t know what, they are in the top 20 customer list anyhow.

Specialist.

With Specialist particularly.

Okay. And, then, finally, for free cash flow, is there a seasonality threat, just in terms of payments versus, I mean, the give and take with working capital?

Yeah. There -- I am sure there’s a few little tweaks, but for the most part, it’s -- it isn’t. I mean, there are times when you have got some tax payments and you know, so our growth reward program payments, you know that, but in the grand scheme of things it’s very minor.

Okay. All right. Thank you very much.

Thanks, Daniel.

Thank you.

Our next question comes from the line of Rosemarie Morbelli from G. Research. Please go ahead with your questions.

Thank you, and good afternoon, everyone.

Good afternoon.

I was wondering if you are seeing any impact from the trade war in China and if not is it because you are too small and it is not affecting you or any other reason?

We are really not seeing any impact at all at this time. We don’t import much from China. So the tariff side isn’t working with us and it’s kind of, Jay?

Yeah. I mean there’s some indirect impact, but it’s hard to measure and it’s hard to really pinned down. You have got some hesitancy in a market to do something that at a period of time, but it doesn’t feel like it sustained.

Okay. And no impact, I mean, then, I think, that Indonesia, for example, has put some tariffs on Chinese -- Chinese goods. Is that affecting you or you are not in Indonesia?

No. We have a very large business in Indonesia. But we have seen no impact of any tariff. I am not sure that it’s impacting our products. And in fact, I don’t think it is, because we would have heard about it and we haven’t heard. So maybe it’s not in our product categories.

Okay. And then going back to price of oil coming down, how long will it take? Are you insightful, first of all, how long will it take for those -- for you to benefit from those costs? I know that the intermediary has to come down as well, but it sounds there was maybe. And so let’s say that you benefit from it in 90 days to 120 days, as Jay mentioned, will you at that point have to give up price?

Pricing wise, we have a very -- our current pricing structure is in place and we see no reason to change that current pricing structure. You are right about that. It is about 90 days to 120 days. We are on FIFO with -- and in that time between when it’s -- when a new lower material costs come into our manufacturing facility and by the time it gets through to us inventory and then on the end its 90 days and 120 days, even a little bit more, so which is why we haven’t really made any changes to guidance on that going out.

If we do see any impact of a sustained lower oil price, we wouldn’t expect that to be seen until the third quarter. Right now our cost of goods are really reflecting the oil price in what months Jay, July, August?

Yeah. July, August.

Which we -- where that high period that was -- when it was in the high 70s. So we have got the period of -- we would not expect to see any impact on the third quarter.

Yeah. Because it -- and you are right, Garry, even if it reflects we didn’t start seeing any real decrease until after the November period.

Yeah.

So it was like November that we started seeing it. So, yeah, we will still have some of these higher costs for a period.

Yeah.

And this is why we have a little uncertainty around oil is that a week ago it was $42, today it’s $52 and three weeks ago it was $60 and five weeks ago it was $75. So, as we said, we need to work out whether this is a serious of events or whether it is a sustainable trend.

Right. And in this environment, it is hard to know.

That would be a true statement.

Maybe you should take up tweeting.

I will leave that one alone.

So, no, I was just wondering if during the quarter, you had any surprises, whether positive or negative. And then, Garry, you talked about seeing growth following your digital optimization and if you could give us some idea as to how much growth is coming in that category?

Number one is, no, we didn’t see really any surprises. It kind of played out pretty well to the way we thought it was. We haven’t growth -- we haven’t yet and I am not sure whether we will be pulling out and disclosing the digital out on its own. What we can say is that, we are day-by-day taking a larger and more aggressive presence in the e-commerce segment, and we are very comfortable and happy with growth we are getting out of that area.

Okay. Great. Thank you. Good luck for the rest of the year and Happy New Year.

Thank you and Happy New Year.

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.