Ladies and gentlemen, thank you for standing by. Good day and welcome to the WD-40 Company Fourth Quarter and Full 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 the 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, Chief Executive Officer, Garry Ridge; and Vice President and Chief Financial Officer, Jay Rembolt. Also joining us today for today's call is our recently appointed President and Chief Operating Officer, Steve Brass. Steve brings with him to this newly created position 28 years of experience with our brands and our culture. Welcome Steve. 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 August 31, 2019. 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 October 17, 2019. The company disclaims any duty or obligation to update any forward-looking statement, 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, and thanks for joining us for today's conference call. Today, we reported net sales of $106.7 million for the fourth quarter of fiscal year 2019, up 4% compared to the fourth quarter of last year. For the full fiscal year, net sales were $423.4 million, up nearly 4% over last year. Translation of our foreign subsidiary results from their functional currencies to the U.S. dollar had an unfavorable impact on sales in both the fourth quarter and full fiscal year. On a constant currency basis, we grew net sales by 6% year-over-year for both the fourth quarter and the full year. Our net income and diluted earnings per common share for both the quarter and the full year were unfavorably impacted, because of a reverse of – for an uncertain tax position that we recorded and disclosed in the fourth quarter of fiscal year 2019. As a reminder, both our net income and diluted earnings per common share were favorably impacted in the prior year, due to the U.S. Tax Cuts and Jobs Act. Jay will talk about this in more detail shortly. Net income for the fourth quarter was $8.6 million compared to $21.6 million last year. Diluted earnings per share for the fourth quarter was $0.63 compared to $1.54 for the same period last year. Net income for the full fiscal year was $55.9 million compared to $65.2 million last year and diluted earnings per share for the full year were $4.02 compared to $4.64 in the prior fiscal year. For the purposes of this call after discussing our strategic initiatives, we'll focus primarily on the financial and operating results for the fourth quarter of fiscal 2019. For a complete discussion of our full year's results for 2019, please refer to the press release…

Thanks Garry. Good afternoon. I'm delighted to be joining today's conference call. As Garry mentioned, I'm new to the role of President and Chief Operating Officer but I have a great deal of experience working in various WD-40 markets around the world. Most recently in addition to oversight of our Americas trade block, I had the opportunity to lead our global digital and e-commerce strategy as well as oversee the coherency of our brand strategy. These are areas where historically much of the work was done within our individual trade blocks. As our company has grown it's become clear that better alignment around these areas is necessary to ensure we continue to move towards our probably wrong and roughly right objective of reaching $700 million in revenue by 2025. During fiscal 2019, great progress was made in the areas of digital and e-commerce. We rolled out our low cost but high performing website model to almost 50 countries around the world and considerably raised our digital IQ globally with several high-impact training events. Outstanding progress was made in the fast-growing area of e-commerce where we experienced global sales growth of approximately 80% far outpacing category growth. In fiscal year 2020, we will continue our heightened focus on digital and e-commerce and we expect to make an investment of approximately $2 million in A&P this fiscal year to support our digital brand building activities. I also want to share with you some work our tribe has been doing related to brand architecture. The blue and yellow can with a little red top in that famous shield that it wears, blue shirt opened store shelves in the United States over 60 years ago. We know our end users around the world trust the shield and that they're making buying decisions based on…

Thanks, Steve. Let's start with the discussion about how we performed against our most recently issued fiscal year 2019 guidance. We expected our 2019 net sales to be between $425 million and $437 million. Today we reported fiscal year revenue of $423.4 million, up 4% compared to 2018 and coming in slightly under our projected expectations. We expected gross margin to be near 55%. Today we reported gross margin of 54.9%. We expected our global advertising and promotional investment to be between 5.5% and 6% of net sales. Today we reported A&P investment of 5.5%. I'd like to remind everyone that we revised our net income and EPS guidance on July 29 following the publication of final U.S. Treasury Department regulations. These regulations prompted us to take a reserve for an uncertain tax position in the fourth quarter and this resulted in the company lowering its 2019 guidance for net income and diluted earnings per share by approximately $8.7 million or $0.63 a share. With this adjustment in mind, we expected net income to be between $54.6 million and $55.7 million, resulting in diluted EPS of between $3.95 and $4.02, assuming 13.8 million weighted average shares outstanding. And today we reported net income of $55.9 million and a diluted EPS of $4.02 based on 13.8 million weighted average shares outstanding. For more information on our tax provision, I recommend that investors review the 8-K report that we filed with the SEC on July 29. Now let's review our 55/30/25 business model; the long-term targets we use to guide our business. As you may recall the 55 represents gross margin, which we target to be a 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…

Okay. Thank you, Jay. So in summary what did you hear from us on our call today? You heard that we had 4% global sales growth for both the fourth quarter and the full fiscal year. You heard that global sales of WD-40 Multi-Use Product grew nearly 3% in the fourth quarter and 4% for the full fiscal year. You heard that global sales of WD-40 Specialist grew nearly 22% in the fourth quarter and 13% in the full fiscal year. You heard that foreign currency exchange rates continue to be a headwind on our consolidated global net sales and you heard that for the full year sales grew 6% on a constant currency basis. You'll hear that -- you heard that we are continued to be committed to our probably wrong and roughly right long-term goal to drive consolidated net sales to approximately $700 million by the end of fiscal year 2025. You heard that we have created a new cross-regional cross-functional ESG team and we anticipate creating an efficient ESG reporting capability in fiscal year 2020. You heard that we'll be continuing our A&P investment in this fiscal year 2020 to support our digital brand building activities. You heard that we are currently evaluating the brand architecture associated with our WD-40 brand products and that we'll be sharing our progress on this exciting project next year. You heard that during fiscal year 2019 great progress was made in the areas of digital and e-commerce. You heard that both our net income and our diluted earnings per share were unfavorably impacted in the fourth quarter and the full fiscal year due to an one-time non-cash tax reserve. You heard that we issued guidance which predicts the company will continue its solid top line growth into fiscal year 2020. In closing today, I'd like to share with you a quote from Earl Nightingale, "People with goals succeed because they know where they're going." Thank you for joining us today. We would be pleased to now open the conference call to your questions.

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

Hi, everybody. How are you?

Good, Linda. Thank you.

So, I guess, first of all, can I just -- simple question, can I just clarify that CapEx -- I know, you have this additional investment to support the new innovation $25 million, is that the CapEx guidance? Or is that the increase in CapEx? Can you just clarify that?

That's the full year guidance.

Okay. Thanks. And then, I think, Steve Brass, when he was talking mentioned something about increased investments and he mentioned A&P and he mentioned $2 million. So is your -- is the SG&A line in the P&L also going to be experiencing some increased investment is that the $2 million he was referring to?

There will be some investment in the A&P investment, as well as some other SG&A investment opportunities. So I would say there will be growth in both.

Okay. Did he say $2 million or am I imagining that or something?

No, he said $2 million. For the past couple of years we've included in the 5.5% to 6% guidance of A&P, is that $2 million investment that we've been focusing particularly on e-commerce, digital and brand-building activities.

Okay. So that's -- all right. So it's included in the 5.5% to 6% guidance?

Correct.

Okay. Got you. So, I guess, the one element of the guidance for FY 2020 that's a little bit different than I would've thought is the gross margin, because you're kind of saying it's flat to down. And, I mean, you've got the wind at your back, at least for a few quarters, on petroleum-based input costs and I know you've talked about the difference between Brent and WTI, but I've noticed that Brent and WTI are both down quite a bit year-over-year. So, I don't know, what am I missing? I mean, it just seems to me that I -- should we be concerned that growth margin is sort of -- could be down and that's not really what I'm expecting based on the input costs? So can you kind of elaborate a little bit?

Yes. Well, you would've seen that we've experienced some higher can costs, which has some upward -- which has had some upward pressure in the last year and continues into this year. There's been some additional warehousing costs as we've increased inventories to try to help support any sort of Brexit activities and that will resolve itself hopefully soon and we should be able to have a better understanding of what that will be in the next few weeks. So there are some upward pressures, but you're right. With respect to petroleum-based products, even though we do have -- we have had a formula change that has caused us to use a more expensive input than we've had in the past. So we have had some cost charge -- some cost increases but from an oil-based -- from oil we do expect some impacts to benefit us as we go forward.

Okay. In terms of the formula change, is that something that's required in certain markets to be more environmentally -- certain environmental-type regulations? Or can you explain a little more about the formula change?

Yes. It was really there to enable us to meet a lot of the dangerous good requirements in a number of our markets. So we've upgraded the formula to lower -- or to be more compliant and allow for easier transportation and less restrictions around transportation storage.

And that's primarily in Asia-Pacific. You might have heard and may have seen there's been a lot of talk about dangerous good storage, particularly in China and then also down in Australia. So we changed one of the carriers in our formula to reduce the impact of dangerous good storage and that carrier is a more expensive carrier than the one that we had in there before.

Okay. Well that explains it. Thank you so much. I mean it doesn't have to do with e-commerce and the fact that you're actually may be delivering these things in a different method because of the growth of e-commerce. Does that have something to do with that or?

Steve do you want to talk to that?

No. I don't think it has any impact at all. It's -- e-commerce has very similar kind of the expectations for the remainder of our business.

I think that said Linda we are and continue to be focused on generating and driving our gross margin at or above that 55%. So while we see a headwind for a kind of the near future a slight headwind we're making efforts to drive up gross margin.

And then Linda just to add lastly to that, as Jay mentioned, the guidance also is impacted by a real uncertainty around currency. You'll see in the range of our revenue it's because currency is so unpredictable. When you look at our business in transaction currencies, we're actually nearly meeting our long-term growth goals of -- in each market. Many markets -- in Europe it grew with double-digit in revenues last year, but when we have the impact of the strengthening of the pound -- sorry the dollar against the pound, we can lose up to 5% to 6%. For example let's take the U.K. for example. Last year in transaction currencies our revenue in the U.K. alone was up 14%. In report -- when we report it's down to 9%. So we put a range in there to hopefully give us some sort of a position to be able to understand where these currencies are but they truly are very unpredictable and do really pollute our results unfortunately.

Right. Yes. Thank you for the explanation. I mean is there any way -- I know this is asking a lot. But is there any way to quantify the impact of those formulation and transportation cost increases on the gross margin impact for the full guidance year for FY '20?

We haven't done that.

Okay. Okay. But once these changes are made, I mean it's now embedded in our cost structure so to speak in terms of this new formulation. It's now embedded in your cost structure going forward, correct?

Yes. And it actually happened in the fourth quarter.

Okay. Thank you. And let me just -- if I could just ask one more. Your new innovation that's coming out that we're expecting to see. Is that -- like midyear I know is it more going to be May or is it going to be more like July?

June. It's Smart Straw 2. We're talking about the Smart Straw next generation part of that is Smart Straw 2. Its first launch will be in June and the first country will be Canada.

Okay. And how quickly after Canada will the next market follow fairly quick or?

We're going to watch how we go in Canada. We're also upgrading our Smart Straw overall. So you'll start to see some of that roll out, but initially we'll see the first impact in as we roll out in Canada and then as we ramp up production around the world, we're moving our Smart Straw production to now two locations around the world increasing our capabilities. One of the new releases we just released was our WD-40 Specialist Penetrant with our EZ-REACH on it which also takes into consideration some of the new delivery system. You'll find that in stores now exciting development in that penetrant range. But the first signs of Smart Straw 2 will be in June and the first market will be Canada.

Okay. Thanks. I really appreciate it.

Thanks. See you Linda.

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

Just for clarification Smart Straw 2 is what you're talking about last call, you just didn't name it that correct? It's the same just the updated thing?

Yes. Yes we call it Smart Straw 2. Yes.

Okay. And then you mentioned that can costs are rising, I mean is there something specific there? Is it aluminum costs or what's causing that to trend higher?

Well most of that cans are steel tin cans that were impacted initially by the tariff impacts that we had about -- that was about $1.5 million I think. Jay is that about approximately what it was? And that was the tariff impacts that were put on European steel. We haven't really seen those savings of reversal of that come through our supply chain yet, although we're having ongoing conversations with our can manufacturers about how those savings or those reductions may come through. And then just an overall increase in the cost of cans, we use very few aluminum cans. Most of them are tin plate cans.

Okay. And then just one other question. You mentioned as adding up, I think the Straw to the Penetrant product line. Is the plan to just kind of introduce it to different products over the next few years? Is it going to spread it out everywhere?

Correct. Well not everywhere but where it's end user appropriate and the penetrant product is absolutely end user appropriate. When you can think about needing to get a drop of penetrant to a hard to get at bolt or something it's very very appropriate. So, we released that a couple of months ago. We've got a big release of it at the SEMA Show coming up in Las Vegas in a couple of weeks. Initial indications are that, it's been well received. We know our end users love it. So EZ-REACH may not go on all product, but it will certainly go on end-user-appropriate products over time.

Okay. And just one final. On penetrant, I know you said you'll introduce in Las Vegas, so does that mean it's going to roll out in the U.S. first as opposed to Smart Straw 2 which is rolling out in Canada first? I mean, is it just because of more penetrant sales here or -- and what's all effecting that?

Sure. Penetrant is in the market right now. It's already on the shelves. It will be introduced into the automotive trade at the SEMA Show. The reason we introduced it in penetrant here is that, it's one of our key development products in the specialist range and our biggest market for penetrant is in the -- specialist penetrant is the U.S.

Okay. All right. Thank you, very much for the clarification.

Sure.

Our next question comes from the line of Joseph Catania with G. Research. Please proceed with your question.

Hi, good afternoon everyone. In terms of your market opportunity in China, obviously you're showing significant growth in China whereas other companies are showing that as a large chunk of the reason for weakness. Can you talk a little bit more about your runway there? Obviously, you're growing off a relatively small base, but how do you see this developing over time? And what kind of potential do you see? Do you see it even possibly getting better if there is a situation where you've the trade resolution more about?

We made an investment in China 14 years ago to open our own subsidiary there. China is now the second largest market in the world for our blue and yellow can with a little red top. We anticipate, we'll continue to see double-digit growth in China going forward. The reason being is, we're building a market there, even though there may have been some slowdown in manufacturing in China. There are a lot of opportunities that we continue to have to introduce our product to end users that aren't using it yet and then to educate current end users to use more product. So, China is a long-term hold for us and we feel reasonably comfortable about our opportunities to build that to a six-figure market over time.

Okay. And in Latin America, obviously maintenance was down 10%. You mentioned some economic challenges that exist in this region. Can you break that down specifically by country, where you may have an outsized impact? Is there any sort of specific disruption that's affecting you more so than I guess other regions in that area?

Sure. This is Steve. We had -- we suffered from the Argentinean economic situation. We had some phasing issues in Mexico with orders. And then our business in Central America and the Caribbean was phased based upon price increases that happened last year and there was pre-price increase buying last year, so the comparison wasn't favorable. So, they were the main three areas that caused the Latin America business to be down. It's the first time we've seen Latin America fail to grow since 2012 and we certainly expect normal service to be resumed in 2020.

Great. And one more from me regarding the tax reserve. I'm assuming, if there is some sort of potential for this to -- or at least a portion of this to come back to you correct? Have you been having any conversations with the Treasury Department about the guidelines that they released? I remember, you mentioning at one point that they weren't quite in line with what you thought the law was supposed to be. So, is there any more color there in terms of -- this is like the most conservative scenario and maybe some that will come back?

That's exactly right. We took the full reserve for what was the kind of the far-end potential. And I think, we do have what we would say is a very strong position that we filed our tax return under which would suggest that there is in the future upon audit or some other resolution that there might be some recovery.

Great. Thanks. That’s all from me.

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