WD-40 Company (WDFC) Q4 2019 Earnings Report, Transcript and Summary

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 we issued earlier today and our Annual Report on Form 10-K which we expect to file on Tuesday October 22. Now, let's start with a discussion about our strategic initiatives and the brands that support many of them. We are aspired 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 investment – investors that these long-term targets are guidepost not guidance and they are probably wrong and roughly right. We acknowledge that our anticipated 2025 targets are aspirational, but we believe that, if the tribe stays focused we can successfully bring these targets within range. As a reminder, we refer to the brands that are going to get us to 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 no vac. Our 2025 brands are our core strategic focus and the primary growth engines for our 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. We aspire to grow the WD-40 Multi-Use Product to approximately $530 million in revenue by the end of fiscal year 2025. In the fourth quarter sales of WD-40 Multi-Use Product were $80.5 million, up nearly 3% compared to last year. This growth was driven by strong sales in Asia-Pacific, where we saw double-digit growth in Australia, China and our Asian distributor markets. In local currencies, we also saw solid growth of WD-40 Multi-Use product in EMEA and for the full fiscal year global sales of WD-40 Multi-Use Product were $325.6 million, up nearly 4% from last year. Strategic initiative number two is that to grow the WD-40 Specialist product line. We're more excited than ever for the future of WD-40 Specialist. In the fourth quarter, sales of WD-40 Specialist were $9.8 million, up 22% compared to the fourth quarter of last year. This growth was driven primarily by strong sales in the United States, where we saw growth of 28%. We're excited to share with you our newest product WD-40 Specialist Penetrant with Flexible Straw. The latest innovation adds the 8-inch bendable straw currently available on EZ-REACH to our specialist penetrant. We've developed over 20 unique WD-40 Specialist formulas, since the product lines inception in 2011, and these equate to over 30 uniquely labeled products available around the world. WD-40 Specialist contributed $35.4 million in fiscal year 2019, up nearly 13% from last year. This continues to move the company towards its goal for the initiative growing the product line up to approximately $100 million in revenue by the end of fiscal year 2025. We're optimistic about the long-term opportunities for WD-40 Specialist, however, there may be some volatility in sales 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. Strategic initiative number three is to broaden product and revenue base. Strategic initiative three includes maintenance products like 3-IN-ONE WD-40 BIKE and GT85, but also includes homecare brands such as Spot Shot and Lava in the Americas, 1001 in EMEA and no vac and Solvol in Asia-Pacific. We believe we are on track to reach a combined revenue for these products of approximately $70 million by 2025. Global sales of these products included under this initiative were $13.7 million in the fourth quarter flat compared to last year. We made reasonable progress in 2019 toward our long-term target for these products. We successfully launched another new SKU in our 3-IN-ONE RVcare line in the U.S. We continue to grow our WD-40 BIKE product business and we experienced unprecedented growth of our 1001 brand in the U.K. due to some favorable impacts of digital marketing associated with the brand. For the full fiscal year, net sales of products included under this initiative were $52.5 million, up 2% from last fiscal year. Strategic initiative four is to attract, develop and retain outstanding tribe members. Our goal under this initiative is to attract, develop and retain talented tribe members and to grow tribe member engagement to greater than 95%. At the end of the fiscal year, we had 495 tribe members located in 15 countries around the world. I'm always amazed that just under 500 people can deliver the famous blue and yellow can with a little red top to 176 countries and territories around the world. Our company's success is certainly directly linked to our outstanding tribe members and their exceptional motivation and dedication to the WD-40 Company, its purpose values and products. Also in support of this initiative, we will begin to relocate our U.K.-based tribe members into our new office building in Milton Keynes over the next couple of weeks. Approximately 87 tribe members will be housed in this new facility, which was specifically designed to increase engagement and collaboration. We are excited that we will officially have the MK hall open for business very soon. Strategic initiative number five is operational excellence. As reflected in our company's values our tribe never stops trying to make it better than it is today and 2019 was no exception. Guided by our 55/30/25 business model, we found new ways to optimize resources systems and processes, while applying rigorous commitment to quality assurance regulatory compliance and intellectual property protection. One of the most exciting initiatives that we embarked on this fiscal year is related to a topic that has made headlines recently environmental, social and governance or ESG. ESG topics have been top of mind here at WD-40 Company for longer than the acronym has existed. For decades, we have been focused on doing what's right in how we create products for our end users, how we treat our employees and those in our supply chain, and how we support the communities where we live and work; it's part of our cultural bedrock. However, to further pursue our long-standing commitments in fiscal year 2019, we created a cross-regional, cross-functional ESG team supported by expert, sustainability advisers to identify all our ESG-related activities and to complete a materiality assessment to prioritize areas for investigation. This assessment incorporated input from customers, suppliers, management, end users, directors, stockholders and of course our tribe around the world. We will further this work in fiscal year 2020 by completing a life cycle assessment for our flagship multi-use product and by creating an efficient and effective ESG reporting capability. We look forward to updating investors on our progress in the coming quarters. That completes the update of our strategic drivers. So let's move on to the details of the fourth quarter results starting with sales. As I mentioned earlier, consolidated net sales were $106.7 million in the fourth quarter, up 4% year-over-year. On a constant currency basis, net sales would have been $109.2 million in the fourth quarter, up 6% compared to last year. Before I discuss what's happening in 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's when something out of the ordinary happens that we will discuss the event here with investors. So now let's start with the Americas. Net sales in the Americas, which include the United States, Latin America and Canada were up 1% in the fourth quarter to $49.3 million. For the full fiscal year, net sales in the Americas were $194 million, up 1% from last year. For the fourth quarter, sales of maintenance products increased 2% or $750,000 in the Americas entirely due to the higher sales of maintenance products in the United States and Canada. Maintenance products sales in the United States increased 2% in the fourth quarter, primarily due to the increased sales of WD-40 Specialist. Sales of WD-40 Specialist were up 28% in the U.S. due to new distribution successful promotional activities and strong sales growth in the e-commerce trade channel. This increase in sales was partially offset by lower sales of WD-40 Multi-Use Product in the U.S., which was down 3% compared to last year due to the timing of promotional activities. We're up against a very tough comparable period in the United States due to a successful EZ-REACH promotion we ran in the fourth quarter of last fiscal year. Maintenance product sales in Canada increased nearly 19% in the fourth quarter, primarily due to strong sales of WD-40 Multi-Use Product. Our Canadian tribe successfully executed some new and enhanced customer promotions, which helped drive the growth. The increase in maintenance product sales in the U.S. and Canada was significantly offset by a decrease in sales in Latin America. Year-over-year sales of maintenance products in Latin America were down 10% due to the timing of customer orders and unstable economic conditions in the region. As a reminder, our maintenance products exclude our homecare and cleaning products. Sales of our homecare and cleaning products in the Americas decreased 3% in the fourth quarter compared to the same period last year, largely due to lower sales of Lava and Spot Shot, which both declined 12% in the quarter. We continue to consider our homecare and cleaning products except those listed as 2025 brands as harvest brands that continue to generate meaningful contribution and cash flows, but are generally expected to become a smaller part of our business over time. In total our Americas segment made up 46% of our global business at the end of the fiscal year. Over the long-term we expect sales within this segment will grow between 3% to 6% annually. Now on to EMEA. Net sales in EMEA, which includes Europe, the Middle East, Africa and India were $36.4 million in the fourth quarter, down about 1% from last year. Year-to-date net sales in EMEA were up nearly 7% compared to last year. EMEA's reported results in the fourth quarter were negatively impacted by foreign currency exchange rates. On a constant currency basis sales in EMEA increased 4% in the fourth quarter and nearly 12% in the full fiscal year. We sell into EMEA through a combination of direct operations as well as through marketing distributors. Reported consolidated sales in the EMEA direct markets, which accounted for 69% of the region sales decreased 4% during the quarter to $25.2 million entirely due to the fluctuating currency exchange rates. On a constant currency basis, sales in the EMEA direct markets increased 1% in the fourth quarter and 10% in the full fiscal year. The increase in sales in the fourth quarter was primarily due to higher sales of maintenance products in many of our EMEA direct markets. Also contributing to the growth in the EMEA segment was -- in this quarter were higher sales of the 1001 Carpet Fresh in the U.K., which continues to benefit from favorable impacts of digital marketing associated with the brand. Significantly offsetting these higher sales were lower sales of WD-40 Multi-Use Product in the United Kingdom due to the timing of promotional activities. Net sales in our EMEA distributor markets, which accounted for 31% of the region sales in the fourth quarter increased 8% during the quarter and 9% in the full fiscal year. The increase in the fourth quarter was primarily due to increased sales of WD-40 Multi-Use Product in Eastern Europe due to the timing of customer orders and more stable economic conditions in the region. In total, our EMEA segment made up 38% of our global business at the end of the fiscal year. Over the long-term, we anticipate sales within this region will grow between 8% to 11% annually. Now on to Asia Pacific. Consolidated net sales in Asia Pacific, which includes Australia, China and other countries in the Asian region increased to $21.1 million in the fourth quarter, up 22% from last year. Year-to-date net sales in Asia-Pacific were up 6% compared to 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 increased to $21.6 million in the fourth quarter, up 25% from last year. In Australia, net sales were $4.8 million in the fourth quarter, up 14% compared to last year. I'm happy to report that our Aussie tribe had the biggest quarter in the company's history because of a major customer placing a large order for WD-40 non-aerosol Trigger Pro, which meets the stringent regulatory constraints that are present in the Australian market. Changes in foreign currency exchange rates had an unfavorable impact on sales in the region. On a constant currency basis sales in Australia would have increased to $5.1 million in the fourth quarter up 21% from last year. In our Asia distributor markets, net sales were $8.9 million for the quarter, up 28% compared to the last year. This increase in sales was driven by successful promotional programs as well as the timing of customer orders. Our Asia distributor markets are not impacted by currency since we sell our products in U.S. dollars in the region. In China, net sales in U.S. dollars increased to $7.4 million in the fourth quarter, up 22% compared to last year primarily due to the timing of promotional activities as well as continued growth from our e-commerce channel. China is the world's largest e-commerce market and our digital strategy in the country is a significant area of opportunity. On a constant currency basis sales in China were $7.6 million, up 25% compared to the fourth quarter of last year. For the full fiscal year net sales in China increased to $19.2 million, up 12% compared to last year. In constant currency sales, China sales were up 16% in the full fiscal 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 patterns and varying industrial activities. In total our Asia Pacific segment made up 16% of our global business at the end of the fiscal year. And over the long-term we expect sales in this segment will grow between 10% and 13% annually. Before we begin our review of the financials, I'd like to take a moment to welcome Steve Brass to our call today. As Wendy mentioned earlier, Steve has been a member of our tribe for 28 years, a native of the U.K. Steve spent a quarter of the century working in various leadership roles in EMEA, trading block before moving to San Diego three years ago to step in the role of President of the Americas trading block. In conjunction with this role as President of the Americas, Steve has been overseeing our global brand, digital and e-commerce strategies. We thought that he needed a little more to do, so in June we appointed him as President and Chief Operating Officer. So with that, I'll pass the call to Steve.

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 that brand loyalty. In 2011, we leveraged the power of the shield and introduced the line of best-in-class specialty products which we branded WD-40 Specialist. This product line has been extremely successful for us and currently represents about 8% of our global revenue. In the spirit of making it better than it is today, earlier this year we decided to evaluate the brand architecture associated with our WD-40 brand products. That is the products in our line that wear the famous shield. The objective of this global endeavor was to optimize our WD-40 Specialist line while protecting the core WD-40 Multi-Use Product. We needed to be certain that our primary packaging that is to say the color and words on our WD-40 Specialist cans was presenting our products in a way that reinforces the product lines connection to the blue and yellow can and helps our end users find the solution they're looking for in any channel where they shop. Later this fiscal year we will update investors on changes that will truly unleash the global power of the blue and yellow can with a little red top. I look forward to updating investors on our assets in the coming quarters. Now I will turn the call over to Jay for an update on the financials.

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 to drive our cost of doing business over time towards 30% of net sales. And finally the 25 represents our target for EBITDA. First, we will look at the 55 or our gross margin. In the fourth quarter our gross margin was 54.6% compared to 55.2% last year. This represents a decline of 60 basis points year-over-year. Changes in major input costs which include petroleum-based specialty chemicals and aerosol cans negatively impacted our margin by 60 basis points. Approximately 30 basis points came from increased costs associated with petroleum-based specialty chemicals. Of this 30 basis points, 20 was due to a formulation change that we made to our WD-40 Multi-Use Product in Asia-Pacific. The remaining 30 basis points came from higher costs associated with aerosol cans. In addition, gross margin was negatively impacted by 60 basis points in the fourth quarter due to sales mix changes and other miscellaneous costs. And finally gross margin was negatively impacted by increased promotional and other discounts that we give to our customers, which lowered our gross margin by 30 basis points during the quarter. These negative impacts to gross margin were partially offset by the favorable effects of price increases, which we've implemented in all three trading blocks over the last 12 months and which positively impacted gross margin by 60 basis points in the fourth quarter. Changes in foreign currency exchange rates had a positive impact on our gross margin of 30 basis points. This is because in EMEA, our cost of goods are sourced primarily in pound sterling, while approximately 50% of our revenues are generated in euros, 20% in the U.S. dollar and only – the remaining 30% are generated in pound sterling. The combined effect of the strengthening of both the euro and the U.S. dollar against the pound sterling caused revenues in total to be worth more in pound sterling thus improving our gross margin. As a reminder, our gross margin target of 55% is not contingent upon commodity prices or currency stand at any particular price point. We cannot control global market dynamics but we continue to be focused and deliberate 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'll address the 30 or our cost of doing business. In the fourth quarter, our cost of doing business declined 31%, down from 34% last year. This decline is primarily due to increased leverage gained by higher reported revenues as well as lower employee-related costs and lower advertising and promotional investments compared to the prior year quarter. For the fourth quarter, 76% 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, as a percentage of sales our A&P investment was 5.5% in the fourth quarter; and finally freight, the costs to get our products to our customers. Investing in our future is always a priority and looking forward, while our long-term goal is to drive our cost of doing business toward 30% of net sales, we'll be making some increased investments in operational efficiencies during fiscal year 2020. Examples of these investments include delivering our next-generation Smart Straw delivery system, improving information system capabilities ,and executing on the ESG initiative Garry shared with you earlier. As a result we expect our cost of doing business as a percentage of net sales will trend up slightly in the near-term. We believe these investments will better position us to achieve our long-term growth objectives. Over time we do expect our cost of doing business will move towards our long-term target of 30% as revenues increase. And this brings us to EBITDA. The last of our 55/30/25 measures. EBITDA was 23% of net sales for the fourth quarter which is up from 21% last year.That now concludes our discussion on our business model. Now, let's discuss some items that fall below the EBITDA line. Significantly impacting our net income and diluted EPS in the fourth quarter was the provision for income taxes. In the fourth quarter the company's tax rate was 62% compared to a negative 13% in the fourth quarter of the prior year. This large swing in the tax rate is the result of a change in the calculation of the toll tax as prescribed by the U.S. Tax Cuts and Jobs Act. Last year in the fourth quarter we recorded a large benefit for the toll tax. Conversely, in the fourth quarter of this fiscal year, following the Treasury department's issuance of final regulations, we reversed this benefit which resulted in the unusually high tax rate for both the quarter and the year. There's been a lot of noise in our net income and EPS numbers for the current and prior period due to the tax provision, but we expect that our tax rate will be in the 20% to 22% range for the full fiscal year 2020. Because of the tax reserve, net income for the fourth quarter was $8.6 million versus $21.6 million in the prior year. This resulted in diluted earnings per share of $0.63 in the fourth quarter compared to $1.54 for the same period last year. Diluted weighted average shares outstanding decreased to 13.8 million shares from 13.9 million shares a year ago. Now, a word about our capital allocation. Our capital allocation strategy includes a comprehensive approach to balance investing in long-term growth while providing strong returns to our stockholders. We continue to return capital to our shareholders through regular dividends and share repurchases. On October 8th, 2019 our Board of Directors approved a quarterly cash dividend of $0.61 per share payable October 31st to shareholders of record at the close of business on October 18th. And based upon today's closing price of $182.67, the annualized dividend yield is 1.3%. During the fiscal year we repurchased approximately 176,000 shares of our stock at a total cost of $29.6 million under the current $75 million share repurchase plan which was approved by the Board in June of 2018. At the end of our fiscal year, we had $45.4 million remaining under the plan. We have historically had an asset-light business model which has required very low levels of capital investment, roughly between 1% and 2% of sales. Fundamentally, nothing has changed over the long-term and we believe this is a good way to think about our current and future capital needs. However, more recently we have been investing more heavily to support our growing business. We've made investments in new facilities in San Diego Milton Keynes, and Pine Brook. In addition we've begun making investments in new manufacturing equipment to increase capacity and make improvements to our Smart Straw delivery systems. In fiscal year 2020, we will once again make some larger investments that we believe will help to drive growth and efficiencies in our business. In total we expect to invest approximately $25 million in fiscal year 2020 the majority of which will be used to procure the propriety machinery and equipment needed to manufacture our next-generation Smart Straw delivery system. We are nearing the end of this heightened period of capital investment and we will be returning to our asset-light model in the near future. Now, we will turn to our 2020 guidance. We want to remind everyone that while there are some global dynamics outside of our control that may have an impact on our fiscal year 2020 results. One of the things that is concerning us this year is the instability of foreign currency exchange rates. With that we are guiding toward net sales growth projected to be between 3% and 7% with net sales expected to be between $436 million and $453 million. Gross margin for the full year is expected to be between 54% and 55%. Advertising and promotion investment is projected to be between 5.5% and 6% of net sales. And the provision for income tax is expected to be between 20% and 22%. Net income is projected to be between $65 million and $66.2 million. And diluted earnings per share is expected to be between $4.74 and $4.83 based on an estimated 13.7 million weighted average shares outstanding. This guidance is expressed in good faith and is believed by the company to have a reasonable basis however it is not possible for us to predict with reasonable degree of certainty the actual impacts of fluctuating currency exchange rates may have. These currency fluctuations could potentially have a significant impact on our fiscal 2020 guidance. This guidance does not include any future acquisitions or divestitures and assumes that crude oil prices will remain close to current levels for the remainder of fiscal 2020. Now that completes the financial overview. Now I'll turn it back to Garry.

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.