Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company First Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. [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 Chairman and Chief Executive Officer, Garry Ridge; Vice President and Chief Financial Officer, Jay Rembolt; and President and Chief Operating Officer, Steve Brett. 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, 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 is presented -- is current only as of today's date, January 9, 2020. 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. Happy New Year, and thanks for joining us for today's conference call. Today, we reported net sales of $98.6 million for the first quarter of fiscal year 2020, down 3% compared to the first quarter of last year. Translation of our foreign subsidiaries 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, sales would have been relatively flat compared to the first quarter of last year. Net income for the first quarter was $12.2 million compared to $13.3 million last year. Diluted earnings per share for the first quarter was $0.88 compared to $0.95 for the same period last year. If you follow us quarter-to-quarter, you may not like the results this quarter. Our business is one which fluctuations in performance of our markets from quarter-to-quarter are not unusual. That's why I don't -- we don't issue quarterly guidance and why I frequently caution investors not to follow us too closely quarter-to-quarter. What's more important is that our long-term strategic drivers continue to perform well and are in line with our expectations. As you know, we aspire to drive consolidated net sales to approximately $700 million in revenue by the end of fiscal year 2025 and to do so while following our 55/30/25 business model. We'd like to remind investors that these long-term targets are probably wrong and roughly right. And though we acknowledge our 2025 targets are aspirational, we believe we can successfully bring those targets within reach. As a reminder, we refer to the brands that are going to get us to our 2025 -- there 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…

Ladies and gentlemen, we have lost connection. Please stand by. We will begin momentarily.

Sorry about that delay. Garry, continue on.

Thank you. The technical Gremlin's got us. So we'll start off again around the conversation of Specialist. So after a lot of research and hard work by the tribe, we decided a new way forward for our WD-40 Specialist product line. If you turn to Page 8 in today's earnings presentation available on our website, you'll see a sneak peek of the new packaging we've designed for our WD-40 Specialist product line. The new packaging will be comprised of a metal blue can and distinctive red top. We believe the new packaging drives major benefits. The new design leverages the famous blue and yellow can, it is simple, and uncluttered. It clearly communicates the product's purpose, and it improves our end users' ability to find the solution they are looking for, both at the store, shelf and online. Ultimately, we believe the new packaging will give us stronger brand presence for both the WD-40 Multi-Use Product and the WD-40 Specialist, aligning them as now the blue and yellow brand with a little red top. We expect to see these new improved versions of WD-40 Specialist packaging on shelves in select markets by mid-2020, then available progressively around the world. Strategic initiative number three is to broaden the product and revenue base. Strategic initiative number three includes maintenance products like 3-IN-ONE, WD-40 BIKE and GT85, but it also includes homecare brands, such as Spot Shot and Lava in the Americas, 1001 in EMEA, and no vac and Solvol in Asia-Pacific. Global sales of these products included under the initiative were $11.8 million in the first quarter, down a little more than 1% compared to last year. As part of our brand architecture initiative, WD-40 BIKE is going to get a makeover this year as well. It will be moved out of…

Thanks, Garry, and good afternoon. As Garry mentioned earlier, consolidated net sales were $98.6 million in the first quarter, down 3% year-over-year. On a constant currency basis, net sales would have been $100.8 million in the first quarter, relatively constant compared to last fiscal year. Before I discuss what's happening in individual segments, I'd like to remind investors about something Garry has shared with you many times. Though we don't consider our business to be seasonal, it is quite common for our sales results to fluctuate from one period to another. These fluctuations can be driven by a myriad of things, 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 regular business activities. So now let's start with the Americas. Net sales in the Americas, which includes the United States, Latin America and Canada, were down 2% in the first quarter to $46.7 million. Sales and maintenance products decreased nearly 2% in the Americas, primarily due to lower sales of WD-40 Specialist in the United States. Sales of WD-40 Specialist in the U.S. were down 19% due to the timing of promotional activities. We were up against a very tough comparable period in the United States due to a successful WD-40 Specialist or the give back promotion we ran in the first quarter of last fiscal year. Maintenance product sales in the first quarter remained relatively constant in Canada and Latin America. As a reminder, our maintenance products exclude our homecare and cleaning products. Sales of our homecare and cleaning products in the Americas decreased 6% in the first…

Thank you, Steve. Let's start with a discussion about 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 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. Finally, the 25 represents our long-term target for EBITDA. First, the 55 or our gross margin. In the first quarter, our gross margin was 54.3% compared to 55.1% last year. This represents a decline of 80 basis points. Impacts from sales mix changes and other miscellaneous costs, primarily in EMEA, negatively impacted our margin by 70 basis points in the quarter. In addition, higher warehousing and freight costs, also primarily in EMEA, negatively impacted our gross margin by 70 basis points. Higher advertising, promotional and other discounts that we give our customers negatively impacted gross margin by 40 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 EMEA over the last 12 months and which positively impacted gross margin by 80 basis points in the first quarter. Changes in major input costs,positively impacted our margin by 10 basis points. Petroleum-based specialty chemical costs positively impacted our gross margin by 30 basis points period-over-period. However, increased cost of aerosol cans negatively impacted our margin by 20 basis points and significantly offset the gains we realized due to the lower petroleum-based costs. Finally, changes in foreign currencies also had a positive impact and impacted our gross margin by 10 basis points. Now I'll address the 30 or our cost of…

Thanks, Jay. In summary, what did you hear from us on this call today? You heard that our business is one in which fluctuations in the performance of our markets from quarter-to-quarter are not unusual. You heard that foreign currency exchange rates continue to be a headwind, wind on our consolidated global sales results, particularly in EMEA. You heard that our long-range, long-term strategic drivers continue to perform well in line with our expectations, and that we remain 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 2025. You heard that we see a significant opportunity to increase the penetration of Smart Straw from 41% to 60% globally over the next 5 years, and that growth is expected to lead to approximately $50 million in incremental revenue. You heard that we're launching a new packaging for our WD-40 Specialist line, which we believe will deliver major benefits as it becomes the blue and yellow brand with a little red top. You heard that our Board of Directors increased our dividend by 10% last month, and you heard that we have reiterated our fiscal year guidance today. In closing, I'd like to share a quote from my friend, Simon Sinek, "Nothing and no one can perform at 100% forever. If we cannot be honest with one another and rely on one another for help during the challenging parts of the journey, we won't get very far." Thank you for joining us today. We would be pleased to now open the conference call to your questions.

[Operator Instructions]. And our first question comes from the line of Linda Bolton-Weiser from D.A. Davidson.

Happy New Year.

Hey, Happy New Year.

So I just wanted to ask first about the new Smart Straw technology product that's coming out this year. I think before, you had been talking about June, and now it seems like you said July. I know it's not a big deal, but is there any sort of delay that you're experiencing in getting the product ready for market?

No, nothing material. It's just a matter of timing of the launch. We'll launch in July. And then over the next 18 months or so, we'll progressively move Smart Straw next generation, which is both Smart Straw 1.5 and Smart Straw 2, around the world. And as we shared, Linda, as we then now have -- as we now have with our -- all of the investments we've made the production capacity, we're now aggressively going to be moving our penetration from 41% to 60% and that will deliver approximately $50 million in incremental revenue over the next few years. So we're excited about being in the position now, and we're ready to go.

Okay. And then can you just talk about -- I guess, on the cost side, your can costs -- you've talked about some of the impacts on your can costs. And it's my understanding that in the past, sometimes you would redo some of these medium-term contracts in the beginning part of the year. Is there any news on that front in terms of what you expect on can costs in the next 12 months?

We've built that into our fiscal year guidance. So we think we're -- our -- the price increase was -- has already built in.

Okay. And can you just give me -- I'm sorry if I missed -- can you just give me what the Specialist -- WD-40 Specialist sales were in the quarter? I missed that number.

Yes, we can. Wendy is looking them up right now. $8.4 million.

$8.4 million. And just in terms of the packaging change for Specialist, is -- are the costs related to that somewhat material? And I assume you have it figured into your guidance, but is there any way that you can quantify or put some -- give us some color on how much those costs are for the year?

They're not material. This is going to be a phased launch. So what will happen is the product that's on the shelf will be replaced with our new packaging as we roll it out. The first one, we think -- Steve, when do we think the first one will be?

It will be June or July.

June or July, you'll see the first one on the shelf. But all of the costs in developing the new packaging have already been absorbed, all of the research. This project has been going on for nearly two years. And so we're really excited about it. We really believe that taking Specialist to the blue and yellow brand with a little red top will give us a much better communication on the shelf. We've simplified some of the communication. So it's going to be a great rollout, and we're pretty excited about it.

Okay. And then can I just ask, I guess, with regard to some of the issues on your sales line in the quarter, you mentioned it was timing of orders, and we've seen that before. Are you pretty confident that some of those orders are going to come back? And can you be more specific to give us some confidence on the next quarter? And also, the slowdown in China, have you seen that kind of alleviated once we're past that time period now?

Yes. Sure. China, there was a couple of things that happened. Number one was it was the celebration of the 70th year of the Republic of China. During that period of time, things slowed up, transportation changed, the positioning of Chinese New Year. So we would expect to see a healthy second quarter in China. If you look at our Asian market, in the last quarter, had a very robust quarter in Asia. Our distributors business was up 27%. China was up 22%. So this -- the first quarter is always a little softer in that region. The other thing, too, is that there's a larger percentage of distributor business in China. So it tends to be a little more lumpy than anywhere else because it's a smaller number of distributor customers buying large volumes, excluding China and Australia, of course. So there's nothing here that we are concerned about. We reiterated our annual guidance, and I think we'll be talking to you in 3 months' time and you probably will see a different picture. And if we thought it was any -- going to be any different to that, we would tell you.

Our next question comes from the line of Daniel Rizzo from Jefferies.

Will you be changing the packaging on other products? Are you considering like looking at like WD-40 BIKE or other things like that to maybe, I don't know, kind of tweak the packaging, so to speak?

Yes. Yes. As I mentioned on the call, Daniel, we're going to be moving BIKE under the Specialist packaging. So it will end up looking like the blue and yellow can with a little red top. So you'll see that start to roll out, too, progressively over the year.

Okay. I'm sorry I missed that. And then, I mean, you mentioned what you're doing with Smart Straw and how important that is. I think you said you're spending $31 million. Did I get it correctly that, that's $31 million over 2 years that you'll be spending to kind of -- to change -- to tweak some of the machinery?

Yes. That's our estimate for this year's overall total CapEx budget. So that's just this year, is right.

The majority of the Smart Straw investment, some of it has already happened. This second tranche, if you will, is buying the machines that go on the line. So there's 2 parts to Smart Straw. There's one -- is the machinery and the dies to make it. The second part is the machinery that we actually put on the production lines to make sure that we efficiently apply it to the can. So all of that will be done as we start to roll it out by the end of this year.

Does anything -- will there be some like trickling into 2020 -- 2021, excuse me, potentially?

Yes, a little bit should trickle into 2021.

Okay. And then you mentioned mix headwind in EMEA. I was just wondering what -- if you could provide some color on that. Is it for like increased distributor sales or just -- I mean, it's less Specialist sales? I was wondering what the mix you were talking about was.

Yes. There's a -- we had a larger percentage of our sales to our distributor markets. So that's one. We also had some higher percentage with a couple of products that have...

1001.

1001, which has a slightly lower margin.

The 1001 sales in EMEA were up 30%, and that margin on 1001 is lower than our core product.

And then finally, you mentioned the -- excuse me, the -- I was wondering how EZ-REACH Straw was going. That seems to be a fairly robust product, too. I mean is it taking share? Or how is the growth trajectory on that?

I'll let Steve answer that.

So EZ-REACH is growing very, very nicely around the world. And so as we expand distribution now into more markets, particularly within the EMEA segment, we are very satisfied with growth, and we expect that to continue to be a major growth driver going forward.

Your next question comes from the line of Rosemarie Morbelli from G. Research.

So I was wondering what is your assumption for oil prices in your guidance.

It's in the current range. I know that we've had some fluctuations recently, but we -- we're within the $60 to $70 range is really the place where we've pegged our plan.

Okay. And whether it is $60 or $70, does eventually change your bottom line or your top line?

So there'll be movement with both, but they are captured within our range of guidance.

Okay. And then I missed, and I apologize. When you were -- and I believe I understood what you said properly. You reported $0.88, and I think that you say that excluding some items, it would have been $0.92. First of all, did I hear that properly? And if yes, what are those items? I missed that detail.

Yes. I think that the reference was that we reported $0.88 had we been reporting under what constant currency that we had -- the currency rates that we had -- were in effect last year, it would have been the $0.92. It's simply a constant currency measure rather than an other item.

All right. No, that is helpful. So now, the new packaging on the Specialist side, this is going to cannibalize revenues. So if I heard properly, you are going to take the old cans from the shelves and then replace them with the new ones, and so this is one thing. How much cannibalization do you expect?

Oh, no.

No?

No, no, no. There will be no -- it's just a straight replacement. So there's no cannibalization at all.

Okay. And when you take back that old can or old packaging, can you reuse the products that is in there and in order to refill a new one, the new product?

We won't be taking any back, Rosemarie. This is a pure replenishment. As the old sells out, we will sell in the new. So it's what we call a soft conversion. So there's no product coming back. There's no disruption in the flow of sales. What we will see for a little time is both packaging on the shelf. But over time, that will evaporate. So this has no revenue, negative cost, negative impact at all.

Okay. I totally misunderstood that. And then you said that you are taking the -- putting the BIKE under the new Specialist packaging, or I am assuming also manage as under the Specialist group. Why keep the financial data where it is and not including -- and not included going forward in the Specialist group?

Well, because we report it now in the other group, and we wouldn't be a comparable because it wasn't in there before. So we've decided at this time to leave it out as a line on its own. And when you think about it in the big scheme of things, it's a couple of million dollars, I guess. So it's not significant. But we'll look at it again at the end of next fiscal year once we've done the conversion to see if it makes sense.

Okay. This is very helpful, and good luck for the full year results. Nevermind next three quarters.

Well, the full year is what we're about. We're playing the infinite game.

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.