Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Second 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 your host for today's call, Ms. Wendy Kelley, Director, Investor Relations and Corporate Communications. Please proceed.

Thank you. Good afternoon, and thanks for 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 Brass.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 February 29, 20.020. 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, April 9, 2020. The company disclaims any duty or obligation to update any forward-looking information, whether as a result of new information, future results or otherwise.With that, I'd now like to turn the call over to Garry.

Thank you, Wendy. Good day, and thanks for joining us for today's conference call. Jay, Steve, Wendy and I are dialing in from our respective homes, where I expect most of you are as well.To begin, I'd like to thank the tribe for their hard work and dedication to the company in these volatile and uncertain times. Our #1 priority during these challenging times is the safety and well-being of our tribe. Today, we will discuss some highlights from our second quarter, but a complete discussion of our second quarter results, please refer to the press release we issued earlier today and our 10-Q for the period ended February 29, 2020, which we filed with the SEC this afternoon.Today, we're going to talk mostly about the global health crisis caused by the COVID-19 outbreak and its impact on our business. We currently find ourselves at the peak of uncertainty as it relates to this global health crisis and its effects on both our company and the global economy. Jay and I were at the helm of WD-40 Company during the global financial crisis in 2008. Together, with our tribe, we successfully navigated those difficult times and the company emerged stronger than when we entered. We realize that the difficult times we are encountering during the 2008 fiscal crisis were very different from the ones we are facing today. We are in a health crisis, which is impacting all parts of the globe and affecting economies worldwide. As a result, the outcome is very difficult to predict. I have, again, confirmed in my mind that people are okay at dealing with risk that struggle with uncertainty. And while it is true that there's a lot we don't know today, there are some things we do know. We do know the health…

Thanks, Garry, and good afternoon. I hope that you're all well during these challenging times. The impact of the global health crisis on our operations represents an unprecedented challenge that we're evaluating and addressing daily. Therefore, today, rather than going through net sales results for the second quarter, I'd like to talk with you about what is happening right now. For details about our second quarter operational results, please refer to the press release we issued earlier today. As you know, the situation is dynamic and changes every day, so I won't be giving any numbers or any future projections, just a high-level summary of what we know today.What I can share with you is that in March, despite the enormous disruption experienced in many countries due to COVID-19, revenue levels were in line with what we have historically seen in a typical March. While this is good news, I want to stress that the future remains uncertain. First, a bit about our supply chain. As most of you know, we outsource the manufacturing of our finished products to contract manufacturers all around the world. Many of our contract manufacturers have been trusted partners for so long, they are considered part of the tribe. Therefore, one of our top priorities is to ensure our business partners stay safe and healthy. All our partners are following the recommendations set forth by governing agencies and are taking necessary precautions to ensure the safety of their employees.Our supply chain is structured such that WD-40 Company products are sourced, manufactured and warehoused as close to our customers and end users as possible. Because we predominantly source and manufacture our products locally, we expect we'll be able to minimize much of the supply chain risk we will encounter during the current health crisis. However, I…

Thank you, Steve. Today, we reported net sales of $100 million for the second quarter of fiscal year 2020, down 1% compared to the second quarter of last year. Translation of our foreign subsidiaries results from their functional currencies to the U.S. dollar, a slight favorable impact on sales in the second quarter. On a constant currency basis, sales would have been $99.7 million, down 2% compared to last year.Net income for the second quarter was $14.3 million, a decrease of 10% compared to last year. And diluted earnings per share for the second quarter was $1.04 compared to $1.14 for the same period last year. And from a financial perspective, we're in an enviable position with a very strong balance sheet and a newly amended $150 million credit facility from which we recently elected to draw down $80 million to further strengthen our liquidity position. We're focused on managing through this crisis to come out the other side as a much stronger business.Let's start with a quick discussion about our 55/30/25 business model, the long-term targets that we use to guide our business. On today's call, I'm going to focus primarily on the drivers for gross margin. In the second quarter, our gross margin was 53.6% compared to 55.4% last year. This represents a decline of 180 basis points. The major drivers of this decline were sales mix changes, higher warehousing and freight and other miscellaneous costs. Impacts from sales mix changes and other miscellaneous costs in all three trading blocks negatively impacted our gross margin by 120 basis points compared to the prior year period. The unfavorable impacts in the Americas and EMEA were primarily due to unfavorable shifts in product and customer mix as well as higher miscellaneous costs. In Asia Pacific, shortfalls in sales in China,…

Thanks, Jay. In summary, what did you hear from us on this call? You heard that our China subsidiary was materially impacted by the COVID-19 outbreak during the second quarter. More importantly, you heard that things are slowly returning to normal for our tribe members in China. You heard that we expect we will continue to encounter volatility and disruption in the regions where our global business operates due to the global health crisis. You heard that our employee engagement score remains the envy of many organizations at 93%. You heard that we are transitioning from a marketing distributor arrangement to a direct business model in Mexico. You heard that we continue to make outstanding progress in the area of digital and e-commerce, and that e-commerce sales have grown 44% year-to-date compared to last year. You heard that we elected to make changes to our line of credit agreement and recently drew down a significant rainy day fund from this line to bulletproof our balance sheet. You heard that we are suspending purchases under our current share buyback plan in order to preserve cash that we continue to return capital to our investors through dividends. You heard that we withdrew our previously issued fiscal year 2020 earnings guidance due to the rapidly evolving impact of the global health crisis. You heard that we are confident our long-term growth aspirations remain a realistic opportunity.In closing, I'd like to share with you a quote from my friend, Simon Sinek, " Remaining calm in times of desperation makes way for opportunity."Thank you for joining us today. Please stay safe. We would be pleased now to open the conference call to your questions.

[Operator Instructions]. Your first question comes from Linda Bolton-Weiser with D.A. Davidson.

So I guess I was most struck by Steve's comment that March was similar to previous March results. So I guess you're kind of saying that sales were flattish, not significantly down. I find that hard to believe, given that we've had a suspension of almost all nonessential manufacturing in the United States, in other countries. So can you just kind of give us a little more color? And also, we've had a lot of investors ask us about a breakdown of your demand by end market. So like how much is automotive, how much would be high tech, manufacturing, different end-market demand. Do you think you could give a little color on all of that?

Thanks, Linda. We were pleased with being able to hold up in March. And I guess it does really reflect on our multiple trade channel, multiple country business strategy. As far as trade channels are concerned, I'll ask Steve just to give a high-level view of the key channels that we operate in.

Sure. Thanks, Garry. So as Garry said, I mean, one of the big advantages of WD-40 Company is that we are diversified both by trade channel and by geographies. So no one trade channel, customer or geography is -- we're not overly reliant. The biggest markets we operate in, our automotive, DIY hardware, e-commerce, as we mentioned on the call, is a fast-growing channel, both in terms of percentage growth and also dollar volume, so -- and an industry as well being the -- one of the big 4. And -- but the beauty is the diversification. And so no one of those trade channels has an overbearing weight on the overall revenues.

So do you expect -- I mean, are you seeing anything in your end markets that indicate that because the decline in China was quite significant. So is it just the rest of the world is slower in seeing the impact in your results? Or is it just something different that's going on in the rest of the world versus what went on regarding COVID-19 in China?

I can give you some color on that, Linda. The down -- what happened in China was due to a planned shipments that we had that were to go out to our customers straight after Chinese New Year. We had a substantial order book in place. And as is customary, China kind of waits till after Chinese New Year to renew themselves and to take on that inventory. And so if the COVID hadn't happened, we would have shipped those orders. So it wasn't an end user a demand issue, it was our inability to ship that caused the sudden downturn in China.China started the shutdown around January 17 and was outright through till well into February, and we didn't -- we weren't able to ship what we had. We are starting to ship those orders now. So that's why there's a difference between China. If you think about in the world right now, most of the dominant trade channels that we operate in are functioning, hardware, home improvement, grocery, club, mass merchant, those trade channels are operating, albeit at a different level.So, people are buying. I drove past my local home improvement store this morning and the parking lot was 75% full. People are going there to buy a product, probably WD-40 as well. So, there were 2 different things that went on between China and what's happening in the U.S.

Okay. That's a good explanation. So can you talk about just your innovation that you were planning to launch? I think it was you were talking about June or July? Are you going to delay that or are you still going to launch your major innovation?

We are still going ahead. You're referring to Smart Straw 2 or Smart Straw next generation. The first market to launch that will be Canada in June. And we're also moving ahead with the continued conversion of our Specialist product range into the new blue and yellow, red top trade dress from our brand architecture. And we will continue to work on the rollout of Smart Straw next generation around the world. It will probably take us 18 months in total to get it out there as it was in the past, but no, we're full steam ahead.

Okay. And then just finally, in terms of the gross margin, I guess relative to at least my estimate, it was kind of disappointing in the quarter. And you mentioned, I think mix issue was quite a big issue. It seems like in many quarters, mix seems to be an issue. And I'm just wondering, is the idea that you're continuing to shift people toward the Smart Straw and Specialist, which is a higher-margin product. Is that still occurring? And then if so, what are these -- I don't know, it seems like almost like a recurring issue with mix that impacts your gross margin?

Okay. I'll touch some of it -- and I'll give it to Jay, if I can. The mix issue in this quarter was the shortfall of sales in China. We have a higher gross margin in China. And because our sales fell into the gutter there completely, that was the issue. Jay, I'll pass on to you for the rest.

Yes. Thanks, Garry. Yeah, Linda, that was -- a lot of what happens is in our direct -- the other is -- the other shift we have is between our direct markets and our MD markets, there's a shift in the margin depending on the volumes in any given period that go through those two distribution channels. So our MD markets, our marketing distributor markets, have a quite a bit lower margin as a whole, our direct markets have a much higher margin. And then when we see mixes between -- there's also even mixes between markets. So for example, there's much higher-margin in Europe than there is in the U.S. based on just the sophistication of the distribution channel and the size of the market.

Okay. And can I just sneak in one last one. Going back to look at your financial results back in the last recession in the '08, '09 period, I think it was an 8% sales decline, if I'm not mistaken. So you did have a sales decline. I know you don't want to give guidance, you're withdrawing your guidance. But would it be a bad idea for conservative analysts to put something like an 8% decline or something like that, assuming we go into a recession?

Linda, the decline that was -- you mentioned for 2008 was primarily because of the strengthening of the U.S. dollar against the pound. It devalued some 25%, I think, in 2008. And I think right now, it would be irresponsible for us to try and predict the future until we get through what we have to get through now. I think we'll have a better idea once the world starts to ramp up again. So -- but in the U.S., in 2008, our sales went sideways. Our consolidated revenue went down, but that was because of the change in the exchange rate from the British pound. Right, Jay?

Yes. Actually, we had a shortfall in the U.S. We actually, in local currency or in-source currency, we were -- we had growth in EMEA, but it was wiped out because of the headwind from foreign currency exchange.

[Operator Instructions]. Our next question comes from the line of Daniel Rizzo with Jefferies.

I got cut off at the end of the prepared remarks. So forgive me if this has already said but did you indicate that the dividend is largely intact that you're not considering cutting that at this point?

I'll let Jay answer that.

No. Yes, we did issue a dividend. The Board declared a dividend, and we -- excuse me, we will issue a dividend at the end of the month.

Right. But I'm saying going forward in the second half of the year, given the uncertain outlook.

We make those dividend decisions on a quarterly basis. I mean our policy hasn't really changed, and that is -- we look first to pay a dividend out at 50% of our earnings, and that strategy continues.

Okay. And then, Garry, you mentioned on seeing in your local distribution channel that things were still going -- your channels are still relatively intact there, and I assume that's with the home improvement market. But I was wondering if you're seeing similar things with both the construction, commercial and then just industrial activity, given the lack of commercial and industrial activity and auto activity, I was wondering, I would assume that you're seeing significant declines in those distribution channels or the channels through those end markets.

Daniel, we're not seeing it yet. It's probably too early, but let me say this, construction is -- at least in California, has been designated as an essential service. As I drive around, I see trucks out, builders out, auto repair stores are still open. The auto industry in itself, in the manufacturing side, I don't think that's huge consumption, but people are fixing cars, the auto zones, O'Reillys, the brake part areas, the oil change people, they're all operating. So stuff is getting done at this time.

Okay. That's actually very helpful. And then final question. You indicated that the CapEx, I think, is going to be at $30 million this year. We assume -- am I right to model that starting next year, it goes back more towards a traditional level? Or is it going to stay at this kind of elevated level as you guys continue to roll things out?

Jay?

We would expect it to go back to very close to historical levels. Once we complete the project with the innovation around our next-generation Smart Straw, we don't have any other significant investments that are begging for a lot of capital.

Is that project expected to be completed this year?

It will be -- there will be some carryover into '21, FY '21.

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.