WD-40 Company (WDFC) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company Third Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. At the end of the prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] I'd now like to turn the conference over to 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 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 [Technical Difficulty] 2020. 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, July 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 now like to turn the call over to Garry.

Thanks, Wendy. Good day, and thanks for joining us for today's conference call. Jay, Steve, Wendy, and I are once again dialing in from our respective homes. We hope you and your families are staying safe and healthy in these unprecedented times. I am so grateful for the highly engaged tribe we have at WD-40 Company. As a global business that operates in 176 countries around the world, each of our locations has been impacted by COVID-19 in different ways, but one thing is certain, our tribe members everywhere adapted quickly to an unparalleled situation. Through considerable effort and ingenuity, the tribe has demonstrated agility and innovation, quickly making dramatic changes to how we conduct business. This has enabled us to hold our own this quarter even when confronted by extremely challenging circumstances. The results our tribe have been able to deliver during this volatile and uncertain time has reinforced to me the importance of a highly engaged workforce. On a completely different topic, I’d like to take a moment to share something that has been on everyone's minds. WD-40 Company has a long history of doing the right thing as it relates to how we conduct ourselves, but we typically refrain from speaking publicly about social or political issues because we have tribe members in 16 countries which span the range of political structure, ethnicity, language, religions, and cultures. However, we want our stakeholders to know that racism runs counter to everything we teach, and the senseless acts of racial injustice that continue to plague our world are both wrong and deeply saddening. At WD-40 Company, we celebrate equality, diversity, and inclusion. And while these things are central to our culture and how we operate, there is always room for improvement. To that end, we are listening, learning and reflecting and evaluating our practices, protocols, and initiatives to find ways we can make a meaningful impact. We expect to share our continuing efforts and focus on progress in these areas of diversity and inclusion with our stakeholders in our initial ESG report that we expect to file in October 2020. Given the disruptions and disturbances that COVID-19 has caused for the past several months, we have a lot to cover today. For most of us, COVID has touched every aspects of our lives and has created challenges beyond anything we've experienced. You've often heard me say that physical awareness and mental awareness or simply said, making the end user aware of the value our products deliver and making them easy to buy through our multi-country, multi-channel distribution strategy is the core to our success. Where we have been easy to buy, like in e-commerce and in certain countries and trade channels that have not been locked down due to COVID-19, we performed very well in this third quarter. To the contrary, in geographies with strict movement restrictions in place or places where our e-commerce business is less developed, our sales were challenged. Today, we reported net sales of $98.2 million for the third quarter of fiscal 2020, down 14% compared to the third quarter of last year. This decline was primarily due to disruptions related to the COVID-19 pandemic. In a few minutes, Steve will discuss in greater detail the impacts that COVID-19 pandemic has had on our individual segments, particularly those with the strictest lockdown measures in place during the third quarter. Translation of our foreign subsidiaries’ results from their functional currencies to the U.S. dollar had an unfavorable impact on sales this third quarter. On a constant currency basis, sales would have been $100.5 million in the third quarter. Though the global health crisis is not over yet, I do believe we have maneuvered through the immediate crisis very well. The test has not been to simply get through this period, but to stabilize the business in such a way that we can reset and thrive in the future. We've always had a very clear strategy with very clear targets enabled by culture. What this crisis has required us to do is pause, reset, and become even more laser focused on how we will achieve our growth aspirations. As a reminder, our growth aspirations are guideposts, our guidance, and they're probably wrong and roughly right. Our growth aspirations are to drive consolidated net sales to approximately $700 million, and to do that while following our 55/30/25 business model. Because of the uncertain global economy ahead, the timing of our growth aspirations are still unclear. We hope to be able to provide an update to investors on our growth aspirations later this calendar year. So, on to strategic initiative number one, which is to grow WD-40 Multi-Use Product. Our goal under this initiative is to grow WD-40 Multi-Use Product to approximately $530 million in revenue. In the third quarter, sales of WD-40 Multi-Use Product were $71.7 million, down 19% compared to last year. The decline in WD-40 Multi-Use Product was driven primarily by a 30% decline in sales at EMEA due to the significant lockdown measures adopted by many countries in the region in response to the COVID-19 pandemic. This decline was additionally impacted by lower sales of WD-40 Multi-Use Product in both the Americas and Asia-Pacific, which declined 11% and 13% respectively due to the impacts of COVID-19. As the blue and yellow brand has evolved, we are focused on ways to premiumize our delivery systems. Delivery systems like Smart Straw have been so successful because end users love the convenience and the value they deliver. I'm very excited to share with you that our latest innovation, Smart Straw Next Generation, which has the ability to be sold with or without a toolbox friendly locking capability has arrived on store shelves in Canada. Smart Straw Next Generation has a more durable, easy to spray actuator, and will create a better end user experience. As we have shared with you in the past, our objective is to grow Smart Straw penetration to 60% of WD-40 Multi-Use Product global sales. Canada is leading the way in launching Smart Straw Next Generation, and we will begin to ramp up our conversion efforts globally next fiscal year. Strategic initiative number 2 is to grow WD-40 Specialist product line. We remain optimistic about the long-term opportunities for WD-40 Specialist and believe we can grow the product line to approximately $100 million in revenue. In the third quarter, sales of WD-40 Specialist remained relatively constant compared to the third quarter of last year, which we view as a win in these challenging times. The stability is primarily attributed to 28% increase in WD-40 Specialist sales in Asia-Pacific, much of which was driven by strong sales in China. In addition, during the third quarter, we experienced strong sales of WD-40 Specialist within the e-commerce channel. We've made significant progress on the global re-brand of WD-40 Specialist, which we shared with you earlier this year. For the first time ever, WD-40 Specialist will fully leverage our most iconic asset, the blue and yellow can with a little red top. We believe the refreshed brand will accelerate awareness and improve findability in store. I'm happy to share with you that the product layering the new WD-40 Specialist packaging hit some store shelves in May ahead of schedule and we are getting very positive feedback from our customers on the refreshed packaging for the product line. Strategic initiative number 3 is to broaden product and revenue base. Strategic initiative number 3 includes [Technical Difficulty] 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. Our goal for the products under these initiatives is to reach combined revenues of approximately $70 million. Global sales of products included in this initiative were $14.1 million in the third quarter, relatively constant compared to last year. Although sales under this category were flat in the quarter, sales of homecare and cleaning and BIKE products were up 10% and 51%, respectively, compared to last year, due to the increased demand as a result of the COVID-19 pandemic. Sales of WD-40 BIKE were particularly strong in EMEA as people in areas hardest hit by COVID are buying and fixing up bicycles and riding them more than ever before. Strategic initiative number 4 is to attract, develop and retain outstanding tribe members. The safety and well-being of our tribe and their families remain our top priority during this health crisis. Accordingly, the vast majority of our employees have been working from home for the last four months. It seems counterintuitive, but I think this prolonged sequestering is actually making us a more connected and collaborative tribe. And as they say, necessity is the mother of invention, and 2020 is the year that our tribe learned to be more technically savvy in how to work more efficiently as a global team from the comfort of their homes. That being said, I'm happy to report that some of our offices around the world are either open or in the progress of phased returns to an office environment. We are being thoughtful, deliberate and flexible in how we return our tribe safely to our offices, and there is not one size that fits all in any of these approaches. Strategic initiative number 5 is operational excellence. I believe our commitment to operational excellence has been an enormous asset over the last four months. From a financial perspective, we have always been good stewards of our shareholders’ capital, resources and conservative in our financial commitments, and this has served as well is in times like these. From an operational perspective, our tribe has never been more focused or better equipped to execute and deliver, despite these considerable hurdles. They must overcome over the short-term due to the impacts of the global health crisis. I'll now pass the call to Steve, who will discuss some of the operational highlights.

Thanks Garry and good afternoon. The impact of the global health crisis on our operations presents us with unique challenges that we continue to evaluate and address on a daily basis. When we spoke to you back in March, we didn't know how hard we would be hit as a result of the COVID-19 pandemic. We were optimistic and shared with you that despite the enormous disruption experienced in many countries, March revenue levels were roughly in line with what we've historically seen. Unfortunately, April and May became much more of a challenge for us as more and more countries around the world went into lockdown. Though our sales held up relatively well compared to some industries, the performance of our individual segments in the third quarter was driven primarily by whether or not distribution channels were open in any particular market. We saw the most significant sales declines in markets that were hardest hit by COVID-19 and which had the most stringent lockdown orders in place. For example, in the United States and Australia, sales increased 1% and 16%, respectively. This is because in these markets most of our traditional distribution channels were open. And in the U.S., we have a developed e-commerce business, which helped us to offset losses we experienced in other trade channels. In markets with very strict lockdowns, for example, many of our emerging markets, distribution was simply shut down and our e-commerce business in those markets is less developed. As a result, sales in these markets were severely restricted in the third quarter. One thing that's become very clear to us in the last four months is how important it is for us to have a robust e-commerce strategy in place. In 2018, we committed to our global vision of becoming the category leader in digital and e-commerce. Since the pandemic began, the number of consumers who are shopping online has been rapidly increasing. We’re fortunate that the investments we've made in this space have positioned us to take advantage of the seismic shift to e-commerce that is currently taking place. During the third quarter, our global e-commerce sales grew by approximately 125% with strong sales growth across all three trading blocks. Year-to-date, e-commerce sales are up by approximately 77%, and this helped to offset some of the loss we experienced in brick and mortar distribution in many markets. So, now let's take a closer look at what's happening in our trade blocks starting with the Americas. Net sales in the Americas, which includes the United States, Latin America and Canada, were down 5% in the third quarter to $50.1 million. Sales of maintenance products decreased nearly 10% in the Americas, primarily due to a 46% decline in sales of WD-40 Multi-Use Product in Latin America. This decline was driven by the decreased availability of our product due to disruptions around the distribution and sale of our products, due to the complete lockdown of many markets within the region, due to the COVID-19 pandemic. In addition, sales in Latin America were negatively impacted because during the third quarter, we recently shifted to a direct distribution model in Mexico. While we anticipate a successful build of our direct customer base in Mexico in future periods, sales in this region were on favorably impacted by the initial transition. The good news is that consolidated net sales in the United States held up reasonably well, up a little over 1% in the third quarter to $43.7 million. We consider this a win given the current environment. This sales increase is attributable to higher sales of homecare and cleaning products in the United States, which increased to $5.9 million in the third quarter, up 43% compared to last year. As Garry mentioned earlier, we're seeing an increased demand for cleaning products as a result of the COVID-19 pandemic. Despite the significant increase in sales of these products in the third quarter, we continue to consider our homecare and cleaning products, except for those tied to our growth aspirations as harvest brands that continue to generate meaningful contributions and cash flows that are generally expected to become a smaller part of the business over time. Finally, consolidated net sales decreased 10% in Canada to $2.7 million, primarily due to a 16% decline in sales of maintenance products, driven by the negative impacts of the COVID-19 pandemic. In total, our Americas segment made up 51% of our consolidated net sales in the third quarter. While there has been a short-term impact on the Americas segment due to COVID-19, over the long term, we anticipate sales in 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, decreased to $32.5 million in the third quarter, down 27% from last year. EMEA’s reported results in the third quarter were negatively impacted by foreign currency exchange rates. On a constant currency basis, sales in EMEA would have decreased to $33.8 million, down about 24% compared to last year. As you know, in March through May, Europe was the epicenter of COVID-19 and therefore nearly all of our European markets were negatively impacted by the pandemic during the third quarter. Sales of maintenance products decreased nearly 26% in EMEA, primarily due to lower sales of WD-40 Multi-Use Product throughout both our direct and MD markets as a result of the comprehensive lockdown measures adopted by many countries in the region as brick and mortar locations. The lockdowns limited many retailers’ ability to participate in promotional activities and sell high volumes of certain products, such as our WD-40 Multi-Use Product. We also experienced lower sales of homecare and cleaning products in EMEA which decreased to $1.7 million in the third quarter, down 45% compared to last year. These declines were driven entirely by lower sales of 1001 Carpet Fresh in the UK. Sales of 1001 Carpet Fresh were significantly higher in the third quarter of last fiscal year due to the favorable impacts of digital marketing associated with the brand. Net sales in our EMEA direct markets accounted for 67% of the region sales while sales in our EMEA distributor markets accounted for 33%. In total, our EMEA segment made up 33% of our consolidated net sales in the third quarter. While there has been a short-term impact on the EMEA segment due to COVID-19, over the long term, we anticipate sales within this segment 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 Asia region decreased to $15.6 million in the third quarter, down 5% from last year. Changes in foreign currency exchange rates had an unfavorable impact on sales in the region. On a constant currency basis, sales in Asia-Pacific would have decreased to $16.4 million in the third quarter, down only 1% from last year. In Australia, net sales were $4.9 million in the third quarter, up 16% compared to last year, driven by increased demand for our no vac and Solvol cleaning products as a result of the COVID-19 pandemic. In addition, WD-40 Multi-Use Product and WD-40 Specialist were up 4% and 18% respectively from period to period. The impacts of the COVID-19 pandemic were very limited in Australia compared to many other countries since COVID-19 case numbers remained relatively low in the country adopted less severe lockdown requirements. 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 28% from last year. In our Asia distributor markets, net sales for $5.8 million for the quarter, down 30% compared to last year. This decrease in sales is primarily due to various disruptions in the market related to the COVID-19 pandemic. Similar to what we experienced in many emerging markets in Latin America, we experienced temporary closures, complete lockdowns and restrictions required by local government authorities as a result of the COVID-19 pandemic. Our Asia distributor markets are not impacted by currency since we sell our products in U.S. dollars in the region. The good news is that in China, where we experienced significant disruptions from COVID-19 in the second quarter, net sales in the third quarter increased to $4.9 million or 26% compared to last year. Sales in China during the quarter were stronger as they began to resume more normal operations. Also, we had some very sizable orders that we were finally able to ship that had previously been delayed due to COVID-19. We remain optimistic about the long-term opportunities in China. Although we expect a lot of volatility along the way due to the possibility of further disruption from COVID-19, 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 consolidated net sales in the third quarter. While there has been a short-term impact on the Asia-Pacific segment due to COVID-19, over the long term, we anticipate sales within this segment will grow between 10% to 13%, annually. Looking forward, given the exceptionally volatile external environment we are experiencing, I want to share some thoughts with you regarding the remainder of the fiscal year. During the third quarter, a large majority of our revenue shortfall came from our EMEA segment. We are pleased to report that our EMEA business saw a very strong rebound in June, particularly in our direct markets, as most countries in the region have relaxed their restrictions, which have been in implemented from March through May. We also saw solid performances from the U.S., Canada and Australia in June. These current market conditions suggest that for the full fiscal year, consolidated revenue is likely to be in a range of $395 million to $405 million. Now, I'll turn the call over to Jay for an update on the financials.

Thank you, Steve. From a financial perspective, we believe we're in a enviable position with a very strong balance sheet, a manageable amount of debt, good cash flow, and historical precedence that indicates our revenue numbers can hold up during an economic recession and rebound fairly quickly thereafter. We believe these factors will help us navigate a world filled with continued uncertainty. Let’s start with the discussion about our 55/30/25 business model, the long-term targets that we use to guide our business. In the third quarter, our gross margin was 54% compared to the 54.5% last year. This represents a decline of 50 basis points. Higher warehousing and inbound freight primarily in EMEA negatively impacted our gross margin by 120 basis points. In addition, increased promotional activities, primarily in the Americas had an unfavorable impact on our gross margin of 70 basis points. The cost of promotional activities, such as sales incentives, trade promotions, and cash discounts that we give to our customers are recorded as a reduction to sales. And the timing and magnitude of these activities can cause fluctuations to gross margin from period to period. Changes in major input costs positively impacted our gross margin in total by 60 basis points. Petroleum-based specialty chemical cost positively impacted our gross margin by 80 basis points, period-over-period. However, increased cost of aerosol cans negatively impacted our gross margin by 20 basis points, and offset some of the gains we've realized due to the lower petroleum-based costs. Beginning in late February, crude oil reached multiyear lows, and we expect falling oil prices will continue to be a net positive to our gross margin. It typically takes between 90 and 120 days before we begin to realize the benefit of lower crude oil prices. In the third quarter, we began to see some benefit from the steep drop in oil prices experienced earlier this year, and we would expect to see this trend to continue. Also, positively impacting our gross margin were foreign currency exchange rates and sales price incentives in EMEA, as well as sales mix changes primarily in the Americas and Asia-Pacific segments. When combined, these items positively impacted gross margin by 80 basis points in the third quarter. Now, I'll address the 30, or our cost of doing business. In the third quarter, our cost of doing business was approximately 32%, compared to 33% last year. As you know, a majority of our cost of doing business comes from three areas, people costs or the investments we make in our tribe. This also includes the costs associated with any earned incentives or what some other companies call bonuses, investments we make in marketing, advertising and promotion, and freight, the cost to get our products to our customers. Despite the reported revenue decline we experienced in the third quarter, we managed to reduce our cost of doing business as a percentage of sales, because we took immediate actions to reduce the spending levels within our business. We've always been good stewards of our resources, frugal in our spending and conservative in our financial commitments. However, the COVID-19 pandemic has required us to become even more prudent in how we invest during these uncertain times. In 2008, during the last significant economic downturn, we took actions that enabled us to adjust our cost structure that allowed us to support our business model and keep our tribes intact. We are focused on achieving similar outcomes now in 2020. This brings us to EBITDA, the last of our 55/30/25 measures. EBITDA was 22% of net sales for the third quarter, which is flat compared to last year. And that wraps up the discussion on our 55/30/25 business model. Now, I'll discuss a few other items. The provision for income taxes was 23.9% in the third quarter of this year, compared to 19.8% last year, and the increase in the tax rate was primarily due to a much lower benefit expected from foreign-derived intangible income. Net income for the third quarter was $14.5 million versus $18.1 million in the prior year, reflecting a decrease of 20%. This resulted in diluted earnings per common share of $1.06 for the third quarter, compared to a $1.30 for the same period last year. Weighted average diluted shares outstanding decreased to 13.7 million shares from 13.8 million shares a year ago. Now, a word about working capital and capital allocation. We define working capital as accounts receivable and inventory, less accounts payable and accrued liabilities. In the current environment, we're paying particularly close attention to our working capital and are using appropriate levels of working capital to manage the profitable growth of our business. When compared to the second quarter of 2020, inventories have remained relatively constant and accounts receivable has increased only slightly. We're keeping a close eye on accounts receivable and do not expect any material changes as a result of the impacts of COVID-19 pandemic. We do believe inventory levels may trend up slightly over the next few quarters. This is due to changes we're intentionally making to support the business. First, we have to ensure that we have adequate levels of inventory on hand in this uncertain manufacturing environment. Second, we recently launched direct operations in Mexico, which requires that we build up inventory to keep and meet the requirements of this new market. Finally, the launch of Smart Straw Next Generation may cause inventories to be elevated for a time. Our capital allocation strategy includes a comprehensive approach to balance investing and long-term growth while providing strong returns to our shareholders. In fiscal 2020, we will invest approximately $25 million in capital projects, majority of which is being used to prepare proprietary equipment and machinery we will use to manufacture our Smart Straw Next Generation delivery system. Though we elected in April to suspend the stock repurchases under our current share buyback plan, we continue to return capital to our shareholders through regular dividends. On June 16th, our Board of Directors approved our regular quarterly cash dividend at $0.67 per share, payable to shareholders of record on the close of business on July 17th. So, with that, let's turn to fiscal 2020 guidance. COVID-19 pandemic has continued to inject a measure of uncertainty into our business, which makes it very difficult for us to accurately forecast short-term financial results for the Company. Due to these events, in April, we withdrew our guidance for fiscal 2020 and will not be issuing any financial guidance for the remainder of the year. Now, that completes the financial overview. I'll turn it back to Garry.

Thanks, Jay. In summary, what did you hear from us on this call? You heard that global sales declines in the third quarter were primarily due to end users not being able to easily buy our products, due to the distractions related to COVID-19. You heard despite these disruptions, sales of WD-40 Specialist remained constant in the third quarter, which we view as a win and a credit to our e-commerce strategy. You heard that sales of WD-40 BIKE were up 51% in the third quarter, primarily due to strong demand in our EMEA segment and strong sales in e-commerce. You heard that sales of our homecare and cleaning products were up 10% due to the strong demand for cleaning products due to COVID-19. You heard that we continue to make outstanding progress in the area of digital and e-commerce, and our e-commerce sales have grown approximately 77% year-to-date. You heard that Smart Straw Next Generation has arrived on some store shelves in Canada. You heard that the refreshed packaging for WD-40 Specialist product line has arrived on some stores’ shelves in the U.S. You heard that we continue to return capital to investors through regular dividends. And you heard that current market conditions suggest that our full year fiscal consolidated revenue is likely to be in the range of $395 million to $405 million. And you heard that we remain confident that our growth aspirations remain a realistic future opportunity. In closing today, I'd like to share a quote from Dr. Martin Luther King Jr. “If you can't fly, then run; if you can't run, then walk; if you can't walk, then crawl, but whatever you do, you have to keep moving forward.” Thank you for joining us on our call today, we'd be pleased to open the conference call to any questions. Over to the operator.

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

Hi. How are you?

Good, Linda.

That’s good. So, thank you for the commentary on what you think sales might be for the year. I guess that implies, if I did my math right, about down 8% to up 1% for the fourth quarter, something like that. What do you see as being the main factors that determine whether you come in at the lower end of that or the higher end of that?

I think there is one thing that plays in completely, and then I'll ask Steve to give his point of view. It's really what will get shut down that we're not aware of right now. In my comments earlier, the thing that's become very clear to us in this last quarter is that, there is high demand for our product, particularly given the increased amount of DIY activity that's going on in the United States and Europe, and where trade channels are open, our point of sale is ahead of last year. But, when consumers can't or end users can't buy our product, that shuts us down. So, I think the biggest risk factor is the risk of unknown of what's going to happen next. So, Steve, what would you want to say about that?

I think that's very true, Garry. So, it's certainly seen a considerable uptick as people have been kind of stuck at home around the world, a significant uptick in DIY activity, which has improved in certainly across the U.S. and Europe. I think secondly, we're in a position to -- fortunate position with our e-commerce capability to be able to respond to some of those lockdown conditions that have occurred. And as you've seen, our e-commerce businesses have absolutely boomed in the third quarter and taken out some of the slack of distribution channels that have been closed down elsewhere.

And then, can you talk about the new product launch in Canada? And can you just mention maybe why you chose Canada first for that launch? And then, what do you think the timing of the next market entry might be, and would the next market be the U.S.?

We chose Canada because a number of years ago we were in Canada with Smart Straw, and we learned through discussion with regulators there that we would have to have a lockable delivery system to meet the regulations. And that was one of the main reasons behind the development of Smart Straw Next Generation. So, Canada was obviously the first place because we've not had Smart Straw there before. And given that we're in early stages of production, volumes are nowhere near where they need to be yet. So, Canada was a great place for us to start. Smart Straw Next Generation is made up of two different delivery systems. It's what we call 2.0, which has the toolbox-friendly lockable delivery system, and then it has 1.5, which is an improvement of the current Smart Straw but not lockable. So, we will start to convert a lot of markets to 1.5 as we bring up production. And that will happen -- start to happen into the mid part of next year, which will mean we'll have a better product with the capabilities to manufacture quantities at a level that will allow us to now certainly push the conversion of markets that don't have Smart Straw at all. So, it's going to be a year to 18-month program probably, Linda, till we see the original Smart Straw 1 gone and it's replaced by 1.5 or 2.0.

And then, can you just talk about -- if you're seeing -- I mean, you mentioned some areas where you are actually benefiting, like the BIKE from sort of these stay-at-home, doing outdoorsy type stuff. Are you seeing any recessionary-type weakness or signs of it as a result of reduced industrial production or anything of that sort in any of your markets?

I don't know, Linda, how I would dissect that from this economic ice age that we're going through right now. I mean, I'm not sure who is back, who is not and why. Now, having said that, we've seen manufacturing start to return in China. But at this time, I think that there is such a disruption in both the market and the distribution channels that it's very difficult to get a clear read on what's moving where. What we have got, which is very reliable is point of sale. And where -- for example, point of sale is extremely positive for us in areas where we know that artisans and trades people would normally buy. So, that tells us that -- there was a great study, and Steve, you might want to mention this, there is a great study that came out in Europe just last week around DIY activity. And Steve, you may want to just touch on the headline of that, if you’ve got that information handy.

Yes. It was just showing a study across multiple countries, I believe, seven or eight key countries across Europe that showed DIY activity during the COVID-19 lockdown period was up by around 30% across Europe.

Thank you. That's very interesting. And then finally, when you report the fourth fiscal quarter in a few months, do you think that you'll have enough visibility to be able to give FY21 guidance? Do you have any sense for that right now?

I don't know.

Okay.

It depends on where we are in the world. I mean, if we've got a vaccine and things are starting to normalize, we maybe able to. But, I think if we come in at that $395 million to $405 million, we're going to be nearly flat -- well, we're going to be nearly flat with last year in some ways. I think, we'll be off between 4% and 8%. And I think, that's a pretty good result given the trauma that the businesses are going through.

Thanks. And just one more that I thought of. It seems that the distributor markets are the ones where sometimes these disruptions occur. Can you just remind us what percentage of your revenue is direct versus through distributors?

I think, Steve, you might have the update, but I think 75% is direct and 25% is through distributors. Is that right, Steve?

That's correct. Yes.

Okay. Thanks very much. I appreciate it.

Thanks, Linda. Stay safe and well.

Thanks.

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

Hi, everyone. How are you doing?

Hi, Daniel.

Hi. You mentioned that you made a reopening that the outlook for sales is dependent upon what shut down or not. I was wondering if your other -- the emerging markets and I guess, Southeast Asia and Latin America are starting to show signs of reopening too of the distribution channel.

Daniel, it varies week to week. Our leadership team currently meets on a weekly basis and we have our global leaders from Europe and Asia Pacific and the Americas on that call. And I must say, it varies from week to week. Certainly, countries like Indonesia, India have been very, very hardly hit -- hard over time. So, it's uncertain yet which countries are moving faster or not. Just this week, even though Australia was doing very well, they had another flare up in Victoria and in Melbourne. Now, where is this being going next? We don't know.

Okay. And then, with the rollout of the next generation of Smart Straw, have you disclosed -- if there is a price premium on that, if you -- I don't know to raising prices just because you were doing introductions or have you not set that?

Certainly, the 2.0 version, which is the lockable one, has a premium. The 1.5 at this stage, it doesn't premium. But, because of manufacturing improvements, it's going to be accretive to gross margin.

Okay. And then, finally, it was mentioned that one of the reasons why the tax rate jumped is because of less sales offshore, less foreign sales. Now, with EMEA rebounding, the world opening up again, I was wondering is it possible to say that that will go back to a more, I mean, more normalized rate for the fourth quarter and going forward from there.

I'll let Jay answer that question.

Yes. Certainly, the rebound in -- somewhat it depends on the rebound in EMEA, but it also depends on the rebound in some of the other markets, like for example Asia and Latin America, whereby we achieve the intangible benefit from sales into those markets as well. So, it's some of our foreign markets are more impactful than others. EMEA, Latin America and the Asian distributors are key to that.

Our next question comes from the line of Rosemarie Morbelli with G.research. Please proceed with your question.

Thank you. Good afternoon, everyone.

Hi, Rosemarie.

Glad to see everyone is well. I was wondering if during this pandemic the different lockdown in the different regions and so on, you have established a new marketing method that you are going to pursue as we come out into what I call the new normal, which may not be normal at all. So, any changes in the way you are operating in the way the tribe is operating, less -- fewer people in offices, which could mean that you don't need as many office facilities? If you could help give us a feel for what you intend to do or how you will change?

Yes. So, one of the things that we are taking advantage of this time is really making sure that we are very conscious of what learnings we had. So, we haven't made any decisions. Already a great number of our people work remotely. But, we believe strongly that social interaction is important, creativity is driven. What has happened though is we become much better at being virtual. So, I think our overall communication and collaboration will improve over before. As far as market is concerned, no, we are sticking to the tried and true, make the end user aware, make it easy to buy. I think, the one area that is continuing, and Steve mentioned it, was around e-commerce and the way that's changed over time. And Steve, you might want to touch on how e-commerce is really playing into what we do, particularly given the development of the major e-commerce players and how they've now distributed around the world?

Sure, Garry. Thank you. So, yes, I mean, we are absolutely reallocating resources. So, owing the money, the growth is happening online around the world. And there has been certain news out there about our product not being suitable for e-commerce due to transportation reasons. I mean, that's just complete hogwash in terms of the transport ability of our product. And the number of the distribution centers are out there in the e-commerce network today, in the U.S. alone, there is over 100 distribution centers for the major U.S. retailer. So, it's just not a barrier to our growth. And that's where we're reallocating resources and [indiscernible] with very, very positive results around the world.

So, you are obviously strong in North America based on what -- I mean, if I heard properly. What about Europe though?

E-commerce in Europe?

E-commerce in Europe, yes.

Yes. In terms of e-commerce, look, we have a global strength. And with the marketplaces, I mean, the same players, the strong in North America, we have a considerable strength also in the EMEA region across multiple countries, and also China is the largest e-commerce market in the world. We have a very strong e-commerce capability there also.

And of the $25 million of CapEx for this year, how much are you adding to the e-commerce project and taking away from another area, if you are?

So, e-commerce is not capital intensive. It's really people intensive. That capital this year is really primarily going toward the Smart Straw Next Generation. But what we have done is brought in some very big talent. And Steve, you might want to mention we brought about our global digital advisor that we brought in and some of the way we are bringing the e-commerce squad together around the world.

Sure. Thanks, Garry. So, yes. So, a couple of years ago, we put one of our best upcoming global leaders in terms of the talented individual to head up our global e-commerce squad. They've achieved just wonderful results for us. And really, doing what we're able to do with the global player, so taking the learnings out of China or EMEA or the USA and spreading them across the world to make great progress on our e-commerce business. So, that's been a big strength. We recently added a Chief Digital Advisor who came in from a major consultancy and is advising the business, Garry and myself in terms of our long-term digital strategy. So, we are making great progress, not only in e-commerce but in the digital strategies that support e-commerce. Our internet traffic during this pandemic has just gone through the roof. And that's certainly leading to conversion in sales around the world.

Steve, one of the markets that's performed very well with e-commerce is Italy. And I think year-to-date our Italian sales are up over last year, but we've made significant progress against the competitive landscape in Italy. Correct?

That is correct. It's just one example and there are many more. So, yes, we're achieving very, very strong growth in many places like Italy. The U.S. performance, obviously, the U.S. market is a very large e-commerce market for us and growing very, very strongly. So, really taking some very nice share in this very fast-growing situation.

All right. Thank you very much. I appreciate the help.

Thank you.

Ladies and gentlemen, that concludes our allotted time for the questions. We thank you for your participation in today's conference call and ask that please disconnect your line.