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Executives

Maria Mitchell – Vice President Corporate and Investor Relations

Garry Ridge – President and Chief Executive Officer

Jay Rembolt –Vice President and Chief Financial Officer

Analysts

Ben Richardson for Jeff Zekauskas – J.P. Morgan

Alan Robinson – RBC

Joseph Altobello - Oppenheimer

Robert Felice – Gabelli & Co.

Liam Burke – Janney Montgomery Scott

Frank Magdlen – Robins Group

WD-40 Company (WDFC) F4Q08 Earnings Call October 15, 2008 5:00 PM ET

Operator

Welcome to the WD-40 Company fourth quarter 2008 earnings release conference call. (Operator Instructions) At this time I’d like to turn the call over to Vice President of Corporate Investor Relations for WD-40 Company, Ms. Maria Mitchell.

Maria Mitchell

Today we are pleased to have Garry Ridge, President and CEO and Jay Rembolt, Vice President and Chief Financial Officer.

This conference call contains forward-looking statements concerning WD-40 Company’s outlook for sales, earnings, dividends and other financial results. These statements are based on an assessment of a variety of factors, contingencies and uncertainties considered relevant by WD-40 Company. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from forward looking statements including the impact from cost of goods, the impact of new product innovation and renovation, the timing of advertising and sales promotion activities and the uncertainty in economic conditions both in the United States and internationally.

The company’s expectations, beliefs and projections are expressed in good faith and believed by the company to have a reasonable basis but there can be no assurance that the company’s expectations, beliefs or projections will be achieved or accomplished. The risks and uncertainties are detailed from time to time in reports filed by WD-40 Company with the SEC including Forms 8K, 10Q and 10K. Readers are urged to carefully review these and other documents and to stay up to date with our most recent company developments provided in the Investor Relations section of our website at WD40Company.com. Our first quarter fiscal 2008 earnings conference call [sic] is scheduled to take place on Wednesday, January 7, 2009 at 2:00 pm.

At this time I’d like to turn the call over to Garry Ridge.

Garry Ridge

This afternoon we reported net sales of $76.9 million for the fourth quarter of fiscal 2008, a decrease of 3% versus the fourth quarter of last year. Full fiscal 2008 net sales were $317.1 million, an increase of 3% over fiscal 2007.

Net income for the fourth quarter was $4.7 million, down 50% compared to the fourth quarter last year. Fiscal 2008 net income was $27.2 million, down 12% versus fiscal 2007. Earnings per share for the fourth quarter was $0.28 per share compared to $0.54 per share for the same period last year. Fiscal 2008 earnings per share were $1.64 down from $1.83.

These results are below the guidance we provided last quarter and there are many reasons for that. Before Jay covers the sales and financials in more detail I’d like to highlight some of the challenges and wins of this year.

Fiscal 2008 can certainly be characterized as the best of times and the worst of times for WD-40. We experienced the best of times with increased international growth our WD-40 3-In-One brands, executing on our strategy established back in 1998 of diversification and growth by brands, borders and trade shows.

We faced the worst of times with continued rising costs of components and raw materials, sales challenges with our household cleaning brands and deterioration in the economic conditions in the U.S. and in some other parts of the world. Our people worked hard to meet the growing challenges of these dynamic economic times and we refined our diversification strategy to meet the realities of today’s market and into the future.

Rising costs of components and raw materials is nothing new; however the volatility and sharp increases we experienced this year particularly in the fourth quarter were unexpected and unprecedented. We started the year with crude oil at around $83 a barrel. Oil prices peaked at $141 or above in July and finished the fiscal year at about $115.

As you know, oil prices have an effect on oil based products, plastic components and cost of diesel fuel we use to transport our goods to our customers. Steel prices also increased dramatically with a strong demand in China, India and Russia and the emerging markets. WD-40 cans are manufactured from tin plate which increased 20% over the last two years.

We have continuously monitored the markets and prepared our teams to respond and adjust to the shifts during these uncertain economic times. While we were able to implement cost containment and margin enhancement strategies we could not shield the company completely from the volatility in commodity pricing this past year, particularly the fourth quarter. We experienced margin erosion as a result.

We also experienced higher SG&A expenses which increased 7% during the fiscal year compared to 2008’s prior fiscal year [sic]. Our freight was up however it is important to note that freight costs could have been much higher if the company hadn’t fully implemented an integrated freight management solution.

Changes in foreign currency also contributed towards higher SG&A costs. We hired staff to support our growing international operations; our legal expenses went up due to increased activity in litigation, case load and increased intellectual property protection. Also impacting Q4 results was an impairment cost of $1.3 million or $0.05 per share on an after-tax basis related to the indefinite lived intangible assets of the X-14 brand. The impairment charge, a non-cash charge, was triggered by a decline in future forecast sales levels of the X-14 brand due to management’s strategic decision to remove a number of products from the grocery trade channel. That decision resulted from the company’s new diversification strategy developed during the fiscal year 2008. This was the first step in transitioning the brand from its high dependence on the grocery trade channel.

In light of these events it could be seen to be the worst of times. However, we do have wins to celebrate, particularly our growth in the international markets. As we commemorated our 53rd birthday for the first time in WD-40’s company history over half or 53% in fact of the company’s total revenues were generated outside the United States. International product sales of WD-40 alone grew from 57% in fiscal 2007 to 62% in 2008. Jay will cover the regional and product sales in more detail but I’d like to highlight that we experienced 15% growth in Europe in fiscal 2008 due to the new Smart Straw technology, expansion in developing markets and the growth of the 3-In-One professional range of products.

China’s sales increased 66% in fiscal 2008 compared to the prior fiscal year. International markets experienced growth this year and helped offset the weakness in the United States.

Another win for us this year was the U.S. conversion of our traditional WD-40 product to our new Smart Straw technology. As a successful innovation that has a dual spray and permanent straw attached. This new technology had allowed us to enhance our margins and our customers’ margins while resolving the number one consumer complaint; losing the straw. We’d like to think our customers will never lose that straw again.

Following the conversion in April the market demand for the product outpaced supply and we worked hard to ensure adequate stock. While still in early stages, we believe the technology is meeting the consumer’s needs and the technology certainly looks promising.

We also launched several new products this year. In the U.S. we were the first to launch a non-toxic and biodegradable carpet stain remover called Spot Shot Pet Clean. We also launched a product called 3-In-One No Mess No Rust Shield, a product that prevents rust and corrosion when placed in small enclosed areas to protect tools and valuables against rust. We also launched 3-In-One Professional Garage Door Lube, incorporating the WD-40 Smart Straw technology. We launched the 3-In-One Professional Range of products in Germany introducing this brand in that country for the first time.

We continued to tighten up our new product development process to launch products that will meet our core consumer needs and the company’s strategic direction.

Beginning with this fiscal year’s 10K the company will start reporting its products offerings in one of two product categories; multipurpose maintenance products and homecare cleaning products. The WD-40 and 3-In-One brand revenues will report under multipurpose maintenance products and all other brand revenues will report under the homecare and cleaning products category.

Now over to Jay who will cover the sales and financial results in more detail.

Jay Rembolt

In addition to the information presented on this call we suggest you review our 10K which will be filed next week. Now that Garry has touched on many of the themes of the year, let’s cover the details regarding our sales and financials for the fourth quarter and the financials for the fiscal year in total.

Net sales were $76.9 million in Q4, a decrease of 3% versus the fourth quarter last year. Fiscal year 2008 net sales were $317.1 million, an increase of 3% over fiscal 2007. Our results by product line were as follows: Multipurpose maintenance products in Q4 had sales of $58.1 million, an increase of 7% and year-to-date sales of $235.9 million, an increase of 9% over the prior year. Looking to our homecare and cleaning products Q4 sales were $18.8 million, down 24% from the prior fourth quarter and the year-to-date sales were $81.2 million, off 11% from the prior year. Our multipurpose maintenance product sales were up in all trade blocks for the fourth quarter and fiscal year driven by continued geographic expansion and growth of the WD-40 Smart Straw in Europe. In April of this year the U.S. also converted many of the WD-40 can sizes exclusively to the Smart Straw.

Our core multipurpose products business continues to be a growth opportunity. In fact, it has been generating a compound annual growth rate of 10% between the years fiscal 2002 and fiscal 2008. Decreased sales of homecare and cleaning products in Q4 and the fiscal year were primarily due to sales declines in the U.S. and Europe resulting from some decreases in distribution, some competitive activity and category decline. The homecare and cleaning brands compete in highly competitive markets and are currently facing shifting product categories. While there were pockets of growth in certain countries such as the Carpet Fresh No Vac in Australia, we recognize that homecare and cleaning products continue to be a challenge for the company.

Spot Shot sales declined 20% in Q4 and 12% for the fiscal year due to reduced sales to some key customers and overall declines in the aerosol spot and stain category. We are currently transitioning to newer, non-toxic and biodegradable product offerings to replace the Spot Shot trigger which is currently in distribution and also help us gain additional new distribution.

2000 Flushes and X-14 automatic toilet bowl cleaning sales declined 36% in Q4 and 15% for the fiscal year due to decreased distribution with key customers, competitive innovation and temporary manufacturing disruptions earlier in the fiscal year. Sales in the entire toilet bowl cleaning category declined in the grocery chain channel where we continue to face increased competition for shelf space. To combat these challenges we are focusing on developing and enhancing distribution channels outside the grocery trade channel as the result of consumer shifts towards the manual cleaning devices we have discontinued our in-bowl products. Our focus is now towards the drop-in category in which we introduced new SKU’s and some product improvements in the fourth quarter.

X-14 Hard Surface Cleaner sales declined 43% in Q4 and 38% for the fiscal year primarily due to lost distribution as the result of some competitive activity and again some temporary manufacturing disruptions that resulted in lost sales. In an effort to sustain the brand we are re-aligning our product portfolio to focus investment and distribution on our more competitive items.

Carpet Fresh sales declined 12% in Q4 and were virtually flat to the fiscal year. While the brand thrived in Australia it experienced reduced distribution and category declines in the mass and grocery trade channels in the U.S. The category decline is attributed to the reallocation of shelf space from traditional rug and room deodorizers to other air care products. We continue to refine our marketing and promotions and pricing strategies to create new opportunities for the Carpet Fresh brand.

Heavy Duty Hand Cleaners which are not categorized under our homecare and cleaning products made up 2% of gross sales in Q4 and for the fiscal year. Total sales of Lava and [Sovo] dipped a bit in the fourth quarter primarily due to soft Lava sales in the U.S.

No onto our results by region. The Americas in Q4 had sales of $42.8 million, off 9% from the prior period and for the year the sales were $176.9 million which represents a 5.5% decrease on prior year. Europe represented sales of $26.1 million, up 5% in the fourth quarter and sales of $110.5 million, up 14.5% on the year. Asia Pacific had sales of $8 million in the quarter which were down 14% from the prior year but on the year Asia Pacific sales were $29.7 million, up 22.9% from a year ago.

The Americas region is our largest segment covering 56% of total sales in fiscal 2008 versus 61% in the prior fiscal year. Changes in foreign currency rates period-to-period positively impacted sales by $200,000 or about 0.5% in Q4 and $1.5 million or 9% in the fiscal year. Most of the region’s shortfall is due to the U.S. which experienced sales declines of 10% in Q4 and 8% for the year driven by declines in the homecare and cleaning brands and softness in WD-40 sales. The U.S. sales of homecare and cleaning brands fell 28% in Q4 and 15% for the year as the result of reduced distribution, continued competitive pressures as well as the manufacturing disruptions mentioned earlier.

WD-40 sales in the U.S. were up in Q4 by 5% yet declined by 3% for the fiscal year as customers reduced inventory levels and in-store promotion activities in response to the slowing U.S. economy. The brand was also impacted by supply constraints for the WD-40 Smart Straw which prompted the company to delay some key promotional activities related to the Smart Straw conversion until fiscal year 2009.

Latin America experienced some softness in Q4 but continued to do well for the year growing 19%. Canada sales grew modestly at 6% in Q4 and 4% for the fiscal year. Growth of our multipurpose maintenance product sales in Latin America and Canada partially offset the decline in the U.S.

No on to Europe which accounted for 35% of global sales in fiscal 2008 versus 31% in the prior fiscal year. Sales increased 5% in Q4 and 15% for the year driven by the distributor markets and the WD-40 and 3-In-One brands. Changes in foreign exchange rates period-to-period positively affected sales by about $300,000 or 1% in Q4 and $2.4 million or 2% for the fiscal year. We sell to Europe through a combination of direct operations in certain countries and other countries we use marketing distributors. We have a direct sales force in the U.K., Italy, France, Spain, Portugal, Germany, Austria, Denmark and the Netherlands. The U.K. was the only direct market to experience a sales decline in Q4 and it declined 22% which caused total sales for the year to fall short by 3% versus fiscal 2007.

The softness in Q4 sales resulted from changes in customer specific promotional activities and from some increased competition surrounding the 1001 brand products. The other direct markets experienced sales growth as follows: France grew 30% in Q4 and 35% for the fiscal year. Italy had 15% growth in Q4 and 25% for 2008. Germany, Austria, Denmark and the Netherlands combined grew 29% in Q4 and 19% for the fiscal 2008 period. Spain and Portugal grew 2% in Q4 and had a 9% growth for fiscal 2008.

We sell through independent marketing distributors in Eastern and Northern Europe, the Middle East and Africa. These distributor markets combined to increased 19% in Q4 and 22% in fiscal 2008 driven by growth in distribution and usage resulting from increased market penetration and increased brand awareness.

Now on to Asia Pacific which grew to account for 9% of the global sales in fiscal 2008 up from 8% in the prior year. Asia Pacific sales increased 14% in Q4 and grew 23% for the year. All three regions, the Asia distributor markets, the direct market of China and the direct market of Australia experienced double digit growth in the fiscal year. Changes in foreign currency rates period-to-period positively impacted sales by $.4 million in Q4 and $1.6 million for the fiscal year.

The Asia Pacific region continues to represent long-term growth potential for the company. We began direct operations in China during fiscal 2007 and we are pleased that our sales in China grew by 66% in fiscal 2008. Sales in the Asia distributor markets were essentially flat in Q4 but grew 12% for the year with growth seen in Indonesia, Korea, Taiwan, Malaysia, Philippines, Japan, India and Thailand. Sales growth resulted from both increased promotional activity and continued growth in the awareness and increased penetration of the WD-40 brand into those markets.

Sales in Australia increased 8% in Q4 primarily due to the Novak brand and 21% for the year which was driven by both the WD-40 and the Novak brands. WD-40 benefited from continued broad distribution across all trade channels and the Novak gained market share in Australia’s growing aerosol rug and room deodorizer category.

That’s it for the sales update. Now let’s review the rest of the financials starting in Q4 and then our fiscal 2008 results.

Gross margin was 44.8% of sales in the fourth quarter compared to 48.7% of sales in Q4 last year. The 3.9% decreased in the margin percentage was due to several factors including increases in cost of raw materials and components, some short-term costs associated with product conversions and sourcing changes that are being made in the U.S., losses sustained in our investments in the related party VML, and an increase in advertising and promotional discounts that are treated as a reduction to sales.

Let’s talk about reaching points. As Garry mentioned earlier the rising cost of products that we have seen in the current period are due to some unprecedented cost increases that we have been experiencing for a number of our components and raw materials primarily aerosol cans and petroleum based products. It really had an impact on the fourth quarter. Also negatively impacting fourth quarter margins were short-term costs associated with product conversions and sourcing changes.

Product conversions are related to the automatic toilet bowl cleaners and the WD-40 aerosol products resulting in obsolete packaging and other components that were written off and expensed in cost of goods in the period. We had manufacturing disruptions which also led the company to attain additional partners to manufacture and warehouse our goods which resulted in higher short-term costs for some of our homecare and cleaning products. We expect the additional sales and margin opportunities arising from the conversions and sourcing changes to far outweigh the short-term costs of conversion.

Losses associated with VML, a related party contract manufacturer also negatively impacted our gross margin in the fourth quarter by $0.6 million. These losses were the result of manufacturing inefficiencies at VML that were recorded as a component of cost of products sold. The decrease in gross margin percentage was also the result of an increase in our advertising and promotional discounts which negatively impacted gross margin by 1.3%. A greater percentage of sales were subject to promotional allowances this quarter due to the overall increase in promotional activity in this quarter versus last year.

We also shifted some investment from broad media advertising to more targeted, customer specific promotions and programs which are reported as a reduction in sales. Certain A&P costs such as coupons, customer rebates, [inaudible] programs and slotting are contributing to the reduction in sales and the timing of these promotional activities as well as the shifts in product and customer mix caused fluctuations in our gross margins from period to period.

Price increases were implemented in certain of our products worldwide earlier in the fiscal year and this added 1.2 percentage points to our gross margin in Q4 but did not fully offset the cost increases we sustained. We will implement additional price increases in fiscal 2009 to mitigate the gap and we will continue to focus on margin enhancement strategies through our innovation efforts.

Those are the highlights of gross margin for Q4. Let’s continue on through the rest of the income statement. Selling, general administrative expenses for the fourth quarter increased from $19.5 million to $20.8 million, growing as a percentage of sales from 20.7% to 27%. The increase in SG&A expenditure stems in part from freight costs which increased by $1 million in the quarter due to higher sales as well as higher fuel costs. Advertising and sales promotion expenses decreased slightly in Q4 versus the fourth quarter last year. A&P expenses decreased from $4.9 million to $4.6 million and as a percentage of sales decreased from 6.2% to 6%.

The lower level of investment is due to the timing of promotional activities as a portion of our investment was pushed into fiscal 2009 due to supply constraints with the WD-40 Smart Straw. Including the promotional allowances of $4.8 million versus $4.1 million in the same period last year the company’s total investment in A&P activities totaled $9.4 million in Q4 versus $8.9 million in Q4 last year.

Amortization expense of $100,000 in the fourth quarter is the result of the 1001 acquisition and was equal to last year’s fourth quarter. The fourth quarter results also include a $1.3 million impairment charge related to the X-14 brand that Garry discussed earlier.

Operating income for the quarter was $7.6 million compared to $14 million in Q4 last year. Net interest expense for the quarter was $0.5 million and that was $0.1 million higher than Q4 last year. The increase is really due to lower interest expense offset by even lower interest income. Our interest expense was lower due to the continued reduction in our debt as we made our annual $10.7 million principle payment in October 2007 but we had lower interest income as the result of lower cash balances and lower interest rates in the current year compared to last year.

Other income was $0.2 million higher in Q4 as the result of the fiscal year versus Q4 last year. Most of this income was due to foreign currency exchange gains. The provision for income taxes was 36.8% for the fourth quarter, an increase from 32.2% in Q4 last year. The increase in rate is primarily due to higher benefits recognized in fiscal 2007 fourth quarter and those related to municipal bond interests.

Net income in Q4 was $4.7 million, a decrease of 50% from Q4 last year. On a diluted per share basis earnings were $0.28 compared to $0.54 in Q4 last year. Diluted shares outstanding in the fourth quarter fiscal 2008 decreased to 16.6 million shares compared to 17.3 million for the fourth quarter of the prior year.

Now let’s review our financial results for the fiscal year. Many of the themes and drivers for the fiscal year results are consistent with those we have just discussed. The gross margin was 46.8% of sales in fiscal 2008 compared to 48.4% of sales in fiscal 2007. The decrease in gross margin percentage was primarily attributable to cost increases in raw material components, costs associated with product conversions and source initiatives that were noted in our Q4 discussion and again increases in our discount to net sales.

As Garry noted, many of our oil based raw material components experienced double digit cost increases during the fiscal year. That put significant pressures on the company’s margin. Costs associated with VML and short-term costs associated with product conversions and sourcing changes also negatively impacted gross profit for fiscal 2008.

We expect the sales and margin opportunities arising from these conversion and sourcing changes to far outweigh the short-term costs of the conversion. Also contributing to the decrease in gross margin percentage was the increase in advertising and other discounts which negatively impacted gross margin by 0.8%.

Price increases implemented on certain products worldwide only partially offset these cost pressures and added 1.1% to the gross margin percentage in 2008 compared to 2007. Additional price increases are planned for fiscal 2009 and we believe these price increases along with innovation and other margin enhancement strategies will help us to increase our gross margin to historical levels.

Selling, general and administrative expenses for the fiscal year increased to 6.7% to $83.8 million increasing SG&A to 26.4% for fiscal 2008 compared to 25.5% in fiscal 2007. The increase in SG&A costs stem in part from freight expenses which increased by $1.5 million as a result of higher sales and fuel costs, changes to foreign currency exchange rates contributing an additional $1.3 million to SG&A expense for the fiscal year, employee related expenses which increased $2 million due to salary increases, additional investment in our sales efforts and higher fringe benefit expense offset by a lower bonus accrual of $1.2 million and our professional service costs which increased $600,000 primarily as the result of increased legal and information technology costs. We also had an increase of $500,000 in the current year due to higher stock based compensation costs.

Advertising and sales promotion expenses decreased to $19.8 million in fiscal 2008 from $20.7 million in 2007. As a percent of sales, advertising and sales promotional expense decreased to 6.3% from 6.7% in the prior year. A portion of advertising and promotion expense was pushed into 2009 due to supply constraints associated with the Smart Straw. We expect to increase our media investment in 2009 as we align our advertising sales promotion activities with the distribution of our new and existing products.

Including the promotional allowances the company’s total A&P investment for the year totaled $38.7 million for fiscal 2008, up from the $37.4 million in 2007. Amortization expense was $600,000 in both 2008 and 2007. As we noted in the Q4 discussion the company recorded an impairment charge of $1.3 million for the X-14 brand.

Operating income for 2008 was $42.7 million compared to $49 million in 2007. Net interest expense for fiscal 2008 was $1.7 million compared to $2 million in the prior year. Other income was $1 million in fiscal 2008 compared to $0.2 million in fiscal 2007, primarily driven by foreign currency exchange gains. The provision from income taxes was 34.2% for fiscal 2008, an increase from 33.2% in the prior fiscal year. The change in tax rate is due primarily to one-time benefits from favorable rulings on tax matters as well as along with significantly higher municipal income interest in fiscal 2007. The loss of these benefits in fiscal 2008 was partially offset by increased benefits related to qualified production activities for the current year.

Net income in 2008 was $27.6 million compared to $31.5 million in fiscal 2007. On a diluted per share basis earnings were $1.64 versus $1.83 in 2007. Diluted outstanding shares decreased to 16.8 million for the year compared to 17.3 million for the prior year. Regarding the dividend, on October 6, 2008 the board of directors declared a quarterly cash dividend of $0.25 per share payable on October 31, 2008 to shareholders of record on October 17, 2008. Based on today’s closing price of $28.10, the annualized dividend and yield would be 3.6%.

About our balance sheet at August 31, cash and cash equivalents were $42 million down from the $61.1 million at the end of the fiscal year. In addition to the $10 million in principle payment on our debt and $16.7 million of dividend payments, we acquired $17.7 million of common stock through the year. Accounts receivable increased to $49.3 million up $2.1 million from the end of the last fiscal year primarily as the result of timing.

Inventories increased to 18.3 million, up by 5.1 million from the end of last year. The increase in inventory is due to new product introductions and sourcing with alternative manufacturers in the U.S. as well as the acquisition of much of the manufactured inventory from VML. Certain finished goods were owned and warehoused by VML and under the company’s historical contract packager model. As the company transitioned to direct management of these finished goods it acquired inventory from VML to supply its distribution centers. The purchase of the VML manufactured goods will continue as we go forward.

Current liabilities were $54.6 million up from $53.9 million at the end of fiscal 2007. Our accounts payable and accrued liabilities increased by $0.5 million due to timing of payments. Crude, payroll and related expenses were down $0.8 million primarily due to decreased bonus accruals. Income taxes payable increased $1 million in the current year due to the timing of payment for income taxes.

That is the financial update for fiscal 2008. More information will be available on our 10K that will be filed this week.

Before Garry moves into his closing remarks I would like to briefly address the outlook for our gross margin, the impact of our relationship with VML and the sales challenges in our homecare and cleaning brands. Our gross margin eroded with the double digit increases in costs of raw materials related to our multipurpose maintenance products business particularly in the back half of the fiscal year. While we instituted selling price increases the timing and amount of those price increases only partially offset the entire cost of our products. We do expect our gross margin on our multipurpose maintenance products to improve with additional price increases planned for 2008 as well as manufacturing efficiencies we gained with the Smart Straw production scale.

Also, we expect margin improvement on our homecare and cleaning products as we transition to alternative manufacturers and bring innovation to the segment. That brings me to the second point, the impact of our relationship with VML. VML has been our primary partner for sourcing homecare and cleaning products and for warehousing and distribution. While the relationship had served the company well, VML began to have manufacturing inefficiency issues this past year that resulted in lost sales and margin. These events led the company to employ alternative and secondary manufacturers and partners. The company incurred some initial start up costs as the result of this sourcing transition as well as loss on the investment in VML. We may incur some additional short-term spend but we believe these changes will result in margin and product quality improvement in the long-term.

The last item I would like to address is our homecare and cleaning brands which have had sales and margin challenges. All of our brands under this segment compete in highly competitive categories. Maintaining and growing sales has been very difficult in some of our brands due to the very large competitors in this space that have greater resources to support heavier media and other advertising. The competitive nature of these categories have also made selling price increases difficult to implement and as a result we have not been able to cover all rising costs of material and have experienced merchant erosion over time. We will continue to support innovation which is critical to maintaining sales and margin for these brands. We recently rolled out several new products in the Spot Shot and 2000 flushes brand and have significant advertising and promotions resources slated to support them in fiscal 2009.

We do believe innovation along with cost reductions achieved through new sourcing will help our performance in the homecare and cleaning brands in 2009.

That completes the sales and financial update. Now back to Garry.

Garry Ridge

We consider WD-40 Company a long-term investment in your diversified portfolio and as such we’d like to share with you why it is fundamentally strong and stable. First, we pay close attention to our credit exposure. The company has strong credit relationships with large and trusted financial organizations and we will continue to manage these relationships closely. We monitor the health of our supplies and major customers as well as financial vendors to ensure we minimize the exposure to third-party relationships.

To minimize our credit risk we use credit insurance with our international distributor markets. We also monitor our direct sales markets very closely and the company has historically had bad debt levels that have been low as a result of these efforts.

Second, we have a strong balance sheet. However, our debt is low and we continue to de-lever the company. We have $42 million remaining on our original $75 million fixed rate term loan which we reduce to $32.2 million of our principle payment in just a few days. The company remains in compliance with all its debt covenants. We also have access to an additional borrowing if needed with a $10 million credit facility available.

Third, we implement best practices with our working capital and cash management strategies that has the company with strong free cash flow. We have cash available for investments and cash to fund the regular quarterly dividends and operating activities. Over the past 55 years our company has fared well in difficult times and we will continue managing the business to ensure long-term sustainability.

Our objective for fiscal year 2009 is to continue to deliver value to our shareholders despite the adverse economic conditions. Ultimately we will deliver value by providing products of choice for consumers. We want to give consumers the ability to choose by developing and acquiring products that consumers buy in our global distribution channels of demonstrated strength where we have the right to win. We want products that create the same positive, lasting memories as our hero product WD-40.

That said we invested time and resources this past year in reviewing our strategy with the objective of answering the following questions. Where do we now have the right play and win? All the work we’ve done in this past year has now confirmed a shift in our belief and that is we must now focus on adjacent business opportunities by leveraging the WD-40 and 3-in-one brands. We believe this focus will provide us with the best global opportunities.

This means that we will look, develop and/or acquire more products under our core multipurpose maintenance products business and leverage the distribution channels where we have this high level of competency. It also means we will continue to diversify through global development and expansion. The new direction has also led us to revise our corporate logo to reflect the likeness and maximize the power and association of the WD-40 brand. We feel this will help address the company’s need to leverage our famous brand while preserving the unique position the brand has in the hearts of many consumers around the world.

While the following guidance for fiscal 2009 does not include an acquisition, we believe that the turbulent times are creating greater numbers of attractively valued acquisition opportunities than in the past few years. Our strong balance sheet and good business model will enable us to execute on acquisition opportunities that are the right fit.

Our guidance for the fiscal year is as follows. We expect our sales to grow between 2-8% to $323 to $343 million driven by continued geographic expansion and market penetration in those markets and new products. We expect our investment in global advertising and promotion expense to rise between 6.5-8.5% and we expect net income of $27.4 to $30.7 million which would achieve an EPS range of somewhere between $1.60 and $1.85 assuming 16.6 million shares outstanding.

While we do not run our business on a short-term quarterly basis, or generally by the quarterly basis, we would like to share our Q1 outlook as well. Q4 was a tough period negatively impacted by short-term events and transitions. It is absolutely no more like business as usual. We believe our results in Q4 were an aberration and we are seeing a recovery in sales and the bottom line in Q1.

With that we will share our guidance for Q1. We expect sales to grow to between $81.5 and $84.7 million in Q1. We expect our investment in global advertising and promotional expense to range between 6.5-9.5% and we expect net income of between $6.6 and $7.4 million which will achieve EPS of between $0.40 and $0.45 per share assuming 16.6 million shares outstanding.

Thank you very much for joining us today. We’d be pleased to answer any of your questions from what seems to be a marathon call.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Jeff Zekauskas – J.P. Morgan.

Ben Richardson for Jeff Zekauskas – J.P. Morgan

I just wanted to discuss business conditions in Europe for a moment. We noticed you had about 5% sales growth. We considered that you probably had a currency benefit, possibly 10% in the quarter and I just wondered if you might speak to price and volume trends in Europe as you see them.

Jay Rembolt

The currency benefit was relatively small in the quarter. If we look at the end of the year in Europe we had really a number of markets that had phenomenal growth through the first three quarters and in some ways it was really just phasing as some of those markets adjusted to the higher level of volumes they had seen. So we don’t see what may be a lower level of fourth quarter revenues in Europe as being indicative of what the future is going to bring.

Garry Ridge

In fact, the guidance that we have given for the first quarter would anticipate that you would see a reasonable growth in Europe in the first quarter.

Ben Richardson for Jeff Zekauskas – J.P. Morgan

I guess speaking to those factors impacting gross margin. Firstly, the product conversion costs and sourcing changes, can you go into a bit of detail concerning those factors?

Jay Rembolt

We have had a number of new introductions and conversions of old products which as you move into the new from the old depending on if you have a soft cut up or a hard cut up you have some additional packaging component material that is left over. So some of those conversion costs were associated with that as we had a number of new products that were being introduced and changes. Some of the costs were associated with changes in our manufacturing partnership and those were costs associated with inefficiencies associated with new runs on new lines and kind of getting a new production facility up to speed. So a number of those costs are not expected to repeat as we go forward.

Garry Ridge

We also had increased freight costs as part of our cost of goods as we were shipping product from a new manufacturer to other warehouses and those costs should also normalize as we go forward. So again those are a number of activities that cause that.

Ben Richardson for Jeff Zekauskas – J.P. Morgan

Lastly on the topic of raw materials, given the decline in oil prices, even steel has backed off a bit, in how many quarters do you expect to see raw material turn positive? Is that possible?

Garry Ridge

Let’s break it into two. Let’s talk about oil first. Oil is down to around $75 today. We’ve got a fair tail on that and that’s why we had such an upswing in Q4. So certainly if oil stays down where it is we’re going to get a positive advantage. The good side of that is both of the major tin plate can manufacturers released to the market a number of months ago they expected steel tin plated cans to increase in price anywhere up to 90% in January. The latest indications we have got is that percentage increase could be anywhere between 45-60%. So although we will see some offset on oil we had not anticipated that level of price rise on our tin plate can purchases. This has been widely announced and discussed. So certainly we would have hoped to have seen some back off but that doesn’t seem to be happening. Our tin can suppliers have been reluctant to confirm what they think the number is because I don’t think they know either. I think it is going to be somewhere in the vicinity of the range that I shared.

Operator

The next question comes from Alan Robinson – RBC.

Alan Robinson – RBC

Garry thanks for your discussion of your credit procedures. It was very helpful. I’d just like to clarify my understanding of your expectations regarding the factors that impact your gross margins. You discussed oil. You discussed tin plate. It seems the other factors, the product conversions, sourcing changes, losses at VML, increases in discount costs for A&P, they look like kind of one-time items really that perhaps shouldn’t impact so much for next year. Is that a fair appraisal?

Jay Rembolt

I think that would be the case with the exception of the discounts. Those move around period to period depending on the mix of marketing activities. So depending on the activities are focused on specific customer trade-type promotions we will see more discount related activities. If we do broad consumer based advertising activities those costs are reduced. So it really varies quarter by quarter.

Alan Robinson – RBC

Did you discuss at all any progress on your cost containment efficiencies program you talked about during the last all?

Garry Ridge

That continues on an ongoing, 24/7 basis. Certainly one of the reasons we changed manufacturers of our automatic toilet bowl cleaners was to get a margin enhancement. So we are working on that. We are working on enhancing margins through innovation, through packaging changes, through rationalization. Certainly we will get a lift in our margin on Smart Straw as we enter next year and all of the high speed automation comes on line. So those are some of the things we have been working on.

Alan Robinson – RBC

So what you are saying really is that things are looking very positive there on your margins, apart from this potential increase in tin plate cans we might expect in January?

Garry Ridge

The thing we have been able to do is we implemented another price increase that took effect in the U.S. on the first of October of about 10%. That has gone through. We have accelerated our price increases. We think we have a handle on most things except for the volatility and uncertainty in steel and oil. But we have been able to offset that with some pricing. We would hope we are going to see an expansion of our gross margin as we go forward unless something doesn’t happen or happens that we don’t know. Today, that could probably happen. There are questions we ask ourselves today we would never bother to ask ourselves two weeks ago. So we’ll see where it goes.

Alan Robinson – RBC

Your guidance that you mentioned for the year and for first quarter that seemed to imply to me you’re going to have much flatter seasonality next year than you have experienced the last couple of years. Is that a fair point and if so what is causing that?

Garry Ridge

No. What it should indicate to you is we are really uncertain looking further out. That is what it should tell you. We feel comfortable with our guidance for this quarter but we are not in a position to and we feel okay about the year but we need to get through the can increase and we need to get through what happens to our bumpy Q4. What we are happy about is we are seeing Q1 coming out strong for us with sales growth and I think if we can weather the storm through that we will give you more information at the end of Q2. Again, we thought it was best to give you that visibility.

Operator

The next question comes from Joseph Altobello – Oppenheimer.

Joseph Altobello - Oppenheimer

Just a few questions here on the top line. In terms of guidance, it looks like it is pretty wide for 2009. Where are sort of the unknown or the biggest unknown? Is it the U.S. you are unsure about or is it Europe?

Garry Ridge

Do you think I can answer that question Joe? I don’t know what I’m unsure of these days. I think what we do know is there are indicators for us that tell us we’ve got growth going forward but I don’t know where things are going to go. We know what is going on in our business but we don’t know what is going to happen in the world around us. So I think that is why we have been wide. We have been probably a little less wide in this quarter guidance because we’ve got a better feel for that. So to us it is a bit like how far do the headlights of a car see down the road? Well it depends how far the car is traveling down the road. Again, these are not times of business as usual and you probably know that much better than I do.

Joseph Altobello - Oppenheimer

In terms of the first quarter you said you are seeing sales growth thus far in the quarter. Is that in both of those regions? Is one region doing better than the other?

Garry Ridge

We are seeing growth across the world. We are seeing growth in the U.S. because of Smart Straw and some of our other brands. We are seeing good geographic growth. We’re seeing growth in all of our geographic locations.

Joseph Altobello - Oppenheimer

In terms of the accounting for the foreign exchange impact maybe I am missing something. If Europe is about 1/3…actually greater than 1/3 of your sales and the Euro has been extremely weak relative to the dollar in the quarter since probably July why are you not seeing a greater FX impact?

Jay Rembolt

Our FX impact we have got a couple of FX impacts. We really have our European business is really driven out of Sterling. So in Europe our sales are recorded and booked in Sterling so when they get converted to the U.S. because of those changes in the quarter year-over-year the impact was smaller than it has been in the past.

Joseph Altobello - Oppenheimer

But the Sterling has been relatively weak as well hasn’t it?

Garry Ridge

It got weak into the end of the fourth quarter. The real weakness has been in the last 5-6 weeks.

Jay Rembolt

We get the gain from foreign exchange when the Sterling is strengthening because it converted at 2:1 instead of 1.7.

Garry Ridge

That is why one other thing our guidance reflects for next year is the impact of for a full year the Sterling going from 2 to what is probably 1.7. So we are actually losing sale growth in our consolidation from Europe in these numbers for next year. Probably to the tune of a couple million.

Joseph Altobello - Oppenheimer

Lastly, on the supply disruptions and the transition from VML, do you see any additional chance of further disruptions going forward or do you think that is behind you at this point?

Jay Rembolt

I think we are comfortable with the move we made and I think we see most of the hiccups have gone through the system. I think we are fairly positive on the outlook with respect to that situation. I think as Garry talked earlier this isn’t business as usual. I think that some of our concerns and some of our focus is really on the health of all of our supplier base. So that is an area that we watch very closely as well.

Joseph Altobello - Oppenheimer

Are you seeing any weakness in your other suppliers thus far in terms of credit and things like that?

Jay Rembolt

Nothing that we have identified at this time.

Operator

The next question comes from Robert Felice – Gabelli & Co.

Robert Felice – Gabelli & Co.

First, I wanted to key back on a previous question related to variance around the guidance. I was hoping you could highlight some of the underlying assumptions that you are baking into the high end and the low end of the range. As you mentioned it is pretty unprecedented times and perhaps that would give us greater clarity around the sensitivity of the guidance.

Garry Ridge

I think the guidance really if you look at it the swing is in our sale number. What is the economic condition of our customers going to be like and how are they going to react. I think the biggest variance is the overall economic conditions that are in front of us now.

Jay Rembolt

In addition to that we also are aware of the potential impact of the steel and potential additional volatility in the oil as well. Somewhat conservative in our expectations with respect to commodities in general.

Robert Felice – Gabelli & Co.

So you are not anticipating raw material costs being a significant headwind or tailwind either way?

Garry Ridge

I think there is one headwind and one tailwind. There is a probably tailwind of oil and a probable headwind of steel.

Robert Felice – Gabelli & Co.

But on a net basis?

Garry Ridge

I think there is probably a little headwind there now. We don’t know. We haven’t had the final confirmation of the steel tin price increase yet so it is only an assumption.

Robert Felice – Gabelli & Co.

What was the magnitude of the delta during the fourth quarter between raw material cost increases and pricing? I’m just trying to get a sense of what the gap was and what is left to be made up.

Garry Ridge

I don’t know that we have that number.

Operator

The next question comes from William Burke – Janney Montgomery Scott.

Liam Burke – Janney Montgomery Scott

Garry on X-14 you said you were going to…you obviously had written down some trademark value and you are going to reposition it in the distribution channel. Are you going to completely take it out of grocery or is it going to be more specialized through the hardware chain? How is that going to be repositioned?

Garry Ridge

Liam what we have looked at very seriously is the whole point is where we have the right to win. In that bathroom area with the expansion of products like the new green products from Clorox and others we have not got the power to win with that product in that category. So we decided we’re not going to throw our investment behind that. So I think what will happen is we will still maintain the premier position we have with our X-14 high end mildew products. Then we’re going to look at where else the brand might be able to travel and more so along to the other trade channels that we have. We basically are out of those general purpose bathroom cleaners where margins were tight, competition is hard and we really just didn’t have a right to win.

Liam Burke – Janney Montgomery Scott

So essentially you’ll be in the grocery channel with just one product and that is the mildew remover?

Garry Ridge

Yes.

Liam Burke – Janney Montgomery Scott

1001 in the U.K. how did that do?

Joe Rembolt

It had some weakness in the quarter and was off.

Liam Burke – Janney Montgomery Scott

Garry on the Spot Shot on the non-aerosol and the green product how did that do? I know the aerosol was sort of being de-emphasized.

Garry Ridge

The aerosol is not being de-emphasized. We’re in the stages of launch and transferring the original pump product into the new environmentally friendly, non-toxic VOC free product. So promotional activity on that is commencing within the next couple of weeks in line with a movie that is being launched and still building distribution. So I think we’ll have a better picture on that in the next 60-90 days but I think we are progressing okay.

Operator

The next question comes from Frank Magdlen – Robins Group.

Frank Magdlen – Robins Group

On the gross margin you said the goal was to get back to historic levels. Is that the recent historic level of say the 48%?

Garry Ridge

I don’t know. I keep saying and I am going to continue to say this business model was built on an assumption of a gross margin north of 50%. We need to get back there and we have been struggling with that for four years now. I think what you are going to see from what we know today in the fiscal year coming 2009 you are going to see us start to go in the right direction towards that. How fast and how much will depend on what the steel prices are, how our price raises fall in and anything else I don’t know about.

Frank Magdlen – Robins Group

Did you have any stock options? Did you lose significant sales because of the product conversions and change in sourcing?

Garry Ridge

One of the biggest areas was in our Smart Straw. Demand outpaced our production capacity in the last five weeks of the year. That really was a flow on from, if you remember when we converted the Smart Straw back in April we had an anticipation that our customers would buy out the classic product because of the increase in the price. They didn’t. The outcome of that was we had a poor Q2 in WD-40 and we had hoped that as transition happened we could build inventory of Smart Straw to be able to support the demand as we got through to the end of the year. In fact we were living hand-to-mouth on Smart Straw right through the end of the year as it was only in the last weeks of August we got full production on line of the second supplier of the actual Smart Straw unit itself.

That is why we then ended up with a major part of the Smart Straw promotion pushing into the first quarter of this year and we had some classic products left over we then cleared out. So it was a consequence of that whole effect that we never got a chance to build inventory so we weren’t maximizing our opportunity with Smart Straw. I believe we are through that now and we’ve got the full production on line. I believe our production capacity will increase over the next month as we finish installing some new high speed equipment that actually puts the straw on the can. Right now it is being done by hand and these new machines are going in to play that will increase our production ability. I think we are through that.

On the household products area we did have some disruption as we transitioned our manufacturing of our automatic toilet bowl cleaners from one production site to another. Not material but some hiccup. More of a cost issue really on gross margin because we were paying either inflated freight rates because we were moving products from one warehouse to another to meet orders instead of being able to source product directly from the manufacturer. We are balancing stock a little more. So a lot more extra costs in our cost of goods just to keep in supply as we balance stock around the warehouses that had inventory but not necessarily in the place we wanted it.

Frank Magdlen – Robins Group

So I take that to mean you lost some sales?

Garry Ridge

Yes, we would have lost some but I think in the household area it wasn’t significant. Certainly there was a reasonable loss in the Smart Straw.

Joe Rembolt

That is in the quarter. In the year-to-date, in the first part of the year we did lost probably $1 million or more of sales in the household products category.

Frank Magdlen – Robins Group

Garry when I looked at the long-term goals that you put up on your web site and you put up in your investor presentations are you inclined to change that at this time?

Garry Ridge

We will update that in December.

Frank Magdlen – Robins Group

On the X-14, is there anything left to write off on that impairment charge? Did you take it all or just part?

Joe Rembolt

Just part of it. There is a little left.

Operator

We have a follow-up question from Robert Felice – Gabelli & Co.

Robert Felice – Gabelli & Co.

You talked about the fourth quarter here being somewhat of an aberration in terms of performance and you have given us guidance on the first quarter and it seemed relative to the fiscal year 2009 guidance that the back half of next year will be pretty weak or baked in the possibility of some substantial weakness. Why is that, especially in light of the fourth quarter?

Garry Ridge

We don’t know. That is why. We are not comfortable. We have given a guidance range in the full year but we’re unsure what the economic conditions are going to be 3-6 months from now. I think not having that comfort zone then it would be irresponsible of us to say that we felt we could swim against the tide. So it is really because we don’t know the impact of the current economic turmoil. It is not business as usual so we can see closer in and we feel we understand where we may end up and that is why the range is as wide as it is because we just don’t know. We know our business but we don’t know what is happening in the broader market. If you find anybody that does can you give them my number? I could really use it.

Operator

We have a follow-up question from Alan Robinson – RBC.

Alan Robinson – RBC

Garry can you discuss how attractive are the acquisition opportunities out there? Are they attractive enough for your board to think about sacrificing the dividend if need be?

Garry Ridge

We look at the dividend on a quarter-to-quarter basis. We understand the dividend is an important part of the investment consideration of the shareholders. At this stage we haven’t had any discussions around that.

Alan Robinson – RBC

Are you more predisposed for smaller, tuck in acquisitions? Or is everything on the table?

Garry Ridge

I think it is a matter of looking at we are certainly conservative. I think you know that. We’re not going to make dumb business decisions and put ourselves at risk for the big prize that is maybe not there. We would like to think we can pull tuck-in acquisitions in pretty easily. So we are very actively looking around. We’d like to see private companies that need help, particularly in this current circumstance. We are looking but I don’t think you will find us doing something that will have you saying, “Oh my God why did they do that?”

Alan Robinson – RBC

Presumably this discussion over the use of cash will still include the potential of share buybacks?

Garry Ridge

We have done share buybacks. We have had dividend increases. We have paid down debt. The management and the finance committee every quarter look at our balance sheet and look at our cash needs, think about what it is we want and where we want to go and we make decisions based around that. We bought $60 million plus worth of our stock back in the last couple of years while paying down $30 million worth of debt, while paying out $15-16 million worth of dividends and still retaining $46 million cash. So I think I best explain it as a balanced, responsible fiscal approach.

Operator

There are no further calls.

Garry Ridge

That is a marathon that is for sure. It is always nice to talk to you. We hope that whatever is going on out there today you and your families are not being impacted adversely and we’ll certainly get on and do the best we can to deliver the best results we can over the next period of time. As I said it is not business as usual but we’re not people as usual. Thanks very much.

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Source: WD-40 Company F4Q08 (Qtr End 08/31/08) Earnings Call Transcript
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