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WD-40 Co. (NASDAQ:WDFC)

Q4 2009 Earnings Call

October 14, 2009 5:00 pm ET

Executives

Maria Mitchell – Vice President Corporate &Investor Relations

Garry Ridge – President, Chief Executive Officer

Jay Rembolt – Vice President, Chief Financial Officer

Analysts

Liam Burke – Janney Montgomery Scott

Jeffrey Zekauskas – J.P. Morgan, Chase

Alan Robinson – Royal Bank of Canada

[Henry Caplan – Oppenheimer]

Frank Magdlin – The Robins Group

Operator

Welcome to the WD-40 Company’s fourth quarter 2009 earnings release conference call. At this time I would like to turn the call over the Vice President of Corporate and Investor Relations for the WD-40 Company, Ms Maria Mitchell.

Maria Mitchell

Thank you for joining us for our fourth quarter earnings call for fiscal 2009. Today we’re 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 of commodity prices, changes in foreign currency exchange rates, impacts of new products and brands 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 by WD-40 Company with the SEC including Forms 8-K, 10-Q, 10-K and readers are urged to carefully review these and other documents and stay up to date with our most recent company developments provided in the investor relations section of our website at www.WD-40company.com.

Our annual shareholder meeting will be held on December 8, 2009 at 2:00 pm at the University of San Diego. A note to our shareholders; we will be using the noted and access method to deliver our proxy materials this year. You will be getting a notice in the mail to help you access your electronic materials and instructions on proxy voting. Our first quarter fiscal 2010 earnings conference call is scheduled to take place on Monday, January 11, 2010 at 2:00 pm.

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

Garry Ridge

Good day and thanks for joining us for today’s conference call. This has been a turbulent and rough year but one with many successes. Unfavorable significant shifts in foreign currency exchange rates greatly impacted our results and excluding that impact, both our sales and income grew versus the prior year.

The global recession hit us hard particularly in Q2, but we did see the trend reverse in Q3 with further growth in the fourth quarter. We experienced volatility in our raw material costs, yet managed the business to significantly improve the gross margin to exceed our goal of 50% in the back half of the year.

We took a $6.7 million in impairment charges related to our home care and cleaning brands which was partially a result of our practice multi-purpose maintenance products. However, that shift in focus has positioned us well going forward which I’ll expand on in a moment.

A rough year, absolutely. Down and out, absolutely not. Not only have we been surviving but we spent fiscal year 2009 positioning ourselves for growth in the future. First, we refined our strategy to focus on multi-purpose maintenance products, the sand box as we call it where we have the right to win. The strategy alignment includes new product development, acquisition criteria, WD-40 brand exploration and strategic marketing initiatives.

Second, we developed the WD-40 D&A signature to use on selected products to further leverage the trust and credibility of the WD-40 brand. Thirdly, we developed Blue Works, an entirely new brand and product line of superior industrial grade multi-purpose maintenance products. Fourth, we increased our distribution of recent renovations including two new products under the 3-IN-ONE brand, the 3-IN-ONE no rush shield and the 3-IN-ONE professional garage door lube.

The bottom line is, while there were many unfavorable forces out of our control, we rose to the challenge and managed the business to minimize the impact of those forces on our results. We decided there was no reason to waste a good crisis. Furthermore, our initiatives put our business on the path to growth despite a prolonged period of turmoil and uncertainty.

With that said, let’s move on to our quarter and annual results. We reported net sales of $77.8 million for the fourth quarter fiscal 2009, an increase of 1% versus the fourth quarter last year, and year to date net sales were $292 million, a decrease of 8% versus year 2008. Net income for the fourth quarter was $7.6 million, up 64% compared to the fourth quarter last year. Year to date net income was $26.3 million, down 5% versus fiscal 2008.

Earnings per share for the fourth quarter were $0.46 compared to $0.28 for the same period last year. Year to date earnings per share were $1.58 down from $1.64 last year.

Let’s cover in more detail the significant impact on our business and Q4 results starting with foreign currency exchange rates. We have seen local currencies fall in value relative to the U.S. dollar across several markets. The stronger U.S. dollar impacted us in three ways; first in converting sales and profits from our international segments, second in causing price fluctuations on our products to our customers and consumers in some international markets and third, by impacting the cost of our U.S. source products to our international segments.

Changes in foreign currency exchange rates were unfavorable to our results in both Q4 and year to date. Current Q4 results translated at last year’s fourth quarter exchange rates or what we term as constant currency basis, would have produced net sales of $82.4 million and net income of $8.7 million.

Thus, on a constant currency basis, Q4 net sales would have increased 9% versus 1% and net income would have been up 85% versus 64%. Constant currency basis is the translation of our current period results from the functional currencies of our subsidiaries to U.S. dollars utilizing the exchange rates in effect for the prior fiscal year period.

Year to date impact of foreign currency fluctuations was significant. Results on a constant currency basis would have produced net sales of $321.9 million and net income of $30.8 million compared with year to date last year net sales would have increased 2% versus a decline of 8%, and net income would have increased 12% rather than a decline of 5%.

In those international markets where we sell our goods in U.S. dollars, the change in foreign currency exchange rates effectively created price rises at local levels and in some cases in excess of 20% to 30%. Exchange rates also impacted the cost of U.S. sourced product to our international segments and negatively impacted our gross margin this fiscal year.

We are working on alternative strategies to minimize the impact of fluctuating currency exchange rates on the price of products in local markets. For instance, we recently began manufacturing Smart Straw in Europe which had been exclusively sourced in the U.S. prior.

Another significant impact was the global economy. In the first half of the year we saw customers tighten up on inventory and consequently reduce volume in response to the economic uncertainty. We saw the tide begin to turn in the third quarter with further improvement in customer sentiment in the fourth quarter.

Sales increased 11% in Q3 over Q2 and Q4 increased 13% over Q3. Fourth quarter net sales of $77.8 million represented a 26% increase over the second quarter sales of $61.8 million. Changes in foreign currency exchange rates had little impact on sales over the last two quarters.

Another significant impact was the expected year over year decline in our home care and cleaning products. Global sales of this product group declined 18% versus last fiscal year as a result of lost distribution, competitive factors and the challenges due to adverse economic conditions. This product group has shown signs of stabilization with much smaller declines of 3% in the fourth quarter of fiscal 2009 versus the same period last year.

Home care and cleaning products also impacted our profitability in the short term due to impairment charges of $3.9 million in Q4 relating to our Carpet Fresh and X-14 brands with a total impairment charge of $6.7 million related to these brands for the fiscal year. These non cash impairment charges were related to the change to de-finited lived assets for Carpet Fresh and X-14 brands which were triggered by declines in profit margins and forecast sales revenue of the brands.

The lower profit margins primarily stem from the significant can cost increase we incurred while the lower sales revenue forecasts were attributed to less distribution in the U.S. and our strategic decision to divert our research and development resources from our home care and cleaning products to our multi-purpose maintenance products and adjacent categories.

We believe this shift in investment and time, talent and treasure to our multi-purpose maintenance products and adjacent categories will reward our shareholders in the long term. We are currently launching a new line of industrial grade, multi-purpose maintenance products under the new brand name of Blue Works. I will give you more details on this fantastic product line later in the call when we discuss our fiscal 2010 outlook.

A positive impact on our results was the improvement in gross margin percentages. Between fiscal years 2003 and 2007, our gross margin averaged 49.8% of net sales. Then volatility and sharp increases in raw material costs eroded our margin percentage down to 46.8% in 2008. We addressed the challenges by implementing several strategies to compact these impacts which helped to improve our gross margin percentage to 51.6% in Q4 and 49.5% for fiscal 2009.

Price increases were needed to cover the sharp rise in raw material costs, yet they were implemented carefully to respect the relationship with our customers and consumers. We continue to look at our business and launch initiatives to improve the quality, service, price and value of our products to ultimately improve our gross margin.

These initiatives included supply chain improvements and product conversions, many of which stem from the work of our cost reduction and containment theme, or as we call them, the crack team. Supply chain improvements have included investments in capital equipment to reduce manufacturing costs and improve quality.

Restructure and consolidation of raw materials sourcing, contracting with alternative manufacturers and service providers where necessary, improving warehouse and distribution operations and costs of repackaging and redesigning displays to reduce cost while maintaining quality. Product conversions were done on all our top three brands, WD-40, Smart Straw and 2000 Flushes.

The conversions involved some change in formulation and/or delivery systems that improved the product and added value to the consumer as well as enhancing our gross margin.

These initiatives required up front investment and expenses that initially impacted the gross margin. We began to see the changes pay off for us in Q3, adding 100 basis points to the gross margin percentage and Q4 which had added 50 basis points for the fiscal year.

These figures exclude the lower petroleum based material costs in Q3 and Q4 stemming from both lower oil prices and sourcing changes. The lower petroleum cost based materials helped us to offset the can increases we incurred earlier in the calendar year. We have been very pleased with the cost benefits we are seeing with the consolidation, restructuring and other changes our team has implemented for the petroleum based materials.

I hope I have been able to give you an additional perspective on the company’s overall performance. Now let’s talk about sales. Sales results in fiscal 2009 versus 2008 by product lines were as follows: multi-purpose maintenance products sales were up 3% globally in the fourth quarter and up 12% in constant currency. Year to date sales were down 5% yet up 6% in constant currency.

In the America’s the product group was up 7% in the fourth quarter and up 3% year to date. Europe multi-purpose maintenance sales were up 1% in the fourth quarter and down 12% year to date. Yet in constant currency, Europe sales were up 23% in the fourth quarter and up 12% year to date.

Asia Pacific multi-purpose maintenance products sales declined 10% in the fourth quarter and 12% year to date due to the continued impact of weakening economies and unfavorable currency exchange fluctuations in that area.

Home care and cleaning product sales were down 3% globally in the fourth quarter, up 18% year to date. Smart Shop grew in the fourth quarter by 6% and was down 9% for the year. Smart Shop was the strongest performing household brand in Q4 and year to date attributed in part to the comprehensive campaign built around the Molly and Me film.

The campaign has included commercial advertising on TV and movie theaters, discounts and free with promotions and with the movie and DVD release, ads in magazines and special in-store displays. We expect the brand to further benefit from a similar program launched around the film Cloudy with a Chance of Meatballs which was the number one film in the first two weeks of release.

Home care and cleaning products in the U.S. were impacted by lost distribution, competitive activities and the overall economic slowdown. Home care and cleaning products fared better in our international markets yet were negatively impacted from changes in foreign currency exchange rates. Europe’s results at actual exchange rates resulted in declines of 4% in Q4 and 12% year to date, yet in constant currency the product group was up 16% and 11% respectively.

Australia’s home care and cleaning products at actual exchange rates resulted in declines of 20% in Q4 and 16% year to date, and in constant currency the product group was down 5% in Q4 and 5% year to date.

Now let’s turn to our results by trading block. The America’s trading block segment increased from 56% of global sales in Q4 of last fiscal year to 57% of global sales in the current fourth quarter. Net sales in the America’s increased by 4% in Q4 and declined 5% year to date. On a constant currency basis, sales increased by 5% in Q4 and decreased by 4% year to date.

America’s multi-purpose maintenance products were up 7% in Q4 and 3% year to date. Home and cleaning products experienced declines of 2% in Q4 and year to date declined 19% due to many competitive and economic challenges that we shared earlier.

U.S. sales were up 3% in Q4 and down 5% year to date. Multi-purpose maintenance products in the U.S. were up 5$ in Q4 and up 4% year to date, and home care and cleaning products were flat in Q4 and down 18% year to date.

Our Latin America business which is primarily multi-purpose maintenance products, total sales were up 57% in Q4 and 6% year to date. These sales increases was due to price increases, promotional activities and increased distribution to new customers.

Canada sales both multi-purpose maintenance products and home care and cleaning products, Canada net sales decreased 19% in Q4 and 16% year to date. In constant currency Canada sales were down 10% in Q4 and down 3% year to date with the dips due to declines in the home care and cleaning product segment.

Now over to Europe which accounted for 34% of global sales in the fourth quarter in both fiscal years 2009 and 2008. Total European sales in U.S. dollars were flat in Q4 and declined 12% year to date in actual exchange rates. In constant currency rates, Europe’s sales increased 22% in Q4 and 12% year to date.

The pound Sterling is the functional currency of our European results and when we speak to the results in constant currency, they are based on holding steady the foreign exchange relationship of our Pound the to the U.S. dollar.

Performance varied across countries in their respective currencies. The European trading block did benefit from the conversion of sales in local currencies to the Pound Sterling, yet ultimately were negatively impacted by the sharp decline in the exchange rate between the Pound Sterling and the U.S. dollar. Most of Europe experienced sales declines at actual Q4 exchange rates yet showed positive growth on a constant currency basis.

The following are the results across our European market on a constant currency basis. The U.K. increased 19% in Q4, 11% year to date. The direct markets which include France, Germany, Iberia, Italy grew 28% in Q4 and 13% year to date, and the distributor markets which include Eastern Europe, Northern Europe, the Middle East, grew 9% in Q4 and 8% year to date.

Now Asia Pacific which accounted for 9% of the total sales in both Q4 and year to date, the Asia Pacific region which includes Asia and Australia experienced a sales decrease of 12% in both Q4 and year to date compared to last fiscal year. On a constant currency basis, sales decreased 6% in Q4 and 5% year to date.

The declines in Asia Pacific are primarily due to China and the Asian marketing distributors. China’s sales decreased 28% in Q4 and 17% year to date and the Asian distributors, 8% in Q4, 9% year to date. These decreases were primarily due to the slower economic environment which began to impact sales during the first quarter.

Sales in Australia decreased 5% in U.S. dollar in Q4 and 14% year to date, yet on a constant currency basis grew 13% in Q4 and 7% year to date. The growth in constant currency was the result of price increases implemented during Q1, increased promotional activity and new distribution across all trade channels.

That’s it for the sales update. I need to take a breather, so I’m going to pass it over to Jay Rembolt, my Chief Financial Officer who will continue with the review of the financials.

Jay Rembolt

In addition to the information presented on this call, we will suggest that you review the 10-K which we’ll file next week.

Our fourth quarter results, our gross margin increased to 51.6% of sales in the fourth quarter compared to the 44.8% of sales in the same period last year. The increase in margin was primarily attributable to price increases, lower discounts, lower petroleum based costs. Gross margin also benefited from cost reductions resulting from sourcing changes and product conversions.

These positive impacts were offset by some higher costs of aerosol cans, foreign exchange impact and some sales mix changes.

Regarding the price increases, we implemented them in Q1 and Q2 of fiscal ’09 and that added approximately 480 basis points to our gross margin percentage in the fourth quarter. The price increase was primarily across our multi-purpose maintenance lines although we did have some implementing for our home care and cleaning products in the U.K.

Our promotional discounts during the quarter, we had a lower percentage of our sales were subject to trade promotional allowances than in the prior year. As a result of these lower advertising, promotional discounts, our gross margin was positively impacted by 70 basis points in the fourth quarter.

Promotional discounts are certain A&P costs such as customer rebates, display allowances, slotting, coupon, that are treated as a reduction in sales.

Cost of products, as we look at our input costs, we have lowered costs for petroleum based materials but that benefit was nearly offset by the higher cost for aerosol cans. Due to inventory cycles, the cost of our petroleum basis products in our Q4 costs of goods continued to be relatively low and positively impacted our gross margin by 450 basis points.

This benefit was offset by the dramatic increase in the cost of our aerosol cans that took effect earlier this calendar year which in the U.S. alone had an increase exceeding 40%. These can increased negatively impact our Q4 margin by about 340 basis points.

The pricing of our tin plate used in our cans is typically set annually and does not fluctuate with the movement in the price of steel in the spot market. However, with the downward pressure on prices over the last several months, we recently negotiated a small cost reduction on our U.S. sources aerosol cans.

We expect the lower can cost to start flowing into our cost of goods sold in the second quarter of fiscal ’10. We anticipate this benefit will be offset by the flow through of higher more recent costs for petroleum based products however.

Other impacts to cost of goods including sourcing changes and product conversions, fluctuation in currency rates and sales mix. The sourcing changes and product conversions that Garry discussed earlier positively impacted our gross margin by 110 basis points and stemmed from new lower cost formulations associated with product conversions, investment in equipment to improve efficiency and cost of manufacturing our product, as well as lower cost from new manufacturers.

In addition in this quarter, we did not have the up front costs associated with these changes as we did in Q4 of last year. These benefits were partially offset by unfavorable changes in foreign currency rates related to the cost of products. In some of our international markets, a portion of the products that we sell are sourced in different currencies.

Changes in foreign currency exchange rates period to period can cause fluctuations in our gross margin with respect to these products. In the fourth quarter these fluctuations had a negative impact on our margin by 50 basis points.

Smart Straw is an example of a product with foreign currency exchange impact. Smart Straw had previously been manufactured in the U.S. and sold to various segments around the globe. The strengthening of the U.S. dollar from the prior year effectively increased the cost of Smart Straw to our international segments.

As Garry mentioned earlier, we’ve recently begun to manufacture and source Smart Straw in Europe which is the second largest market for the Smart Straw.

Sales mix and other miscellaneous items combined to negatively impact our margin by 40 basis points.

On to operating expenses beginning with selling, general and administrative expenses, for the fourth quarter these expenses remained flat versus the prior period at $20.3 million. As a percentage of sales, SG&A slightly decreased from 26.4% in Q4 of fiscal ’08 to 26.1% in the current quarter.

Favorable impacts to our SG&A would include the impacts of currency exchange rates in Q4 compared to the prior year which decreased the expense by $1.6 million. We had savings on freight to customers decrease by another $.6 million due to lower fuel costs, increased shipping efficiencies as a result of some lower sales in the quarter.

We also had some savings in a variety of other miscellaneous costs that amounted to $.3 million. These favorable impacts were offset by higher employee related costs which increased by $2 million primarily due to annual compensation increases and staff increases.

Higher R&D costs for the quarter increased by $.4 million primarily due to the changes in the nature of and the timing of our new product development. Advertising sales and promotion expense decreased from $4.6 million to $4.1 million in the fourth quarter and decreased as a percent of sales from 6% to 5.3%. The lower level of investment is due to the timing of advertising activities as well as the favorable impact of foreign exchange rates.

Amortization of intangible assets of $.1 million is related to customer lists acquired in the 1001 acquisition completed in 2004. Q4 results also included an impairment charge of $3.9 million related to the Carpet Fresh and the X-14 brand that Garry had mentioned earlier.

Operating income for the fourth quarter was $11.3 million compared to $7.6 million in Q4 last year. Net interest expense for Q4 was $.5 million, up slightly from the same period last year.

Other income decreased by $.2 million during the quarter and that was due to foreign currency exchange losses compared to the prior quarter that experienced some foreign currency gains.

Provision for income taxes decreased from 36.8% in Q4 of last year to 29% in the fourth quarter primarily due to the increase in percentage of foreign earnings taxed at lower rates as we ended the year.

Net income in Q4 was $7.6 million, an increase of 64% from the $4.7 million in Q4 last fiscal year. Changes in foreign currency rates period over period had an unfavorable impact on net income of $1.1 million. Q4 results on a constant currency basis would have produced net income of $8.7 million or 85% over Q4 last year.

On a diluted per share basis, earnings were $0.46 in the fourth quarter compared with $0.28 in the same period last year. Diluted shares outstanding have increased slightly from 16.6 million shares in Q4 of last year to 16.7 million shares in the current quarter.

Now we’ll move on to our year to date results. Our year to date gross margin percentage grew 270 basis points at 49.5% of sales. The gross margin improvement is attributable to the same factors noted in our Q4 discussion. Price increases added approximately 70 basis points to gross margin and positive impacts from product conversions, sourcing changes added an additional 80 basis points.

Our cost of aerosol cans however, impacted our gross margin negatively 150 basis points, and foreign currency exchange rate fluctuations had a negative impact on our margin by 60 basis points, most of which is related to our European segment.

A shift in sales mix from year to year had a negative impact on gross margin by another 40 basis points along with some close out transaction and other miscellaneous items which had another 40 basis point impact.

The cost of petroleum based products had a neutral impact to gross margin year over year, whereas the cost of petroleum based products increased in fiscal 2008 and peaked in our Q4. The opposite occurred in 2009 as petroleum products in our cost of goods peaked in Q1 and gradually decreased in Q2 through Q4.

As we look to our operating expenses, our SG&A year to date expenses decreased by $83.8 million to $78.1 million. As a percentage of sales increased slightly from 26.4% to 26.7%. The decrease in SG&A stems primarily from the changes in foreign currency rates compared to last year which had an impact of $7.8 million on the expense line as well as freight costs which decreased by $3.2 million due to lower sales, lower fuel costs and improved shipping efficiencies.

Partially offsetting some of these decreases were employee related costs which includes salaries, profit sharing, fringe benefits, which increased $4.1 million primarily as a result of annual compensation increases and additional staffing needed during the year.

Research and development costs increased $1.1 million primarily due to the timing of the new product development activities. Other miscellaneous expenses including stock based compensation, professional service fees, bad debt expense had a slight increase in total of about $.1 million.

Advertising, sales and promotional expenses decreased slightly to $19.5 million and increased as a percentage of sales from 6.3% in 2008 to 6.7% in the current year. The slight decrease in the expenditure was due to the timing of investment activities as well as the favorable impact of foreign currency exchange rates which had a $1.7 million impact in the current year.

Amortization of our intangible assets for the year was $.5 million related to the 1001 brand customer list. Year to date results also had a second quarter and a fourth quarter non cash impairment charge totaling $6.7 million related to the Carpet Fresh and X-14 brands.

Operating income for fiscal 2009 was $33.9 million or 13.6% of net sales compared to $42.7 million or 13.5% of net sales in fiscal year 2008.

Net interest expense for the year was $2.1 million, up $.4 million from fiscal 2008. Although we had lower interest expense from our lower debt, we also had lower interest income due to the lower interest rates in the current year. The lower interest income more than offset the benefit that we achieved from our lower interest expense.

Other income decreased by $.4 million. The decrease versus the prior year was due to foreign currency exchange losses in the Europe segment in the current year.

The provision for income taxes decreased 34.2%, down to 31.4% in the current year primarily due to tax benefits from changes in California tax law realized in the second quarter. The lower tax rate was also attributable to a favorable mix of foreign income taxed at lower rates as well as the renewal of the Federal R&D credit.

Year to date net income decreased 5% to $26.3 million compared to $27.6 million in the same period last year. Changes in foreign currency exchange rates had a $4.5 million impact on net income. Fiscal 2009 results translated to U.S. dollars at the prior year exchange rates or on a constant currency basis would have produced net income of $30.8 million or 12% above our 2008 figures.

On a diluted share basis, earnings were $1.58 in fiscal 2009 compared to $1.64 in fiscal 2008. Our diluted shares outstanding have decreased to 16.7 million in the current year compared to the 16.8 million that we had throughout the full fiscal year of ’08.

Regarding the dividend, on October 2, the Board of Directors declared a quarterly cash dividend of $0.25 per share payable on October 30, 2009 to shareholders of record on October 16, 2009. Based on our closing price today of 31.8, the annualized dividend yield would be 3.1%.

About our balance sheet at August 31, 2009, cash at $46 million was up from the $42 million at the end of fiscal ’08. Cash provided by operating activities was $34.6 million. We had issuance of some common stock upon the exercises of stock options which provided an additional cash proceeds of $1.3 million.

These cash inflows were partially offset by our $10.7 million annual principal payment as well as $16.5 million of dividends, and we had approximately $3 million of cash used for capital expenditures during the period.

We continue to de-lever the company with our annual $10.7 million principal payment. As of August 31, our outstanding balance on our original $75 million loan was $32.1 million.

Generating consistent cash flow and dividends to our shareholders as well as maintaining a strong balance sheet continue to be priorities for us. We believe that our existing cash and liquidity available for undrawn $10 million line of credit and our anticipated cash flows from operations will be sufficient to meet the projected operating capital requirements for our business in the near future.

Again, more information will be available on our 10-K. Please take an opportunity to look at that next week.

Thanks so much, and now I’ll turn it back to Garry.

Garry Ridge

Now let’s discuss our outlook for guidance for fiscal 2010. We see sales growth for ourselves in light of the improving economic conditions and the initiatives we have been working on as part of our strategic vision including the launch of our Blue Works product.

We anticipate the growth to flow through to net income if raw material costs maintain at recent levels. The following fiscal year 2009 guidance does not include any acquisition activities and assumes foreign currency exchange rates will remain close to fiscal year 2009 levels.

We expect our fiscal year net sales results to be in the range of $298 million to $380 million, a growth of between 2.2% and 8.9% versus fiscal 2009. We expect our global advertising and promotional investment to be in the range of 6.5% and 8% of net sales. We expect net income to be between $30.2 million and $32.8 million which would achieve EPS or earnings per share of $1.80 to $1.95 assuming 16.8 million shares outstanding.

So before I leave you today I’d like to share a quote with you from our sixteenth U.S. President, Abraham Lincoln. “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new so we must think anew and act anew.”

Finally, DW-40 Company has two significant assets; product and people. To all our tribe members, the folks in the United States, Spain, France, Germany, Italy, the U.K., Scotland, the Netherlands, Denmark, Portugal, Canada, China, Australia and Malaysia, a special thank you as you carried the day in this challenging year. You never gave up. You resisted panic for a belief that we all have something significant yet to do. A really big good on you mates to all of you.

Thank you very much for joining us today. We’ll be pleased to answer your questions at this time.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Liam Burke – Janney Montgomery Scott.

Liam Burke – Janney Montgomery Scott

Garry, Southeast Asia, Asia Pacific rather was down both in the quarter and the year. If I took out, how did China do within those results?

Garry Ridge

China had a tough year. It started just before the Chinese New Year last year when manufacturing went down. I don’t think it’s in any way a long term issue. We’ve seen China start to come back again now, so overall we grew the year before 65% or something there about so it was a big comp to come round in this condition. So I’m comfortable with where we are and I think we’ll start to see China circle round.

Liam Burke – Janney Montgomery Scott

On Blue Works, is the performance or the sales, do you expect to be more of a second half event or would you see something sooner, earlier in 2010.

Garry Ridge

We don’t start to ship until November, early December, so there’s virtually nothing in this first quarter.

Liam Burke – Janney Montgomery Scott

Jay, I know with a lot of activities overseas, the tax rate tends to jump around. Is there any tax rate that we can sort of estimate for 2010?

Jay Rembolt

As I look forward, I think we are looking and projecting at around 34.5%.

Operator

Your next question comes from Jeffrey Zekauskas – J.P. Morgan, Chase.

Jeffrey Zekauskas – J.P. Morgan, Chase

The impairment charge of $3.95 million pre tax, what was that after tax? Did you pay any book taxes or were there book taxes allocated to that?

Jay Rembolt

Yes. We got a full tax benefit for that. That is the book charge and net of our tax rate gets us to a net number less than that which we didn’t break out separately.

Jeffrey Zekauskas – J.P. Morgan, Chase

That’s what I’m asking about, what that number is.

Jay Rembolt

We didn’t break it out.

Jeffrey Zekauskas – J.P. Morgan, Chase

So we don’t know the after tax effect of the $3.95 million charge?

Jay Rembolt

We hadn’t specifically broken it out, but it’s easy math on our average tax rate.

Jeffrey Zekauskas – J.P. Morgan, Chase

In your revenue projections for next year when you do your earnings guidance, what do you include for Blue Works?

Garry Ridge

There’s not a lot. We don’t ship Blue Works until late November, early December. So we don’t see a big inflow of Blue Works revenues until certainly the back half of the year, so there’s not a material amount of Blue Works certainly in the first half of the year, and we think it will be a slow build up. We’ll know more as we start to ship in the first quarter. There’s a little unknown there.

We’re getting very favorable responses from the end users and the customers but the real volume won’t be known until we start to ship. At this time the guidance doesn’t have a lot of Blue Works in it.

Jeffrey Zekauskas – J.P. Morgan, Chase

What’s the goal for the fourth quarter of next year? Do you want to be at $2 million quarterly run rate of $3 million? Is that the right order of magnitude or is the order of magnitude larger or smaller?

Garry Ridge

I honestly would not be doing justice to try and predict that because I will be materially wrong whatever number I give you. We’ve identified Blue Works as being a great opportunity going forward. We won’t know its run rate completely until we start to ship distribution and get our customers buying it.

We intend to update the market every quarter and a step by step basis on how Blue Works is being accepted and what its success is looking like.

Jeffrey Zekauskas – J.P. Morgan, Chase

Jay went through a nice discussion of all the puts and takes on gross margin and I think I probably muddled myself in listening to it. As I understood what you were saying, it sounded like price increase was the largest single factor behind the year over year gross margin improvement and that raw materials year over year hadn’t appreciably changed. Is that true or have I muddled that?

Jay Rembolt

In some ways, the oil based materials year over year were about equivalent, so there was a minimal impact on an annual basis year over year of oil based materials. We did have a fairly significant increase in the cost of our cans which had an impact, a negative impact. So our input costs on an annual basis were not favorable to us.

Jeffrey Zekauskas – J.P. Morgan, Chase

So it was prices that really determined the gross margin leverage in the quarter.

Jay Rembolt

We did have a significant impact from price increases in the fourth quarter, although in the fourth quarter which was different from the annual year, we did get benefit from lower oil based products. We got nearly 450 basis points from that I believe.

Garry Ridge

The other impact was the actually realizing the improvements that we’ve made in the supply chain, particularly capital equipment that we put in place, our packages that reduced our cost because of increased line speeds. We benefited from re-formulations in products such as our 2000 flushes product. So really the reductions or the savings came from that area to the tune of about 110 basis points.

Jeffrey Zekauskas – J.P. Morgan, Chase

Can you give me an idea of whether your volumes changes in the fourth quarter versus the fourth quarter last year?

Garry Ridge

Globally if you took it in U.S. dollars, you’re talking volumes globally.

Jeffrey Zekauskas – J.P. Morgan, Chase

Volume like the number of ounces sold. Did the number of ounces you sold change very much?

Garry Ridge

We never really discuss that.

Operator

Your next question comes from Alan Robinson – Royal Bank of Canada.

Alan Robinson – Royal Bank of Canada

Jay could you clarify the cost reductions you’ve negotiated on tin can costs. So I know normally you get a reset every January I guess in terms of your tin can input costs. So is it the case this time around that you just pre negotiated that price which will be in effect for 12 months. Is that right?

Jay Rembolt

We don’t know that to be the case. What happened is that as we got near the middle of our year in the late summer, there had been a continued gap between the underlying cost of steel and tin plate, and there’s a number of discussions and negotiations that suggested that price should come down.

We had some acknowledgement from can manufacturers that they also felt that that price should come down. So as we continued having those discussions, we were finally able to achieve I think it was a 6% price reduction in the cost of cans that will be in effect throughout the remainder of our calendar year.

I’m not sure what the temperature is for our January price reset. That will be revisited on our first quarter call.

Alan Robinson – Royal Bank of Canada

You mentioned that this will take effect in the second fiscal quarter of yours but presumably it takes awhile for these cheaper goods to go through your inventory.

Jay Rembolt

That’s exactly right.

Alan Robinson – Royal Bank of Canada

Clearly you did very well on the gross margins this quarter, in the fourth quarter. You discussed your view of gross margins for the fourth quarter back on your last call in July where you stated you expect the margins to be somewhat close to what you saw in the second quarter, just below 50%. What changed your view for the fourth quarter where it’s almost 52%?

Jay Rembolt

We were looking in July the third quarter margin, up over 50% and we projected that forward as opposed to the year to date third quarter margin which was still down below 50%. So we saw the margin holding above 50% for the fourth quarter and I’ll apologize for that lack of clarity in communication.

Garry Ridge

The next question that you probably have and we see given what we know today, that we are going to be able to maintain the level of margin in that 50% range through the year as long as oil doesn’t hit $140 a barrel and other things go south on us. But certainly there are a lot of embedded cost reductions in our system now that we’re comfortable with particularly in some of the areas of production and our out sourcing program.

Alan Robinson – Royal Bank of Canada

It sounds like your production improvements really were perhaps a little bit better than you had expected. Is that fair?

Garry Ridge

We didn’t get the full benefit of them until later in the year. And that may be hit by mix of sales too. For example the amount of Solvol we put in the new high speed lines, and certainly the more we sell there’s a benefit there.

Alan Robinson – Royal Bank of Canada

Looking at your home care line in Europe, it looks like it’s doing just fine on a constant currency basis. How do you view your competitive situation there in Europe in terms of home care over the next year or two? Are you starting to see some of the larger multi-national home care competitions increase their investments and promotion there?

Garry Ridge

The answer is yet, but I think in the category we’re in over there, which is a little different from here, we have a very strong brand in 1001 that dominates in one particular segment over there which is basically the carpet care and cleaning segment. We are a much stronger brand in that segment than we were in the U.S. where we had one or two products in a segment.

So I think we’re reasonably comfortable that we’ve got a good robust brand in 1001 and should see that continue as long as we continue our level of investment and our product development for that brand in the U.K. which we intend to do.

Alan Robinson – Royal Bank of Canada

Are you shipping Blue Works globally next year or is it just domestically?

Garry Ridge

We’ll start in the U.S. in November/December and we believe that come the mid year you will start to see it move definitely into Europe and probably into Asia later in the year. But we have some learning still to do, but there is a lot of activity going on now in determining marketing opportunities is Europe and Asia, particularly given the formulations are all complete.

Operator

Your next question comes from [Henry Caplan – Oppenheimer]

[Henry Caplan – Oppenheimer]

I was surprised to hear you say that there was a lower level of promotional activity in the quarter given that a number of companies recently talked about being more promotional. I was wondering why that was. Is there something in particular in your categories or retail partners that’s driving that?

Jay Rembolt

It was primarily timing. If I look at some of the larger promotions that we have at customers, what I heard is there are few that slipped into the beginning of fiscal ’10. So there’s some of that.

Garry Ridge

But no decisive move to change. It was just the way the cards fell at the end of the year.

[Henry Caplan – Oppenheimer]

In terms of the advertising, the advertising expense was certainly lower than we had expected. Figure out if that was lower advertising because you sort of cut …

Garry Ridge

Advertising comes in a lot of different shapes and forms. We don’t do a lot of what people would call the traditional advertising that comes from lower rates on TV and whatever. But certainly we do use a number of different vehicles and it’s a matter of timing and when we move them around that what we do at certain times that creates that. It was still within our range, maybe a little bit at the lower end of the range. \

[Henry Caplan – Oppenheimer]

I wanted to gauge your sense about, talk about the acquisition in M&A environment. You’re sitting on roughly $45 million of cash right now. I know you talked about de-leveraging the balance sheet. I wanted to see where M&A came into play if at all.

Garry Ridge

We continue within our sand box and where we have the right to win look for the opportunities. We’ve looked at opportunities in the past year and quarter. Nothing has floated our boat yet, but we do have resource. We have talent that is assigned to that role particularly and we certainly have a very clear understanding of what we don’t want.

And therefore, we’re busy trying to find what we do want at a price that we believe is value to our shareholders and something that we can return, get some good returns out of.

[Henry Caplan – Oppenheimer]

Would that likely skew towards the multi-purpose maintenance products or the home care and cleaning?

Garry Ridge

No. We have stated that we will be reducing the impact of the home care and cleaning products on our business over time and you would not find us making acquisitions in that space. If you had a chance to go and look at our slide of maintenance products, [audio break] where we feel lead to those acquisitions.

We’ll be looking globally too. It’s not necessarily in the U.S. We see those opportunities in other countries around the world.

[Henry Caplan – Oppenheimer]

I think on the call you mentioned retailers may be becoming a little more aggressive in terms of inventory levels. I wanted to see to what extent that had been a rebuild in inventory at retail had been built into your guidance for 2010?

Garry Ridge

I don’t think there’s a rebuild. I think there’s a stabilization. There might be a new level now, but you can’t do business from an empty barrel so the retailers have to make sure they’ve got product on shelf. But we’ve never really benefited from a great build up in inventory. Our product moves through fairly quickly.

But what we are seeing is a new level of certainty which is getting retail to promote more and really work with us on some of those activities. But I’m not anticipating that our results are a huge inventory build up. I think they’re more about promotional sale through and those sort of activities.

Operator

Your next question comes from Frank Magdlin – The Robins Group.

Frank Magdlin – The Robins Group

That was a nice quarter. I’m looking and saying from your perspective what went better than you thought? You gave guidance and I know you do a good due diligence but some favorable things that you could highlight.

Garry Ridge

I think what we thought is it didn’t get any worse than it did. I know that’s a funny answer, but I think we live in a bit of uncertainty and certainly that got a little let up in the quarter. Certainly our gross margin was a little better than we had anticipated and that was a pleasing off set to us.

We started a little bit to see the dollar come back a little bit. That was good for us. We loved the stabilization of our household products in the U.S. We think we’ve got that stabilized. The U.S. had a good come back in the fourth quarter, so more promotional activities than usual.

I think overall the business climate got a little more certain and we were able to control costs pretty well. We’ve got a pretty good job of keeping the lid on stuff through the year, so I think that was also good.

Jay Rembolt

The margin did improve a little bit more than expected. We were anticipating a little over the 50% so to see it get to 51.6% was not what we clearly saw as we gave guidance in the third quarter.

Frank Magdlin – The Robins Group

When you’re looking out as we’re trying to figure out quarterly results, is there anything other than the back end for the Blue Works that’s taking place that might change the strength of a quarter?

Garry Ridge

We’ve always said please don’t try to manage us quarter by quarter, and I know that’s tough because that’s something you have to do. But it will depend on promotions shift and when they fall. We feel okay about the year at this time and we’re going to, I’m describing this year as a perfect game of golf.

And why do I say that? We have to play each month as if it was a new hole, not letting the past month or the hole in front of us influence our thinking that much as far as operational excellence is concerned. So I think that the things that are good is a little stability. The doom and gloomers have probably gone away a little bit and that’s opening up our opportunities.

I wish I could give you a better guidance. We did guide quarterly last year because we saw such a big fluctuation in what happened before, but we don’t necessarily know if it’s going to happen this year.

Frank Magdlin – The Robins Group

To switch to manufacturing, the Smart Straw in Europe, was that in effect for all of the fourth quarter?

Jay Rembolt

A large chunk of the fourth quarter.

Operator

Your next question comes from Jeffrey Zekauskas – J.P. Morgan, Chase

Jeffrey Zekauskas – J.P. Morgan, Chase

When you were talking about your prices being up, did you mean your prices were up or did you mean your mix was positive?

Jay Rembolt

If we look at the impact of our margin, and I’m hoping we’re talking about the same thing, we did have price increases in Q1 and Q2 of ’09, of the current year which had an impact as we got to the end of the year and when we have comparisons year on year. So we saw for the full year, we saw nearly 470 basis points of impact because of the price increases.

Jeffrey Zekauskas – J.P. Morgan, Chase

What I was trying to understand is you’ve done a nice job of penetrating your demand base for more Smart Straw and I would imagine your Smart Straw can is more expensive than the non Smart Straw can. You’ve had other improvements in your product line so I was wondering how much came from selling these higher priced cans and how much came from the straight price increase with the same product year over year.

Garry Ridge

About 39% of our business is now Smart Straw so there is a big part of that in Smart Straw, and there’s no doubt our revenue per ounce has increased because we had an increase in cost with Smart Straw and an increase in sell price with Smart Straw so there is a little bit of that going on.

But it’s still about 39% of our total volume of our multi-purpose maintenance products, so there’s still 60% that is in the classic can.

Jeffrey Zekauskas – J.P. Morgan. Chase

So by the end of next year, what do you think the percentages will look like?

Garry Ridge

Probably reasonably similar because the big change was the conversion in the U.S. We’re not planning to wholesaling convert any other markets although we are increasing our volume in Smart Strewing in the developing European markets through just over time. We’re more allowing the consumer there to make the choice and they are making Smart Straw choices. So I don’t know that that will change a lot from what I can see today.

Jeffrey Zekauskas – J.P. Morgan, Chase

In the first quarter of fiscal 2010, you’re going to go up against a revenue comparison that really happened before the financial crisis began. So I would think that, and you probably still have some tougher currency comparisons all things being equal, so all things being equal is it likely that your first quarter is your toughest earnings comparison of the year?

Garry Ridge

I would choose as I never do make those comparisons public, not to make that comparison. But I’m not sure the economic conditions hadn’t already started to happen back then. Also remember the first quarter last year we were selling against price rise as well. So I think that the thing that we’re looking at now is we’re going into a new year. Our margins are holding up. We think volumes have stabilized. We getting a lesser impact on the U.S. dollar.

We won’t get the full; the biggest impact on the dollar was in the second quarter when we dipped down to $1.35 to $1.40. So the comps have got to get better going forward, but I don’t know that they’re going to be that dramatic.

Jeffrey Zekauskas – J.P. Morgan, Chase

Do you think you can grow household products next year or is that too hard?

Garry Ridge

No. We don’t plan to grow household. It will grow outside of the United States. We’re now harvesting household and I think it’s stabilized. But because we made the decision not to increase investment particularly in R&D and put it into things like Blue Works and some other initiatives that we’ve got in the works for our multi-purpose maintenance products and adjacent categories, no we won’t.

Operator

We have no further questions. I’ll turn the conference back to our speakers for any additional or closing remarks.

Garry Ridge

Okay, we’re done. Thanks very much and we’ll be with you come December time.

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