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WD-40 Company (NASDAQ:WDFC)

F2Q 2014 Results Earnings Conference Call

April 08, 2014, 5:00 PM ET

Executives

Garry Ridge - President, Chief Executive Officer

Jay Rembolt - Chief Financial Officer, Vice President - Finance

Analysts

Liam Burke - Janney Capital Markets

Ben Richardson - JPMorgan

Joe Altobello - Oppenheimer

Linda Bolton-Weiser - B. Riley & Co.

Rosemarie Morbelli - Gabelli & Company

Operator

Good day, and welcome to the WD-40 Company second quarter 2014 earnings release conference call. Today's call is being recorded.

At this time, I would like to turn the call over to the President and Chief Executive Officer, Mr. Garry Ridge. You may begin, sir.

Garry Ridge

Good day. Before we start, I would like to remind you that except for historical information this conference call may contain forward-looking statements concerning WD-40'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 the forward-looking statements, including the impact of commodity prices, the introduction of new product lines and the fluctuating global conditions, including currency exchange rates, both in the United States and internationally. The company's expectations, beliefs and projections are expressed in good faith and are 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 the WD-40 Company with the SEC, including forms 8-K, 10-Q and 10-K, and you are urged to carefully review these and other documents and to look for updated company information on our Investor Relations website at www.wd40company.com. A reminder that our Q3 earnings conference call will be on July 9

Thanks for joining us for the call today. Today we reported net sales of $94.2 million for the second quarter of fiscal year 2014, an increase of 9% over Q2 last year. Year-to-date net sales were $189.7 million, an increase of 4% over the prior year period. Net income for the second quarter was $10.3 million compared to $10.5 million in Q2 last fiscal year. Diluted earnings per share for the second quarter was $0.67 compared to $0.66 for the same period last fiscal year. Year-to-date net income was $21.8 million, an increase of 2% over the prior year period. Year-to-date diluted earnings per share were $1.41, up 4% from $1.35 in the prior fiscal year.

Before we focus on the sales results, let's review the progress we have made towards our strategic initiatives. Strategic initiative number one is to grow WD-40 multi-use product. Sales of WD-40 multi-use product increased by 10% in the second quarter compared to Q2 last fiscal year. We grew multi-use product sales 16% in the Americas and 18% in EMEA segment. Multi-use product sales decreased 25% in Asia-Pacific, primarily due to China and our Asian distributors. China was lower due to a general slowdown in economic growth, as well as a decrease in our sales associated with promotional programs. Sales in Asia were impacted by backlog of orders that we were unable to ship in Q2 of this fiscal year as we planned. We expect to ship these queued orders in Q3 of this fiscal year. Sales also continued to be impacted by the transition of our marketing distributor in Indonesia which is one of the larger markets in our Asia Pacific distributor region.

Our strategic driver number two is to grow the WD-40 Specialist product line. The WD-40 Specialist product line continued to support the brand with sales doubling over the prior year second quarter. We experienced strong growth across all three segments compared to both Q1 last fiscal year as well as Q1 of this fiscal year. We released new product offerings in certain markets throughout the second quarter, while expanding distribution of existing products into new territories. We continue to develop new formulations and delivery systems for the future WD-40 Specialist products.

Our strategic initiative three is to broaden our product and revenue base. Our goal under this initiative is to leverage the strengths within our company to derive revenue from new sources outside our flagship WD-40 Multi-use product and the WD-40 Specialist product line. We launched five new SKUs under our 3-IN-ONE brand at the end of the second quarter in certain markets and also expanded distribution of WD-40 bike products in test markets in Australia earlier in the fiscal year.

Strategic initiative number four is to attract, develop and retain outstanding tribe members. We welcomed 8 new tribe members during the second quarter and have welcomed 22 new members year-to-date. Developing our tribe members is of utmost importance to us. We commenced our third year of the leadership lab in January to help the next generation develop talents and skills for both their professional growth and the company's performance. We also continued with the Tribology University, a program of technical product knowledge that enables our tribe to better converse about the attributes and features of our products. Those development programs are now offered globally allowing all our tribe members from sales to accounting from Shanghai to San Diego to better position themselves for greater opportunity with our customers and within the company.

Strategic driver or initiative number five is operational excellence. This includes the continuous improvement by optimizing resources, systems and processes. Operational excellence is also key to meeting our ever-increasing customer and regulatory requirements, as well as helping to offset rising cost that help us protect our gross margin. During the second quarter, we continued to benefit from our aerosol can sourcing project in China and Europe, which both greatly contributed to our gross margin improvement. We also managed a smooth transition to a lower VOC formula in California to meet the new regulatory requirements. We also continued our investment and testing of new systems to improve our back-office operations, most particularly a major upgrade of our ERP system in EMEA and a new global human resource information system. Both systems are on track to go live at the end of the fiscal year.

Last but not least, we began to implement a new project management system that will help improve visibility, resource management and tracking of our innovation and renovation project.

That completes an update of our strategic initiatives. So let's move on to the details of the second quarter and year-to-date results starting with sales. Sales in multipurpose maintenance products category accounted for 89% of the global sales in the second quarter with category sales up 11% in Q2 and up 7% year-to-date compared to the prior fiscal year periods. Products under this category include the WD-40 and 3-IN-ONE brands, as well as some immaterial sales of the WD-40 bike product line.

By trading block, sales of multipurpose maintenance products in Q2 were up 18% in the Americas, up 17% in EMEA and down 23% in Asia-Pacific, compared to the prior year period. Year-to-date sales of multipurpose maintenance products were up 9% in the Americas, up 10% in EMEA and down 8% in Asia-Pacific, compared to the prior fiscal year period. Homecare and cleaning products category accounted for 11% of global net sales in Q2 with the category down 8% in Q2 and down 11% year-to-date. Brands under this category include Spot Shot, 2000 Flushes, Carpet Fresh, No Vac, 1001, X-14 and the Lava and Solvol brands.

By trading block, sales of our homecare and cleaning products in the second quarter were down 12% in the Americas, up 8% in EMEA and down 7% in Asia-Pacific. Year-to-date sales of homecare and cleaning products were down 14% in the Americas, down 4% in EMEA and down 7% in Asia-Pacific, compared to prior year fiscal periods.

Now, let's take a look at the results by segment starting with the Americas. Sales in the Americas segment increased 12% in the second quarter and were up 4% year-to-date versus the prior year period. The segment accounted for 48% of our global sales in Q2 as compared to 46% in the prior year period. Total U.S. sales were up 16% in Q2 and up 6% year-to-date. Multipurpose maintenance products sales increased 23% in the second quarter, primarily due to higher promotional activity and new distribution of the WD-40 Specialist product line, compared to the prior year period.

Homecare and cleaning product sales decreased 10% in the second quarter driven by Carpet Fresh and Spot Shot which declined 33% and 21% respectively. Homecare and cleaning products continue to generate positive cash flow despite the sales decline with a portion of the declines stemming from our decision to reduce sales of low margin products and programs which require significant trade discounts. Sales in this category also declined due to decreased promotional programs, competitors and category declines, as well as volatility of orders within the warehouse, clubs and mass retail channels.

Sales in Latin America were up 20% in Q2 and are up 9% year-to-date driven by higher WD-40 sales throughout the region. Sales in Canada decreased 22% in Q2 and 15% year-to-date due to the timing and decreased promotional level of activities and programs, as well as an unfavorable impact from changes in foreign currency exchange rates. At constant currency, sales in Canada would have declined by 15% in the second quarter.

Now on the EMEA segment which includes Europe, the Middle East and Africa. Sales in the EMEA segment were up 16% in Q2 and are up 9% year-to-date as compared to prior year periods. Changes in foreign currency exchange rates had a favorable impact on sales in the second quarter. On a constant currency basis, sales in the EMEA segment would have increased 13% in Q2. Changes in foreign currency exchange rates did not have a material impact on year-to-date sales. The segment accounted for 40% of global sales in Q2 compared to 38% in the prior fiscal year.

We sell into EMEA through a combination of direct operations in certain countries as well as through exclusive marketing distributors in other countries. Sales in our EMEA direct markets were up 9% in Q2 and are up 3% year-to-date. The sales growth in the second quarter was primarily due to promotional activities and the increase sales of the WD-40 Specialist product line stemming from new distribution and additional product offerings. Sales growth year-to-date was primarily due to new distribution, continued growth of the base business and positive impacts of sales price increases. The direct markets accounted for 64% of EMEA's total sales in Q2 compared to 69% in the prior fiscal year period.

We sell through exclusive marketing distributors in Eastern and Northern Europe and in the Middle East, India and Africa, with most of sales consisting of the WD-40 brand. The distributor markets in total were up 33% in Q2 and up 19% year-to-date. The distributor markets accounted for 36% of EMEA's total sales in Q2 compared to 31% in the prior fiscal year period. We experienced double digit sales across the distributor markets in Q2 and year-to-date due to the continued growth of the base business in key markets, a successful promotional program in Russia and the increased sales of the WD-40 Specialist product line in Eastern Europe.

Now the Asia-Pacific segment. Sales in the Asia-Pacific segment were down 21% in Q2 and are down 8% year-to-date. Changes in foreign currency exchange rates had an unfavorable impact on sales in the second quarter and year-to-date. On a constant currency basis, sales in Asia-Pacific segment were down 16% in Q2 and down 4% year-to-date. The segment accounted for 12% of global sales in the second quarter and 14% year-to-date.

Sales in Australia decreased 3% in Q2 and were down 1% year-to-date compared to prior year fiscal periods. Although reported sales decreased period-to-period, sales increased on a constant currency basis due to the base business and the launch of the WD-40 Specialist product line in Q2.

Sales in China decreased 28% in the second quarter and were down just 2% year-to-date. The sales decrease in the second quarter was attributed to differences in promotional activity, programs with more significant and our customers purchased more products in the second quarter fiscal 2013 as compared to programs in the current fiscal year. We also believe sales have been impacted by lower overall growth in the region. Be remember we continue to focus on the long-term opportunities in China, but there will continue to be a lot of volatility along the way due to the timing of promotional programs, the building of distribution, the shifting economic patterns and the varying industrial activities.

Sales throughout the rest of Asia decreased 30% in Q2 and 15% year-to-date. The lower sales in the quarter were driven by a backlog of orders that we were unable to ship in Q2 of this fiscal year. We expect to ship these orders in Q3 of this fiscal year. Sales were also impacted in Indonesia from the continuing transition to a new marketing distributor.

That's it for the sales update. Now I will pass it over to Jay who will continue with the review of the financials. Thanks, Jay.

Jay Rembolt

Garry, thank you so much. Just a reminder, in addition to the information that we will provide on this call today, we suggest that you review our Form 10-Q which we will file tomorrow.

Now let's first review our 50/30/20 rule, the measures that we use to guide our business. As you may recall, the 50 represents gross margin, which we target to be at or above 50% of net sales. The 30 represents our cost of doing business, which is our total operating expenses excluding depreciation and amortization. Our target is 30% or less. And then finally, the 20 represents EBITDA. If our gross margin is at or above 50% and our cost of business is 30% or less, our EBITDA will be at or above the 20% target. EBITDA is earnings before interest, taxes, depreciation and amortization. The descriptions and reconciliations of these non-GAAP measures are available in our 10-Q and in our investor presentations.

Now a look at gross margin or the 50. Gross margin in the second quarter was 51.6% compared to 50.9% in the prior fiscal year period. The increase of 70 basis points in gross margin was primarily driven by lower input costs as well as the impact of price increases implemented during the last 12 months, all of which were partially offset by higher promotional discounts.

A look at input costs. We experienced a net unfavorable impact of 70 basis points from our major input costs. This was driven by changes in the cost of petroleum-based materials along with lower can costs and in Asia-Pacific and EMEA segments. The net impact of changes in other input cost was not material. Sales price increases are considered and implemented on a country-by-country basis periodically to help offset the impact from input cost increases. Period versus period, our gross margin improved by 30 basis points as a result of price increases. This was offset by higher promotional discounts, which had an unfavorable impact on our gross margin of 30 basis points.

A higher percentage of sales during the current quarter was subject to promotional allowances compared to that in the prior year. The cost of promotional activities such as sales incentives, trade promotions, cash discounts that we give to our customers are recorded as a reduction in sales. The timing and magnitude of these activities cause fluctuations in gross margin period to period. All other impacts to gross margin, combined, were neutral for the quarter, and these include changes in foreign currency exchange rates in our EMEA segment, sales mix, manufacturing cost savings and all other miscellaneous impacts.

The themes discussed for the quarter for gross margin also apply to the year-to-date results. Gross margin year-to-date was 51.8% compared to the 50.5% in the prior fiscal year. The increase of 130 basis points in gross margin was primarily driven by the combination of price increases, lower promotional discounts, lower input costs, manufacturing cost savings and a net favorable impact to year-to-date from changes in foreign currency exchange rates in our EMEA segment. That completes our gross margin.

Now let's take a look at the 30 or our cost of doing business. In both the second quarter and our year-to-date period, the cost of doing business was 34% compared to 33% in the prior fiscal year periods. While our goal is to have the cost of doing business at or below 30% of net sales, the percentage may fluctuate due to the changes in sales and timing of expenses, as well as investments that we make for the future. Year-to-date 69% of our cost of doing business came from three areas, 39% is related to people costs or our investment in our tribe, 18% from our investments in marketing and advertising and promotional activities, and finally 12% in freight costs which was getting our product to our customers.

Now more details on our SG&A expenses. In Q2, they increased by 11% to $26.7 million. As a percentage of net sales, SG&A expense was 28.3% in Q2 compared to 27.6% in the prior year quarter. Employee related costs increased by $1.2 million due to higher staffing levels as well as higher compensation costs associated with annual merit increases and higher bonus expense. Professional services along with travel and meeting expense were each up $0.2 million. Freight expense was up $0.4 million versus the prior period due to higher sales volume and all other miscellaneous expenses combined increased by $0.6 million and these include research and development costs, depreciation expenses, regulatory compliance costs and others. Changes in foreign currency exchange rates had an unfavorable impact period to period increase in SG&A expenses by $0.1 million.

The themes discussed for the quarter also again apply to year-to-date results. SG&A expense year-to-date was $53.4 million versus $49.3 million in the prior fiscal year period. As a percentage of net sales it was 28.1% this fiscal year versus 27.1% in the prior fiscal year. Advertising and sales promotion expense increased by 14% in Q2 to $6 million. As a percentage of sales, A&P investment was 6.4% in Q2 compared to the 6.1% in the prior year period. The increase in advertising and sales promotion expense was primarily associated with promotional programs conducted in the Americas this period.

Year-to-date advertising and sales promotion expense was $11.6 million compared to $11.3 million in the prior fiscal year period. Advertising and sales promotion expenses as a percentage of sales decreased to 6.1% year-to-date from the 6.2% in the prior year. The slight increase in advertising and sales promotion expense year-to-date was primarily driven by the aforementioned increase in the Americas programs during Q2.

Our amortization of intangible assets increased $0.7 million in Q2 compared to $0.5 million in the prior year period and year-to-date amortization was $1.2 million compared to $0.9 million in the prior period. The increase in the year-to-date amortization was primarily due to the change in the useful life the 2000 Flushes trade name in Q3 of the last fiscal year.

Total operating expenses in the current quarter were $33.3 million compared to $29.7 million in Q2 of last year. Operating income in Q2 was $15.3 million compared to $14.4 million in the prior quarter and year-to-date total operating expenses were $66.2 million versus $61.6 million in the prior year period. Operating income year-to-date was $32 million compared to $30.3 million in the prior fiscal year.

EBITDA, the last of our 50/30/20 measures, was 18% of net sales in Q2 compared to 19% in the prior year quarter. Year-to-date, EBITDA was 18% to net sales in both the current and prior year periods. Again, we target EBITDA to be at 20% but expect variations from time to time as sales, A&P investment and other expenses fluctuate with the timing of our activities, as well as our investments that we make for the future.

Interest income and interest expense remained constant in the second quarter with net interest expense increasing by $0.1 million year-to-date. Other net expense increased by point $0.8 in the second quarter and $1 million year-to-date. The change period to period was mainly due to fluctuations in exchange rates, primarily the U.S./Pound or the Great British Pound against the U.S. dollar. We recorded foreign currency exchange losses in the current fiscal year, compared to foreign currency exchanges in the prior fiscal year.

The provision for income tax in Q2 was 31% versus 30.2% in the prior year quarter. The higher tax rate in the current year was primarily driven by changes in the portion of the company's earnings which are foreign and are taxed at lower rates. Year-to-date the provision for income taxes is 30.6% in both the current and prior fiscal year periods.

Net income in Q2 was $11.3 million versus $10.5 million in the prior year quarter. Changes in foreign currency exchange rates period to period did not have a material impact on the translation of our results during the second quarter.

Diluted earnings per common share were $0.67 in Q2 compared to $0.66 in the prior fiscal quarter. Diluted shares outstanding decreased from 15.7 million shares to 15.3 million shares. Year-to-date net income was $21.8 million versus $21.4 million in the prior year.

Changes in foreign currency exchange rates had an unfavorable impact on the translation of our results by $0.2 million. Our year-to-date results translated at last year's exchange rates or what we term as constant currency basis would have produced net income of $22 million versus the actual $21.8 million.

Diluted earnings per common share were $1.41 year-to-date compared to $1.35 in the prior fiscal year period. Diluted shares outstanding decreased from 15.7 million shares to 15.3 million shares.

A look at our balance sheet. On February 28, our balance sheet continues to remain strong as cash and term deposits continue exceeding our debt. At February 28, our cash and cash equivalents were $41 million and we had $45 million in short-term investments, consisting of term deposits and callable time deposits held in money centered banks. The current portion of our debt under our existing line of credit was $73 million. It represented a $10 million increase in the line during the second quarter and was primarily used for the repurchase of our shares.

We continue to return capital to our shareholders through regular dividends and share repurchases. Regarding the dividend, on March 25, the Board of Directors declared a quarterly cash dividend of $0.34 a share payable on April 30 to shareholders of record on April 11, 2014. Based on today's closing price of $77.82, the annualized dividend yield would be 1.75%.

As for share repurchases, we acquired nearly 240,000 shares of our stock at a total cost of $17 million during the second quarter. These shares were acquired under our latest share repurchase plan approved by the Board of Directors in June 2013. It provides authorization to acquire up to $60 million of the company's outstanding shares through the plan's end date of August 2015. We expect to continue executing our share repurchase program throughout the remainder of the year.

Well, that completes our financial review. Again, more information will be available in our 10-Q. We will be filing tomorrow.

And now back to Gary.

Garry Ridge

Thanks, Jay. Looking forward, we remain cautiously optimistic about several macroeconomic factors. As per our second quarter and year-to-date results, we expect that growth in EMEA and the Americas will continue to more than offset any lower industrial activity and sales in Asia-Pacific. We also hope there will continue to be a relative stability in input costs and that our efforts to improve operations and sourcing will benefit our gross margin. We also expect the benefit we currently have in our margin will help offset unfavorable impacts we are beginning to see related to changes in foreign currency exchange rates.

Given this outlook, our guidance remains unchanged from what we shared with you in January. The following fiscal year 2014 guidance does not include any acquisitions or divestiture activity and assumes that foreign currency exchange rates will remain close to recent levels. We expect our fiscal year net sales results to be in the range of $383 million to $398 million or growth of between 4% and 8% versus fiscal 2013. We project gross margin to be close to 51%.

We expect our global advertising and promotional investment to be in the 6.5% to 7.5% of net sales. We expect income of $40.5 million to 42.8 million, which would achieve a diluted EPS of $2.65 to $2.80 assuming 15.3 million weighted average shares outstanding.

So, in summary, what did you hear from us in today's call? You heard, we increased sales by 8% in the second quarter and that double-digit growth in the Americas and EMEA more than offset the lower activity in our Asia-Pacific region. You heard we doubled sales of our Specialist product line and that we launched new offerings in Europe. You heard we grew gross margin by 70 basis points over the period and that we continue to be above our target.

You heard that we continue to make progress on and benefit from our strategic initiatives, including new SKU launches to grow sales and aerosol can project reduce costs and programs to increase margins. You heard that we grew diluted earnings per share to $0.67 in the second quarter and returned capital to shareholders through the purchase of 239,501 shares at a cost to $17 million. You heard that our outlook is cautiously optimistic and that we are maintaining our guidance with sales growth of 4% to 8% for fiscal year 2014.

In closing, I would like to share a quote with you from Franklin D. Roosevelt. The only limit to our realization of tomorrow will be our doubts of today. Let us move forward with strong and active faith.

Thank you for joining us today. We would be pleased to now open the conference call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). We will go first to Liam Burke with Janney Capital Markets.

Liam Burke - Janney Capital Markets

Good afternoon, Garry. Good afternoon, Jay.

Garry Ridge

Hi, Liam.

Jay Rembolt

Hello, Liam.

Liam Burke - Janney Capital Markets

Garry, you said that Eastern Europe, or the distribution side of the European business was up 33%. A lot of those are smaller or more emerging markets. Do you see any similarities between those markets and the ones that you serve that are relatively more developed like China?

Garry Ridge

Well, there are a couple of big markets in that Eastern bloc, Liam. Places like Poland and Russia are in that bloc. So I think overall in Eastern Europe, we continue to see an increase of the people being aware and using more of our Blue and Yellow can, plus we are being pleased with the adoption of our Specialist product line in a number of countries, including Russia which was one of the first of those distributor markets to take on a range of Specialist earlier in the year.

Liam Burke - Janney Capital Markets

Do you see any conflict between a newer WD-40 introduction and Specialist or do you see them growing together?

Garry Ridge

We don't take Specialist into a market until the WD-40 core brand has a measured level of awareness and acceptance. We have to have that to get buy-in or to gain from leveraging what we call the power of the shield. But it is not unlikely that both could grow at similar rates in the initial period. Again, we believed, and still believe that Blue and Yellow can market is bigger than the Specialist market but we maybe learning that could be different in some places over time.

Liam Burke - Janney Capital Markets

Okay, and then on China, you spoke about how you have some cost savings on the aerosol cans. Is that production facility meeting your expectations and has it been running up to how you thought it would?

Garry Ridge

Yes, absolutely. It's delivered as we wanted and is well placed to deliver the volumes that we need in the foreseeable future.

Liam Burke - Janney Capital Markets

Thank you, Garry.

Garry Ridge

Thank you.

Operator

We will go next to Ben Richardson with JPMorgan.

Ben Richardson - JPMorgan

Good afternoon, gentlemen.

Garry Ridge

Hi, Ben.

Jay Rembolt

Hi, Ben.

Ben Richardson - JPMorgan

Just a quick question about the ERP implementation in Europe. Just any idea about possible savings and the timing of that implementation?

Garry Ridge

We are in the final pilot program. We expect to -- we will progressively implement it in different geographic areas over a year. All of the initial costs have been sunk costs. So we would think that it will be at least a year from now till it is fully operational in all of the geographies of Europe. It's more providing capacity than cost savings. As our business is growing substantially over there, we have needed more capacity to be able to facilitate the transactions. So, it's more really. There are obviously efficiencies but we don't think that it's going to reduce the number of people we have. In fact, we have probably increased a couple. So it's preparing us for the future growth.

Ben Richardson - JPMorgan

Okay, and then on the topic of share repurchase. It seems that you are going at a pretty good clip here, and what remains of the $60 million? And you mentioned that you will likely consider to buy - execute that throughout the year. But what might be the pace for that?

Jay Rembolt

We have targeted somewhere between 30 million to 35 million on an annual basis and that would effectively take us up through a couple months prior to our current authorization.

Ben Richardson - JPMorgan

Okay, and what remains at this point?

Jay Rembolt

$35 million.

Ben Richardson - JPMorgan

$35 million. Okay, perfect. Thank you.

Garry Ridge

Thank you.

Operator

We will go next to Joe Altobello with Oppenheimer.

Joe Altobello - Oppenheimer

Hi, guys. Good afternoon.

Garry Ridge

Hi, Joe.

Joe Altobello - Oppenheimer

Just a couple of quick questions, I guess on Asia-Pacific first. In terms of the weakness this quarter, you mentioned that there is a backlog of orders that you were supposed to ship in the first quarter got pushed back into the second. Could you quantify for us, or actually from the second to the third, could you quantify how much of those orders got pushed back?

Garry Ridge

We probably would have been reasonably flat if they would have shipped for the quarter, and they are all to distributor markets. So that was orders that was going to places other than Australia and China where we manufacture, but they are all distributor business.

Joe Altobello - Oppenheimer

Okay, and the way that you described it, it sounds like that those orders have not been shipped yet, as of April 8.

Jay Rembolt

Yes, they’ve shipped.

Joe Altobello - Oppenheimer

Okay, they have. And China, could you tell us what China did in the quarter year-over-year?

Garry Ridge

I think we mentioned it. You got another question while we find that?

Joe Altobello - Oppenheimer

Yes, just in terms of gross margin, I think, year-to-date, you have done 51.8% or thereabouts. Your guidance is still around 51%. So maybe I am reading this too literally, but that would imply some decline both sequentially as well as year-over-year. So help us understand why we would see the decline in gross margin you guys are guiding to in the back half of the year?

Garry Ridge

We are not that good at forecasting the future. He who guides by the crystal ball gets the glass. So there is nothing significant there but we have got exchange rates. We have got volatility in oil prices, all of the normal things. But I think, as you might have gathered from the call we were potentially reasonably comfortable that we were going to be at least that way we are guiding. Jay, you had…?

Jay Rembolt

Yes, essentially we left our guidance alone. We are very pleased that our margin is up over that 51%, but we really are guiding towards our bottom-line earnings and we left it alone. We feel fairly comfortable in that range.

Joe Altobello - Oppenheimer

Okay, and then in terms of Specialist, obviously you mentioned that it doubled year-over-year. A lot of that is coming from new distribution. I think Australia was part of that new distribution. Are there other big markets that you still have to go into with that brand over the six or 12 months or so?

Garry Ridge

Well, there is a number of aspects to that, Joe. Firstly is, it’s not only the brand but it is the categories that we choose to go into. So we are not only increasing distribution of Specialist but in the United States, for example, we are still at early days. We continue to get more of the SKUs of the different categories into distribution. They are delivering excellent results for our retail as we are actually growing categories that we were not growing before. So our retailers are very comfortable with that. Specialist is a long, long road and we will be talking about it for as long as I am here, and probably longer than that. So we believe that is what we expected it would be which is our platform for leveraging the power of the shield. We are certainly delighted that we have doubled sales year-over-year. It's becoming a significant number now and now that we have seen that performance we gain more confidence about our ability to be able to very deliberately extend the brand, and I say the word ‘deliberately’ because this is not just slap that shield on anything. There is a lot of work been going on over the past many years and consistently and into the future about where we will take it. So the world, as you know, is our oyster. We can take things to more people and more places faster than anyone else now. We spent the last 10 years building up that distribution center globally and I think Specialist really shows how that having set up that distribution, we are able to take more things to more people and more places faster. So Specialist is - we are in a comfortable position with this and we feel good about the future.

Joe Altobello - Oppenheimer

Okay. Thanks, Garry. Thanks, Jay.

Garry Ridge

Thank you.

Operator

We will go next to Linda Bolton-Weiser with B. Riley.

Linda Bolton-Weiser - B. Riley & Co.

Hi. First, can I just ask for a clarification on what you said on Asia? Did you mean that the whole Asia-Pacific segment would have been flat excluding the backorder issue? Or just the rest of Asia piece that was down 30%?

Garry Ridge

The rest of Asia. Well when you look at it, Australia was relatively flat anyhow, China was down and the rest of Asia would have been flat if would have shipped that backlog.

Linda Bolton-Weiser - B. Riley & Co.

Okay. I got you. And then, well, just on that issue with the Indonesia distributor transition, I can't quite remember how long you have been talking about that, but when did that issue start to impact and when will we fully anniversary that disruption from that?

Garry Ridge

We changed the distributor in September last year. So we will lap at this September and what we are going through really is a ramp-up with the new distributor. So it took time to ship product in to our new distributor. There was, if you will, a gap in the market, but the in-market sales of good and it's just an event, its not a trend. We will be through it and on our way.

Linda Bolton-Weiser - B. Riley & Co.

Okay, and then I was wondering, did you see any uptick in consumption demand in Philippines because of cleanup efforts there after the typhoon? And how does Philippines rank in terms of size of market for you? Is it one of the smaller or how does it rank versus like India and a few of those other markets there?

Garry Ridge

It would be a mid-size market as far as consumption is concerned in Asia-Pacific. India would be smaller than the Philippines because India is not as developed yet. We may have seen some. But I think as we have talked before, Linda, it would be very unusual to see a needle move, because of a particular geographic climatic condition that would be so obvious amongst the scheme of things. But yes, we always see an uptick in consumption but it is event driven and it is just an opportunistic result. But it normally doesn't make a huge difference. One of the reasons also is that the event happen and sometimes the product has to get to that region. They don't carry excess inventory hoping for a typhoon. So we may see some depletion of inventory and some top up later, but it's really hard to be able to focus in on one geographic area, particularly a country the size of Philippines and think that it might make a difference.

Linda Bolton-Weiser - B. Riley & Co.

Okay, and then can you just talk, I think your normal habit is to redo some tin contracts in January. Can you give us some rough idea how that went? Does that bake in a lower tin cost, moderately lower, much lower, flatter? Can you give some color on that?

And also, it seems like petroleum-based cost might be down a little bit since you last report? Would that be true? Thanks.

Garry Ridge

Actually today there, in the last few days they have been up. They are a little around 100 and a little over 100, where I think we last reported we were more into 90s, I think. But from a standpoint of the tin plate in our contracts, yes, in the U.S. we renegotiated our contract in the first quarter, in the first part of the year in January and essentially we saw no increase in the pricing this year. We had some negotiations that lowered our can costs at the very end of last year. So we are going into this year with lower can cost.

Linda Bolton-Weiser - B. Riley & Co.

Great. And just one last thing. Did you say that the other expense item was more negative than in prior year because primarily of FX?

Garry Ridge

Yes. We had gains on foreign currency transactions in the prior year whereas this year we had some foreign currency exchange losses.

Linda Bolton-Weiser - B. Riley & Co.

Okay, great. Thanks a lot, guys.

Jay Rembolt

Thank you, Linda.

Garry Ridge

You are welcome.

Operator

We will go next to Rosemarie Morbelli with Gabelli & Company.

Rosemarie Morbelli - Gabelli & Company

Hi. I was wondering if you could talk about what you are seeing in terms of overall demand in Europe? Have you seen an uptick as many companies have seen? Or are your products not as affected by the economic turnaround that we expect?

Garry Ridge

Well, I think you will see that last year when Europe went through its economic challenges, was it last year, I think it was the year before. We also went sideways, not necessarily because of a lack of demand of our product but more as a result of activities of the retailers and distributors who sell our product. We have seen a steady increase in confidence over the past 18 months in Europe and that's being reflected in the results that you are seeing being delivered now. So we are very encouraged about our opportunities for long period of time into Europe and will weather the storms as they come and our products itself again is not necessarily that impacted by the end user. It's more impacted by the activities of the distributors and wholesalers.

Rosemarie Morbelli - Gabelli & Company

So when you look at what the activities of the distributors, and if you look sequentially on a monthly basis, since the beginning of the year are you seeing sequential improvement every month or it just doesn't work like that for you?

Garry Ridge

It doesn't work. We would have trouble over the many European countries that we are in tracking them month-by-month. Quarter-by-quarter would be the best but year-on-year, but yes, we have seen a general increase in business activity across most of the European markets, particularly one is Spain. Now Spain is a doing reasonably well right now and it was one of the worst performing markets 18 months ago. But our business in Spain has rebounded very significantly in the last year.

Rosemarie Morbelli - Gabelli & Company

All right. That is very helpful. Thank you. And I was wondering also, if your sales in the U.S. were affected by the bad weather we had or if that has no impact whatsoever?

Garry Ridge

I can't say it has no impact but certainly, if there was any impact, I think it might have been reflected in the sales. We had a good quarter. Certainly as customers can't get to stores to buy product, then we are not going to sell products. But we know that overall the conditions will be impacted like most others but there is nothing that we can say this did that.

Rosemarie Morbelli - Gabelli & Company

Okay, and then lastly, if I may. Could you talk about whether the turmoil in Russia, Eastern Europe is affecting your revenues and whether you expect it to?

Garry Ridge

Not that we can see at this time. Whether it will or not, I don't know.

Rosemarie Morbelli - Gabelli & Company

Okay. Thank you.

Garry Ridge

Thank you.

Operator

We have no further questions at this time. So I turn the conference back over to Garry Ridge for any additional or closing remarks.

Garry Ridge

Thank you so much. Thanks for all of those who have joined us. Thanks for the questions. And we will look forward to talking to you again on July 9. Until then, keep spraying. Bye for now.

Operator

That does conclude today's conference. We thank you for your participation.

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