WD-40 Company (WDFC) Q2 2012 Earnings Report, Transcript and Summary

Good day, and welcome to this WD-40 Company Second Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Vice President of Corporate and Investor Relations for WD-40 Company, Ms. Maria Mitchell. Please go ahead.

Good afternoon, and thank you for joining us for our second quarter fiscal year 2012 earnings call. Today, we are pleased to have Garry Ridge, President and CEO; and Jay Rembolt, Vice President and Chief Financial Officer. This conference call contains forward-looking statements concerning WD-40 Company's outlook for sales, earnings, dividends and other financial results. These statements are based on an assessment of a variety of factors, contingencies and uncertainties considered relevant by WD-40 Company. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from forward-looking statements, including the impact of commodity prices, impact of changes in foreign currency exchange rates, the impact of introducing new products and fluctuating global market conditions, 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 WD-40 Company with the SEC, including Forms 8-K, 10-Q and 10-K. And readers are urged to carefully review these and other documents and to stay up-to-date with most recent company developments provided in the Investor Relations section of our website at wd40company.com. Our third quarter earnings conference call is scheduled for Monday, July 9, 2012, and will be webcast. Now I'd like to turn it over to Garry Ridge.

Thank you, Maria. Good afternoon, and thanks for joining us today on the eve of a holiday. Today, we reported net sales of $86 million for the second quarter of fiscal year 2012, an increase of 9% over Q2 last fiscal year. Year-to-date net sales were $170.9 million, an increase of 7% versus the same period last fiscal year. Net income for the second quarter was $10.6 million compared to $9.1 million in Q2 last fiscal year, an increase of 16%. Diluted earnings per share for the second quarter was $0.65, up from $0.53 from the same period last fiscal year. Year-to-date net income was $17.4 million compared to $18.2 million in the same period last fiscal year, and year-to-date diluted earnings per share were $1.07, up from $1.06 for the same period last year. As we review our results for the second quarter, as we normally do, we'll be doing so under our 50/30/20 business model rule, and we'll be talking about our strategic initiatives. Firstly, overall we are pleased with our second quarter results. We grew global sales by 9% versus the period last year. Much of the growth came from the U.S., in part from our successful national launch of the WD-40 Specialist product line. Stellar sales growth in our Asia distributor markets and China helped offset the lower sales in Europe, which continues to be impacted by the economic uncertainty in the region. Our margin was below our 50% target due to higher input and manufacturing costs, and our investments in the North American supply chain architecture project, as well as higher discounts in display mix associated with our large increase in sales. We continue to be worried about rising oil costs and would like to see these costs roll back a little. If they continue to rise, pricing may play a part in offsetting these impacts. Price increases implemented to date are alleviating some of these pressures, as our gross margin did improve slightly over the first quarter of our -- of this fiscal year. While our cost of doing business was 31% compared to our targeted of 30%, we experienced a large improvement over the first quarter of the fiscal year. The improvement was largely due to higher sales while keeping our operating expenses in check. EBITDA and net income improved over both the prior year quarter and the first quarter of the fiscal year of 2012, and we are trending well and we continue to be excited about the opportunities we see going forward. Before we focus on the sales results in a little more detail, let's review the progress we've made during the second quarter towards our strategic initiatives. Our number one strategic initiative is maximizing the WD-40 brand through geographic expansion and increased market penetration. We want WD-40 in more places, being used with more people, but with more uses, more frequently. We continue to build the WD-40 foundation with the significant growth of the WD-40 brand sales in key global markets including Asia, China, Australia, Canada and Latin America. It's pleasing in China that we're encouraged by our progress in building a long-term, sustainable business with growth. Our second strategic driver is being the global leader in the WD-40 Company's product categories and platforms. Sales growth of multi-purpose maintenance products in the U.S. picked up more steam, growing 33% versus the prior year period. It's been a long time since we've seen growth figures like that in the U.S., which is a mature market for WD-40 multi-use product. Some of this growth stem from the national launch of WD-40 Specialist product line in January. Following a successful pilot last fall, we launched 5 new products under the new WD-40 Specialist product line across the U.S. in the second quarter, and we are very confident in the direction we have taken. We are tracking well in the U.S. with our rollout, and we've just begun the rollout of the WD-40 Specialist product line in Europe. Number three is of strategic drivers, is focusing on strategic business relationships, primarily acquisitions, joint ventures and strategic partners. While we have yet to find an acquisition opportunity that meets our criteria, we continue to explore licensing arrangements to build our product offerings for our new WD-40 Specialist product line. Our fourth strategic driver is pursuing long-term fundamental innovation for continued profitable growth of the company. There are several products in concept and development for the WD-40 Specialist product line. Many of these are for new adjacent categories where we do have the right to win. Our innovation efforts extended beyond new products and platforms and included new business processes, product reformulations and technology. Our North American supply chain architecture project is a great example of where we're innovating our supply chain processes and network to both improve service delivery to our customers while reducing our overall cost in the short term. We owe the supply chain a "good on you, mate" for that effort. Last and definitely not least, under our fifth strategic initiative, we continue to attract, develop and retain tribe members to execute on our vision. We welcomed 14 new tribe members during the second quarter to support sales and operations across the globe. We conducted our biannual employee opinion survey, and we're absolutely delighted with the results. Our employee engagement measures is a reflection of our tribe's dedication and the envy of many organizations at 92.6%. To those new and not-so-new tribe members listening to this call today, thank you. Thank you for your commitment to our core values and for making it better than it is today and to helping us grow the WD-40 economy. That completes the update on our strategic initiatives, so I'll move into a little more detail about second quarter results starting with sales. Multi-purpose maintenance products made up 83% of global sales in the second quarter, with the category sales up 9% in Q2 and up 8% year-to-date compared to the prior fiscal year periods. By trading block, the Americas were up 26%, Europe was down 13% and Asia Pacific was up 33% in Q2 compared to the prior year quarter. The increase in the Americas was primarily driven by the U.S., which regained distribution in various trade channels and at a high level of promotional activities versus the prior year periods. Results in the U.S. also benefited from the January 2012 national launch of the WD-40 Specialist product line. The sales decrease in Europe was driven primarily by adverse economic conditions which exists throughout Europe, as well as timing of customers' orders which tend to shift in relation to the timing of price increases. Growth in the Asia Pacific region was driven by promotional activity, a more stable economic condition throughout the region and the ongoing growth of their core business. Global sales of multi-purpose maintenance products by brand were as follows: the WD-40 brand sales were up 9% in Q2 and are up 8% year-to-date. The sales of the 3-IN-ONE brand were up 15% in Q2 and were up 4% year-to-date. The BLUE WORKS brand represents less than 1% of our global sales in both Q2 and year-to-date. Homecare and cleaning products made up 17% of global sales in the second quarter, with category sales up 6% in Q2 and 2% year-to-date. Products under this category includes Spot Shot, 2000 Flushes, Carpet Fresh, No Vac, 1001, X-14, Lava and Solvol brands. By trading block, sales of our homecare and cleaning products in the second quarter were up 6% in the Americas, up 9% in Europe and up 3% in Asia Pacific. homecare and cleaning products sales in the Americas benefited from an increased level of promotional activity within the warehouse club channel and high levels of product offerings carried by certain key customers. The majority of the growth came from our Spot Shot and Carpet Fresh products, which had sales increases of 9% and 11%, respectively, in the U.S. in the second quarter. In Europe, sales of the 1001 brand recovered in the second quarter and helped to offset the sharp declines in sales that were experienced in the first quarter. The 1001 brand sales grew 9% in Q2, but they are down 8% year-to-date. Customer orders are close to historic levels now. The customers have sold through large amounts of inventory they purchased in the fourth quarter of the fiscal year 2011 in support of promotional activity in advance of Q1 price increases. Sales growth of homecare and cleaning products in the Asia Pacific region was driven by Solvol sales in Australia, which increased 16% in the second quarter, partially due to the favorable impact from changes in foreign currency exchange rates. Now, we'll talk a little bit more about the segments. In addition to the organic growth, I'd say, global sales benefited from price increase implementation to offset input costs, as well as favorable impact from exchange rates. Our year-to-date fiscal 2002 (sic) [ 2012] results translated at last year's fiscal exchange rates or what we term as constant currency basis would have produced net sales of $169.7 million versus $190 -- sorry, $170.9 million. Exchange rates did not have a material impact on Q2 fiscal year 2012 results. A little more detail on the Americas. Sales in the Americas segment increased 21% in the second quarter and were up 12% year-to-date versus the prior year period. The segment accounted for 53% of sales in the second quarter versus 48% in the period last year. In the U.S., sales were up 24% in the second quarter and are up 14% year-to-date, driven primarily by the growth of the WD-40 Spot Shot and Carpet Fresh brands. As we've said, WD-40 sales benefited from the successful launch of the WD-40 Specialist product line, as well as the regaining distribution with a number of major customers. Homecare and cleaning product sales benefited from high level of promotional activities and a high level of product offerings carried by certain key accounts. Sales in Latin America increased by 5% in the second quarter and 1% year-to-date with most of the growth in our multi-purpose maintenance products. Sales in Canada increased 14% in the second quarter and 11% year-to-date, driven by high level of customer orders as a result of increased promotions. Changes in foreign currency exchange rates did not have a material impact on sales. Now let's take a look at Europe. Sales in our European segment were down 12% in the second quarter and down 7% year-to-date as compared to the prior fiscal year periods. Changes in foreign currency exchange rates did not have a material impact on sales in the second quarter, but did have a favorable impact on year-to-date sales of about USD $400,000. The segment accounted for 33% of global sales in the second quarter compared to 40% in the prior year quarter. We sell through a combination of direct markets in certain countries, as well as exclusive marketing distributors. As those of you who are familiar with us know, we have our direct sales operations in the U.K., in Italy, France, in Iberia, which includes Spain and Portugal and in the market we term as the Germanics region, which includes Germany, Austria, Denmark, Holland, Switzerland, Sweden and The Netherlands. Overall sales from the direct markets decreased 5% in the second quarter and decreased 9% year-to-date compared to the prior year periods. The sales decline in the direct markets was primarily due to the current adverse and uncertain economic conditions which exist in Europe. Sales from direct markets accounted for 70% of the European sales segment in the second quarter compared to 65% of the European segment in the prior fiscal year period. Where we sell? Through independent marketing distributors in Eastern and Northern Europe and in the Middle East and Africa, with virtually all sales consisting of the WD-40 brand. Sales in our European distributor markets decreased 24% in the second quarter and 3% year-to-date. Sales in the distributor markets were negatively impacted versus prior year periods, due mainly to the timing of customer orders. In the second quarter of fiscal 2011, sales were much higher due to customers placing orders in advance of our price increase that became effective at the end of the second quarter of fiscal year 2011. This fiscal year, customers increased their purchase in Q1 advance of a price increase implemented in the current quarter. Now let's take a look at Asia Pacific. The sales in the Asia Pacific segment were up 28% in the second quarter and are up 29% year-to-date. The segment accounted for 14% of global sales in Q2, up from 12% in the prior year period. Asia Pacific sales in the second quarter benefited from changes in foreign currency exchange rates, as sales on a constant currency basis would have produced net sales of $11.7 million versus the actual of $11.9 million. Year-to-date sales on a constant currency basis would be $25.4 million versus the actual of $26.1 million. Sales in Australia increased 12% in Q2 and are up 14% year-to-date compared to the prior fiscal year period. The sales growth was attributed to stable economic conditions and the ongoing growth of our base business. There was also a favorable impact from changes in foreign currency exchange rates, as we've noted, and on a current currency basis, the sales increase would have been 9% in Q2 and 7% year-to-date. China. China continues to be a growth engine for us with growth of 61% in the second quarter and 58% year-to-date. We benefited from our ongoing growth of our base business and some large promotional programs that did not occur in the prior year period. Sales throughout the rest of the Asia area increased by 29% in both Q2 and year-to-date. The increase was due to stable economic conditions and continued growth of the WD-40 multi-use products throughout our distributor markets, including those in Indonesia, Malaysia, Taiwan, the Philippines and in South Korea. I'm going to take a break. That's it for the sales update. I'll let Jay now review some of the financials and some more progress up against our 50/30/20 measures. Over to you, Jay.

Garry, thanks. I just want to remind you an addition to the information presented on this call. We suggest that you review our Form 10-Q, which we will file Monday, April 9. As we look at the rest of the financials, let's first look at our 50/30/20 rule. The 50, as you might remember, 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 for this is 30% or less. And finally, the 20 represents EBITDA. If our gross margin is at or above our 50% level, and our cost of doing business is 30% or less, our EBITDA will be at or above the 20% of net sales. 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. First, we'll look at the gross margin, or the 50, in our 50/30/20 rule. Gross margin in the second quarter was 49.0% compared to the 51.8% in the prior year quarter. The decrease of 280 basis points in gross margin was primarily attributed to higher raw materials and manufacturing costs, expenses related to our North American supply chain architecture project and higher promotional discounts. These expenses were partially offset by the positive impacts from price increases. We experienced a net unfavorable impact of 290 basis points from our major input costs. Higher cost for petroleum-based materials, as well as aerosol cans period versus period, negatively impacted margin by 230 basis points. The remainder -- the remaining unfavorable impact of 60 basis points stem from higher raw material costs related to our homecare and cleaning products, as well as higher manufacturing costs in certain segments. Sales price increases have been implemented country-by-country in a help to offset the impact from increased input costs. In the quarter, price increases favorably impact our gross margin by 210 basis points and have been driven by price increases implemented throughout the last 12 months. Higher advertising and promotional discounts negatively impacted our gross margin by 80 basis points in the quarter. A higher percentage of sales during the current quarter was subject to these promotional allowances compared to that in the prior fiscal year quarter. The timing of advertising, promotional and other discounts, which are recorded as a reduction to sales, may cause fluctuations in our gross margin from period to period. All other impacts combined negatively impacted our global gross margin by 120 basis points. These include the transitional impact of the North American supply chain architecture project, as well as some changes in sales mix. In the first quarter of fiscal year, we began executing the North American supply chain project with the goal of improving service delivery to our customers, while reducing overall costs associated with our supply chain network. This project includes consolidation of our third-party packaging facilities and restructuring of our distribution center network. In the second quarter, the activities associated with this transition led to additional shipments of products between warehouse locations, increased inventory levels, resulting in higher warehousing, handling and freight costs. The higher level expenses impacted our gross margin by 100 basis points. While we expect to incur additional expenses of this nature over the next couple of months, we also -- we expect to be seeing cost savings once the new structure is fully implemented and complete. Various changes in sales mix negatively impacted our global gross margin by 20 basis points. These would include things like product mix in the store displays, shifts in brand mix. The sales growth we experienced period versus period was partially due to increased promotional display placements with some of our major customers, which are more expensive configurations compared to standard shelf placements. The themes discussed for the quarter for gross margin also apply year-to-date. Gross margin year-to-date was 48.8% compared to 51.4% in the prior fiscal year. The 260 basis point decrease in gross margin was attributable to higher raw materials and manufacturing costs, higher expenses related to the North American supply chain project, higher trade and promotional discounts and an unfavorable sales mix shift. These impacts were partially also offset by the positive impact from sales price increases. In the quarter, we once again took a deep look at opportunities and challenges associated with hedging our petroleum-based raw materials. From the work, we have concluded that we will not be engaging in commodity hedging at this time, we will instead focus our time, talent and treasure on cost reductions from our supply chain project, global sourcing, product reformulations, as well as margin improvement opportunities from our new product development activities. That completes the gross margin discussion. Now, on to the 30, our cost of doing business. In the second quarter, the cost of doing business was 31% of net sales compared to 34% in Q2 of the prior fiscal year. Our sales increased 9% in Q2, while our operating expenses grew by 1%, causing a decrease in the cost of doing business percentage period-to-period. Year-to-date, the cost of doing business was 33% of net sales compared to 34% in the prior fiscal year period. SG&A expense in Q2 was $21.9 million versus $21.6 million in the prior fiscal year quarter. As a percentage of net sales, it was 25.5% in Q2 versus 27.3% in the prior year quarter. The increase in SG&A expenses was primarily due to increased freight costs, along with higher professional service costs. Freight cost increased $0.5 million, primarily due to the increased diesel costs, higher sales volumes and some smaller order sizes on average. Professional service cost increased slightly by $100,000 due to higher legal and consulting fees. These increases in SG&A expenses were partially offset by a $0.3 million decrease in new product exploration expenses within our research and development team. The decrease in these expenses versus the prior year was primarily due to the increased level of spending during the second quarter of fiscal year 2011 that was related to the development of the WD-40 Specialist product line. As for employee-related expenses, we did experience higher costs during the second quarter due to annual compensation increases and higher staffing levels. However, these increases were fully offset by a lower bonus and stock-based compensation expense period versus period. SG&A expense year-to-date was $44.5 million compared to the $43.3 million in the prior fiscal year period. As a percentage of net sales, SG&A expense was 26.1% year-to-date versus 27.0% in the prior fiscal year period. And the themes discussed for the second quarter are similar to those year-to-date. Freight costs were up $0.9 million year-to-date, while employee-related costs which include salaries, bonuses, profit sharing, stock based comp and other fringe increased by $0.6 million due to annual compensation increases and higher staffing levels. Professional service costs increased $0.4 million as a result of higher legal and consulting fees. Changes in foreign currency exchange rates further increased SG&A expenses by $0.3 million. These increases were partially offset by lower new product exploration expenses, which decreased by $0.5 million year-to-date, again attributable to the higher level of spending in the prior year associated with the Specialist brand. Travel and meeting expenses also decreased $0.3 million in the year-to-date period. Other miscellaneous expenses, which include broker sales commissions, insurance and bad debt expense decreased by $0.2 million period-over-period. On to advertising and sales promotion expense. In the second quarter, it was $4.9 million compared to the $5.4 million in the prior year period. As a percent of sales, A&P investment in Q2 was 5.8% compared to the 6.8% in the prior year period. The decrease in advertising and sales promotion was primarily due to the decreased promotional activities in Europe, along with some lowered cost associated with the Americas programs. Year-to-date advertising and sales promotion expense of $12.8 million was $1.4 million higher than the prior fiscal year. Advertising and sales promotion expenses as a percentage of sales increased to 7.5% year-to-date versus the 7.1% in the prior year period. The increase was due again to higher levels of advertising and promotional activities, primarily in our Americas and Asia Pacific segments. Amortization of intangible assets was $0.6 million in Q2 compared to $0.2 million in the prior year period. The increase in amortization is related to our decision to change our 2000 Flushes, Spot Shot and 1001 trade names from indefinite-lived intangible assets to definite-lived intangible assets. The change was effective February 28, 2011, and amortization of these 3 trade names began on March 1, 2011. The prior year quarter only included amortization of the Carpet Fresh and X-14 trade names and the customer lists acquired in the 1001 acquisition. Year-to-date amortization was $1.2 million compared to $0.4 million in the prior fiscal quarter, the increase, again, was attributed to the change in trade names. Total operating expenses in the second quarter were $27.4 million versus $27.2 million in Q2 of last year. Operating income in Q2 was $14.7 million compared to $14.9 million in the prior year quarter. Year-to-date operating expenses were $58.5 million versus $55.1 million in the prior year period. Operating income year-to-date was $25 million compared to $27.2 million in the prior fiscal year. EBITDA, the last of our 50/30/20 measures, was 19% of net sales in Q2 compared to 18% in the prior year quarter. Year-to-date EBITDA was 16% of net sales compared to 18% in the prior year. We target EBITDA of 20% of net sales, but expect variations from time to time as sales, A&P investment and other expenses fluctuate with the timing of our activities. Our EBITDA percentage is also affected by investments we make for future growth. Interest income for both periods -- for both quarters was under $100,000. Interest expense in Q2 was less than $100,000, down $100,000 versus the prior year. Other income and expense changed by $100,000 in the current fiscal quarter due to lower foreign currency exchange losses period against period. Year-to-date interest income was $100,000 and was relatively flat period versus period. Interest expense year-to-date was $0.3 million compared to $0.5 million in the prior year period, primarily due to lower interest rates on our revolving credit facility as compared to the interest rate on our term loan in the prior year. We made our final principal payment of $10.7 million on our term loan in October of last year. Other expense year-to-date was $0.2 million compared to the $0.1 million in the prior year period. We experienced foreign currency exchange losses in the current fiscal year compared to foreign exchange gains in the prior year period. The provision for income tax in Q2 was 28% versus 32.9% in the prior fiscal year quarter. The lower tax rate was driven by the release of reserves associated with expiring statutes, the higher proportion of income generated by our foreign operations and are taxed at lower rates, as well as a decrease in the state tax rate as a result of recent changes in California state tax law. Year-to-date, the provision for income taxes was 29.5% versus the 32.2% in the prior year. The lower tax rate year-to-date was due to the same factors that we discussed for Q2. Now the combined effect from the increase in income from foreign operations and the California tax law changes have lowered our overall annual effective tax rate projections. Absent any other onetime changes, we expect the effective tax rate for the second half of the year to be close to 31.5%. Net income in Q2 was $10.6 million versus $9.1 million in the prior year quarter. Changes in foreign currency exchange rates did not have a material impact on net income period-to-period. Our diluted earnings per common share were $0.65 in Q2 compared to $0.53 in the prior fiscal quarter. Diluted outstanding shares decreased from 17.2 million to 16.1 million shares for the current year. Our year-to-date net income was $17.4 million versus $18.2 million in the prior year period. Changes in foreign currency exchange rate had a $0.2 million favorable impact on net income. Year-to-date 2012 results on a constant currency would have produced a net income of $17.2 million. Diluted earnings per common share for the -- were $1.07 year-to-date compared to $1.06 in the prior year period. And our diluted shares outstanding decreased from the 17.1 million in last year to 16.1 million shares this year. Regarding the dividend, on March 20, the Board of Directors declared a regular quarterly cash dividend of $0.29 per share payable on April 20, 2012, to shareholders of record on April 13. Based on today's closing price of $44.78, the annualized yield would be about 2.6%. About our balance sheet, at February 29, 2012, cash and cash equivalents were $67.7 million, up from the $56.4 million at the end of fiscal 2011. Net cash provided by operating activities was $15.2 million, and partially offset by cash used in investing activities of $1.3 million and net cash used in investing activities of $1.1 million and the negative impact from foreign currency exchange rates of $1.5 million period-to-period. Major cash inflows related to investing and financing activities included $1 million in proceeds from the sale of property and equipment, primarily the sale of our warehouse facility in Memphis, Tennessee. We had $40 million of net borrowings on our revolving line of credit, and $1 million of proceeds from issuance of common stock upon the exercise of stock options. Major cash outflows related to investing and financing included $2.3 million in capital equipment purchases, $22.7 million in share repurchases. We paid dividends of $9 million, and we had $10.7 million payment for our final principal payment, which retired our long-term debt. Other items to note regarding our balance sheet include inventory, as well as our share repurchase activity. Our new supply chain structure will result in higher levels of inventory than we typically held in the past. Since the end of last year, inventory increased by $8.3 million year-to-date. The increase in inventory was primarily attributable to the increased product from third-party packagers in support of our supply chain architecture project, but it also included inventory purchases to support the launch of the Specialist product line, as well as higher overall sales levels in this fiscal year. As for the share repurchases, we acquired nearly 95,000 shares at a total cost of $4.1 million during the second quarter under the latest share buyback plan approved by the Board of Directors on December 13, 2011. This latest plan authorizes the company to acquire up to $50 million of outstanding shares through December 12, 2013. During the first quarter, we completed the purchases under the company's previous $60 million buyback plan and acquired nearly 470,000 shares at a total cost of $18.6 million. Thus, year-to-date, the company has repurchased a total of 565,000 shares at a total cost of $22.7 million. WD-40's financial position continues to be strong, supported by consistent cash flows and a healthy balance sheet with significant cash balance. We paid off our long-term debt in Q1 and have $35 million available on our $75 million revolving line of credit. For any additional liquidity needs, we continue to focus on utilizing our cash and liquidity to invest for the future and to provide long-term returns to our shareholders. This completes the financial overview. More information will be available in our 10-Q, which we'll file on Monday. Thanks so much. Now back to Garry.

Thank you, Jay. You can take a breath.

Thank you.

Now let's touch on what we consider -- what is our bright future ahead at WD-40 Company. We expect the U.S. sales to continue to grow as we build distribution for the WD-40 Specialist product line. Sales are full speed ahead in Asia and China as new sales and marketing tribe members grow our base business and build new distribution in the industrial channel. The completion of our North American supply chain architect project will position us to reduce cost of goods sold and improve service to customers, particularly in fiscal year 2013 and beyond. All of these initiatives support our achievement of our sales and 50/30/20 targets over the long term. I'm quite pleased with our tribe for their initiative, hard work and persistence and perseverance to develop new market opportunities and implement gross margin protection strategies. Now on to our guidance, which we have updated to reflect the projected lower shares outstanding. While fiscal year 2002 -- '12 will be a great year, we anticipate we may come in at the lower end of our guidance range due to the challenges in Europe and the concerns over rising oil prices. The following fiscal year 2012 guidance does not include any acquisition activities and assumes foreign currency exchange rates will remain close to recent levels. Sales, we expect our fiscal year net sales results to be in the range of $353 million to $370 million or a growth of between 5% and 10% versus fiscal 2011. We project gross margin to be close to 50%. We expect our global advertising and promotion investment to be in the range of 7% and 8% of net sales, and we expect net income of between $37.2 million and $39.2 million, which would achieve a diluted EPS of between $2.33 and $2.45, assuming $16 million weighted share -- average shares outstanding. So let's sum up. In summary, what did you hear from us on this call today? You heard we grew global sales by 9% versus the prior year period. You heard U.S. sales on a positive trajectory supported by increased and regained distribution, increased promotional display activities and the successful launch of the WD-40 Specialist product line. You heard we have and continue to have strong growth in China and other Asian marketing -- markets where we have marketing distributors. You heard we experienced tempered sales in Europe that were impacted by adverse economic conditions. You heard that we continue to incur expenses and have a high level of inventory related to the implementation of the North American supply chain architecture project. You heard that our gross margin was below our target of 50%, partly due to expenses associated with supply chain architecture and heavy display mix. You heard that while we expect sales growth of 5% or more for the fiscal year 2012 that we may be at the lower end of our guidance range due to uncertain business conditions impacting Europe sales and rising oil prices that impact gross margin. You heard that we continue to make progress on our strategic initiatives to support profitable long-term growth. We are launching WD (sic) [WD-40] Specialist in certain international markets in support of being a global leader in the multi-purpose maintenance products, and we are driving further innovation in WD-40 Specialist creating products for new categories where we do have the right to win. You heard that we acquired nearly 95,000 shares during the second quarter under our current $50 million share buyback, and you heard that this has been a great quarter and this will be a great year for WD-40 Company. Thank you for joining us today. In closing, I won't share a quote today, but I'll just wish a happy Easter and we'd be pleased to now open the conference call for your questions.

[Operator Instructions] And we'll go first to Liam Burke with Janney Capital Markets.

Garry, I think I've got this right. The multi-purpose maintenance in the Americas were up 26%. You identified the regained distribution, but also the launch of Specialist. The Specialist launch is relatively recent. Is it gaining traction that fast where you're actually moving the needle on sales growth?

The initial pilot we did, as we shared in the last call, exceeded our expectation. And at this time, we are reasonably pleased with the pickup. We are still in early stages, Liam, but we'd like to believe that the results we're seeing and the sell-through we're seeing in stores would indicate that our end users are pleased with what we're offering. They see value from it and that the blue and yellow shield is certainly giving them the confidence to buy the Specialist product line.

Are you seeing any shift from a core WD-40 product line to the more specialized on the -- anywhere in the channel?

When we initially went down this project, we were very conscious of the fact that there may be cannibalization. In the early data that we have, we have not seen any meaningful cannibalization.

Okay, great. And Jay, you said that inventory was up. Obviously, the math from the end of the year, $8.3 million, a lot of that were partially from sales increase and then a percent from the reorganization of the distribution channel. After the smoke clears, do you expect your inventory turns to get back to more historical levels?

I think it -- we expect it to be close. I think we will -- as we -- we will see a higher level of inventory, probably moderating at this level, maybe slightly down a little bit. But as we move and continue to increase our sales, I think we should get a feeling that it trends back to what we've seen in the past.

And we'll go next to Eric Hollowaty with Stephens Inc.

A couple of quick ones. The pricing that you announced some time ago in multi-purpose maintenance, has that been substantially or entirely implemented? Or is there any more to go for the rest of this fiscal year?

It's basically all done.

Okay. And with respect to your comments about future price increases that may be necessary, how do you think about -- what's your decision framework for making that decision? What are you looking at in order to determine whether that will be necessary? And how do you think about which channels you would implement that in? Do you think it would be channel and worldwide or just -- any more color you can give on how you're thinking about that would be great.

Okay, yes, let me approach a little bit of that. Thanks for the question. The major unknown in pricing is oil. Our goal as a company is to, again, get our gross margin above 50% and to drive it further north of that, and the majority of that improvement will come from product innovation, product mix and supply chain architecture and similar changes that will increase our efficiency. The wild card that we continue to have is oil, so the decision we make around oil is based on the severity of the move and the longevity of that move playing into our pricing system. So right now, we've seen oil kind of bouncing around $100 and so for a few months, I guess. We saw it bouncing around $85 last year for a while. What annoys us and worries us is not necessarily the price of oil, although high oil prices isn't necessarily good for the world in total or most of the world, but it's the volatility and the uncertainty of where it will be tomorrow. That's why the finance team did a deep dive looking at some of the offsets to that, which might have been hedging, which we worked out -- was not a great option for us. So we'll be watching oil. And when we feel that oil is at a stage where it's set at a new high, and it's -- there's a big possibility it will stay there. Or if we saw a massive change in the oil price because of some political condition that we thought was going to maintain a high price over time, then we would move. And because oil adds into 83% of our sales, which is our multi-purpose maintenance products, if we did it, we do it in all trade channels all around the world.

Okay, great. And with respect to the Specialist launch in Europe, how long do you think that will take? I take it from your comments, you started that in the third quarter. Do you expect it to be completed in the quarter? Or how should we think about that?

Well, Specialist launch will never be completed.

I should say the introduction.

Yes. The introduction started already. We've started to ship in, in Europe, in the U.K., Germany and Italy. And there'll be more to come as we bid that down. It's a matter of not biting off more than we can chew, but the -- thanks to all the work we did with BLUE WORKS. All the formulations were ready to go in Europe, and we were just waiting for some positive and -- or not, feedback from the pilot we did here. And as all the green lights went here, we were able to maneuver and marshal our activities fairly quickly, that enable us to start shipping in those countries which we've already started to do in this quarter.

[Operator Instructions] And we'll go next to Joe Altobello with Oppenheimer.

A couple of questions. First, in terms of pricing, since we're on the subject, I mean, you guys, as you've mentioned, have taken pricing throughout the world, I guess, over the last year or so, what's been -- have you noticed any impact on volumes at least near term or maybe longer term after the price increase? Or is the price increase typically pretty much incremental to the top line?

We initially get some pushback, of course, from the trade, so you may get some trade-generated volume fluctuations as you implement the price increase and that could be positive or negative. But as far as our end users are concerned, the research that we have when we track total ounces, we haven't seen any material negative impact.

Okay, great, that's helpful. And then secondly, on the gross margin. If I look at your guidance today of around "50%" gross margin for the year, you need to do an incremental improvement, I guess, in the back half of north of 100 basis points. Can you talk about all of the things that impact the gross margin in the first half? What's going to get better or which things will get better in the second half that are going to get you to that 50-plus percent gross margin?

Well, we expect to start benefiting from the implementation of the North American supply chain project, so we expect that to be positive to gross margin in the second half of the year. We also expect that mix of sales will benefit us on gross margin. Jay?

As well as pricing that we've been -- that we've taken in the first half of this year, so we've had some price increases in the first half that haven't been fully embedded.

Okay. Got it. Just one last one, if I could. I don't know if you guys quantified this, but can you tell us how much Specialist, at least the launch of Specialist in the U.S. did add to the top line?

No.

That does conclude our question-and-answer session. At this time, I would like to turn the call back over to Garry Ridge for any additional or closing remarks.

Okay. Thank you all for joining us. We look forward to being with you in about 90 days. Safe time over the holidays and keep stopping squeaks for us. Good afternoon.

That does conclude our conference. You may now disconnect.