Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-forty Company Third Quarter Fiscal Year 2017 Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen only mode. At the end of the prepared remarks, we will conduct a question and answer session.
I would now like to turn the presentation over to your host for today's call, Ms. Wendy Kelly, Director of Investor Relations and Corporate Communications. Please proceed.
Thank you. Good afternoon, and thanks to everyone for joining us today. On our call today are WD-forty Company's President and Chief Executive Officer, Gary Ridge and Vice President and Chief Financial Officer, Jay Remboldt. In addition to the financial information presented on today's call, we encourage investors to review our earnings presentation, earnings press release and Form 10 Q for the period ending May 31, 2017. These documents are available on our Investor Relations website at investor.
Wd40company.com. A replay and transcript of today's call will also be made available at that location shortly after this call. On today's call, we will discuss certain non GAAP measures. The description and reconciliations of these non GAAP measures are available in our SEC filings as well as our earnings presentation. As a reminder, today's call includes forward looking statements about our expectations for the company's future performance.
Of course, actual results could differ materially. The company's expectations, beliefs and projections are expressed in good faith, but there can be no assurance that they will be achieved or accomplished. Please refer to the risk factors detailed in our SEC filings for further discussion. Finally, for anyone listening to a webcast replay or reviewing a written transcript of this call, please note that all information presented is current only as of today's date, July 10, 2017. The company disclaims any duty or obligation to update any forward looking information whether as a result of new information, future events or otherwise.
With that, I'd now like to turn the call over to Gary.
Thanks, Wendy. Good day and thanks for joining us for today's conference call. Today, we reported net sales of $98,200,000 for the Q3 of fiscal year 2017, which was an increase of 2% from the Q3 of last fiscal year and a new company record. Net income for the Q3 was $14,400,000 compared to $12,700,000 in the Q3 of last fiscal year, an increase of 14% year over year. Diluted earnings per share for the Q3 were also a new company record at $1.02 compared to $0.88 for the same period last fiscal year.
Now let's start with the discussion about our strategic initiatives. Strategic initiative number 1 is to grow the WD-forty multi use product. Our most important strategic initiative is to take the blue and yellow can with a little red top to more places for more people who will find more uses more frequently. In the Q3, global sales of multiuse products were up slightly compared to the same period last fiscal year. The softness came from the Americas segment and was offset by stronger sales in Asia Pacific and the EMEA segment.
I'll discuss these fluctuations in more detail when I review the results by segment. Strategic initiative number 2 is to grow the W-forty Specialist product line. Once we've built equity and established the power of the shield in a particular geography, we can leverage that brand recognition to develop new product lines like WD-forty Specialist. In the Q3, global sales of WD-forty Specialist was $7,300,000 which represents a 30% increase over the Q3 of last year. In fact, we had double digit growth of WD-forty Specialist across all three trading blocks in the 3rd quarter.
The initial acceptance of our new WD-forty Specialist greases in the U. S. Has been very encouraging. Additionally, we delivered our 1st shipment of WD-forty Specialist to greases in the U. S.
At the end of June. We continue to believe that WD-forty Specialist will be a sustainable revenue and earnings growth engine for many years to come. Strategic initiative number 3 is to broaden the product and revenue base. Our goal under this initiative is to leverage the recognized strengths of WD-forty Company to derive revenue from new sources and brands. We continue to expand the product offerings within our 3 in-one and GT85 brands as well as WD-forty bike.
In the Q3, we launched 3 in 1 RV Care product line. It's a very early time for this, but we're excited and see lots of future opportunity with maintenance products in this new channel. Strategic initiative number 4 is to attract, develop and retain outstanding tribe members. Our goal under this initiative is to attract, develop and retain talented tribe members. Our long term target under this initiative is to grow employee engagement to greater than 95%.
As we shared with our investors earlier this fiscal year, we completed the acquisition of a new building that will house our San Diego based tribe members. We are currently in the final process of renovating the property and expect to relocate our tribe to the new office facilities in late August. Strategic initiative number 5 is operational excellence. We are continuously focused on optimizing resources, systems and processes as well as applying rigorous commitment to quality assurance, regulatory compliance and intellectual property protection. Recently, we held our annual R and D and Quality Summit where our researchers, scientists and quality assurance tribe members gathered together to collaborate and gain alignment on some of the global opportunities and challenges our tribe is facing related to quality assurance, innovation and regulatory compliance.
The summit is a living, breathing example of our tribe consistently striving to make it better than it is today. That completes the update on our strategic initiatives. So let's move on to the details of the 3rd quarter results, starting with sales. Consolidated net sales were 98 $200,000 in the 3rd quarter, up $1,700,000 versus last year. If we remove all foreign currency exchange impacts, our consolidated revenue would have been about $100,300,000 up 2,100,000 dollars or 4% compared to the Q3 of last fiscal year.
This $2,100,000 difference is due to the fact that in the Q3, we generated approximately 40% of our sales in currencies other than U. S. Dollar and changes in foreign currency exchange rates continue to negatively impact our consolidated results. Translation of foreign subsidiary results from their functional currencies to the U. S.
Dollar had an unfavorable impact on sales of 4,700,000 dollars On a constant currency basis, total net sales would have been $102,900,000 an increase of 7% compared to last year. This is what we refer to as translational related exposure and an impacts reported results from Canada, Australia, China and the EMEA segment. However, due to changing foreign currency exchange rates, our consolidated net sales were actually improved this quarter by about $2,600,000 due to the transaction related impacts. This currency exposure only impacts our reported EMEA results and primarily due to the impact of the strengthening of the euro and the U. S.
Dollar against the pound sterling. Now let's take a closer look at what's happening in the individual segments. We will start with the Americas. Consolidated net sales in the Americas, which includes the United States, Latin America and Canada, decreased to $49,000,000 in the 3rd quarter, down about 2% from last year. Sales of maintenance products in the Americas decreased 1% in the 3rd quarter, primarily due to a 3% decrease in the sales of maintenance products in the United States.
The decrease in the United States was driven primarily by shifting buying patterns in some trade channels as well as efforts of certain customers to more closely manage inventory levels. Maintenance product sales in Canada were up 10% in the 3rd quarter, primarily driven by improving market and economic conditions as well as increase in sales associated with our promotional programs. Maintenance product sales in Latin America were up 8% in the quarter, primarily due to higher sales of WD-forty multi use product in Mexico. Although sales in Mexico increased in the current quarter, business conditions in Mexico continue to be uncertain. As a reminder, our maintenance products exclude our home care and cleaning products.
We continue to consider our home care and cleaning products specifically in the U. S. As harvest brands that continue to generate meaningful contributions and cash flows, but are generally expected to become a smaller part of the business over time. Sales of our home care and cleaning products in the Americas decreased 5% in the Q3 compared to the same period of last year. Now let's go on to EMA.
Consolidated net sales in EMA, which includes Europe, the Middle East, Africa and India, increased to $34,400,000 in the 3rd quarter, up 4% from last year. EMEA's reported results in the 3rd quarter were negatively impacted by foreign currency exchange headwinds. On a constant currency basis, sales in EMEA would have been $38,900,000 an increase of $6,000,000 or 18 percent compared to the last year. However, these constant currency numbers do not paint a complete picture since we experienced favorable impacts of $2,600,000 from transaction related exposures in the 3rd quarter. We think the very best way to give you a complete look at how our markets are performing is to look at our results in local currencies in which we conduct sales transactions in our direct markets.
Although the reported sales in direct markets decreased 1% in U. S. Dollars in the Q3. Sales in euro based direct markets increased 4% driven by growth throughout Continental Europe, mainly due to increased sales of WD-forty Specialist. Sales in our pound based direct markets increased by 8% driven by strong sales of maintenance products.
Our EMEA direct markets accounted for 64% of the region's sales. The remaining 36% of EMEA's sales during the quarter were generated by our distributor markets. Distributor market sales increased 16% in U. S. Dollars in the 3rd quarter, primarily due to higher sales of WD-forty multi use product in Eastern Europe, particularly in Russia, as a result of more stable market conditions in the region.
We would like to remind investors that political and economic instability in the region makes it difficult for us to predict what level of sales we'll have in this market in the future. If we now could, we'll go down to Asia Pac. Consolidated net sales in Asia Pacific, which includes Australia, China and other countries in the region, increased to $14,700,000 in the 3rd quarter, up 8% from last year. Although changes in foreign currency exchange rates did not have a material impact on sales, fluctuations in foreign currency exchange rates impacted sales results in both China and Australia. In Australia, net sales in U.
S. Dollars were $4,500,000 in the 3rd quarter, 4% compared to last year. Changes in foreign currency exchange rates had a favorable impact on these results. In the function in its functional currency, the Australian dollar, sales were up 1% in the quarter, primarily due to continued growth of the base business. In China, net sales in U.
S. Dollars were $3,600,000 in the 3rd quarter, up 6% compared to last year. Changes in foreign currency exchange rates had a negative impact on these results. In its functional currency, the Chinese RMB sales were up 12% in the quarter. The growth in China was primarily due to new distribution and continued growth in sales in our largest customers in the region.
We continue to remain optimistic about the long term opportunities in China. However, we expect a lot of volatility along the way due to the timing of promotional programs, the building of distribution, shifting economic conditions and very industrial activities. In our Asian distributor markets, net sales were $6,700,000 for the quarter, up 12% compared to last year. The increase in sales was primarily driven by the timing of customer orders and a high level of promotional activities for WD-forty multiuse product, particularly in Indonesia, the Philippines and Taiwan. Our Asian distributor markets are not impacted by currency since we sell our products in U.
S. Dollars. I'll take a pause now and turn it over to Jay and ask him to review the financials.
Thanks, Gary. First, let's review our fifty fivethirtytwenty five business model, the long term targets we use to guide our business. As you may recall, the 55 represents gross margin, which we target to be at 55% of net sales. The 30 represents our cost of doing business, which is our total operating expenses excluding depreciation and amortization. Our target is to be at 30% of net sales and that leaves us finally with the 25% which represents EBITDA.
First, the 55% are gross margin. In the Q3, our gross margin was 55.3% compared to 56.8% in the Q3 of last year. Net changes in major input costs, which include petroleum based specialty chemicals and aerosol cans, negatively impacted our gross margin by 180 basis points in the current quarter, primarily due to the increased costs associated with petroleum based products. As you know, crude oil is one of the primary feedstocks of our petroleum based specialty chemicals. This impact is even more pronounced in our EMEA segment, where costs of petroleum based specialty chemicals are sourced in pound sterling, yet the underlying inputs are denominated in U.
S. Dollars. The overall strengthening of the U. S. Dollar against the pound sterling from period to period resulted in a significant increase in cost of goods in pound sterling.
Sales mix and other miscellaneous costs also negatively impacted our gross margin by 50 basis points, primarily due to product shifts in the Americas. Advertising, promotional and other discounts increased compared to last year in our Americas segments and negatively impacted our gross margin by 20 basis points. The gross margin was also negatively impacted by 10 basis points due to higher warehousing and inbound freight costs, primarily in the Americas and Asia Pacific. These negative impacts to gross margin were partially offset by changes in foreign currency exchange rates, which positively impacted our margin by 100 basis points. This is because in EMEA, our cost of goods are primarily sourced in pound sterling, 45% of our revenues are generated in euros with 25% in U.
S. Dollars and only the remaining 30% are generated in pound sterling. The combined effect of the strengthening of both the euro and the U. S. Dollar against the pound sterling caused revenues in total to be more in pound sterling thus improving our gross margin.
The gross margin was also positively impacted by 10 basis points due to selected price increases in which were implemented in our EMEA segment over the last 12 months. As a reminder, our gross margin target of 55% is not contingent on oil staying at any particular price point. We cannot control global market dynamics such as the price of crude oil or fluctuating currencies, but we can and are continuing to be focused and deliberate in managing the rest of our business so that we can maintain gross margin at a level close to our target 55% over the long term. And that completes our discussion on gross margin. Now we'll address the 30 or our cost of doing business.
In the Q3, our cost of doing business declined to 33%, down from 36% last year. This decline is primarily due to lower employee related costs along with lower A and P investments as well as the increased leverage gained by higher reported revenues compared to the prior year period. While our target is to have our cost of doing business at 30% of net sales, we plan to continue to make thoughtful and deliberate investments in support of our 5th strategic initiative that of operational excellence and to support the long term growth objectives of our business. And this includes investments in quality assurance, regulatory compliance and intellectual property protection in order to safeguard the blue and yellow can with a little red top. We can we expect to move closer to our long term target of 30 over time as revenues grow.
For the Q3, 75% of our cost of business came from 3 areas: our people costs, the investments we make in our tribe the investments we make in marketing, advertising and promotion As a percentage of sales, our A and P investment was 5.5% in the 3rd quarter compared to 6.4% in the prior year period. And finally freight costs, the cost to get our products to our customers. And that brings us to EBITDA, the last of our 50five-thirty-twenty five measures. EBITDA was 23% of net sales in the 3rd quarter compared to 20% last year. Now as we completed our discussion of the 50fivethirtytwenty 5 business model, I'll go on and discuss a couple of other items worth noting.
Other income and expense changed by $1,100,000 from quarter to quarter, primarily due to foreign currency exchange gains and losses. We recorded foreign currency exchange gains of less than $100,000 in the Q3 this year. This compares to $800,000 in foreign currency exchange losses that we experienced last year. The change is primarily due to the relative movement of foreign currency exchange rates and the fluctuation of non functional currency balance sheet accounts. The provision for income taxes was 28.8 percent in the 3rd quarter compared to 28.1% last year.
The increase was primarily driven by a slight shift of expected annual earnings generated between the U. S. And foreign operations year over year. Net income for the Q3 was $14,400,000 versus $12,700,000 in the prior year. Changes in foreign currency exchange rates had an unfavorable impact on the translation of our consolidated results.
On a constant currency basis, net income would have been $15,100,000 in the quarter. Diluted earnings per common share were $1.02 in the 3rd quarter compared to $0.88 for the same period last year. Diluted weighted average shares outstanding decreased to 14,100,000 shares from 14,300,000 shares a year ago. Now a word about capital allocation. Our capital allocation strategy includes a comprehensive approach to balance investing in long term growth while providing strong returns for our stockholders.
We target our maintenance CapEx of between 1% 2% of net sales And as Gary mentioned earlier on the call, in addition to our maintenance CapEx in the current year, we're making an investment of approximately $18,500,000 to buy and renovate a new office building to house our San Diego based tribe members. In addition, we continue to return capital to our shareholders through regular dividends and share repurchases. On June 20, our Board of Directors approved a regular quarterly cash dividend of $0.49 per share payable July 31 to stockholders of record at the close of business on July 21st. Based on today's closing price of $110.30 the annualized dividend yield is 1.8%. So far this fiscal year, we've repurchased approximately 245,000 shares of our stock at a total cost of $26,200,000 under their current $75,000,000 share repurchase plan, which had been approved by the Board of Directors in June of 2016.
As of the end of the third quarter, we had $48,800,000 remaining under the plan. With that, let's turn to guidance. We've lowered our fiscal year 2017 revenue guidance. However, our remaining guidance remains unchanged. Net sales is projected to be flat to up 2% with net sales expected to be between $382,000,000 $388,000,000 Gross margin for the full year is expected to be above 56%.
Advertising promotion investment is projected to be below 6% with net income expected to be between $51,300,000
$52,300,000
Diluted earnings per share is expected to be between $3.64 3.71 based on 14,100,000 weighted average shares outstanding. As a reminder, this guidance doesn't include any future acquisitions or divestitures and assumes that currency rates and crude oil prices will remain close to current levels for the duration of 2017. That completes the financial overview. Now I'll turn it back to Gary.
Thanks, Jay. In closing, let's summarize what you did hear from us on the call today. You heard that we reported net sales of 98,200,000 dollars a new record for the company in the Q3. You heard that we reported diluted earnings per share of $1.02 another company record. You heard that globally maintenance product sales grew 3% in the 3rd quarter.
You heard that global sales of W-forty Specialist grew 30% this quarter and that we've had double digit growth of Specialist in all three trading blocks. You heard that foreign currency exchange rates continue to be a headwind and on a constant currency basis reduced our net sales by approximately $4,700,000 Additionally, you heard that this reduction in sales was significantly offset by $2,600,000 in transaction related impacts in EMEA due to the strengthening of the euro and the U. S. Dollar against the pound sterling. You heard that we are maintaining our net income and EPS guidance for fiscal year, but that we are lowering our revenue guidance.
So historically, in closing today, which is the last conference call we'll do from the facilities here Cuddihy Place, I'd like to share with you a quote from Simon Sinek. It's better to go slow in the right direction than to go fast in the wrong direction. Thank you for joining us today, and we would be pleased to now open the conference call for your questions. Thank you.
Our first question comes from the line of Daniel Rizzo from Jefferies. Please proceed with your question.
Hey, everyone. How are you doing?
Good, Daniel.
Very good.
Thank you. You just provide some color on the you mentioned inventory management in the U. S. I was wondering if that's going to persist potentially until Q3. And also I was looking for color on that.
You said something about shifting buying patterns. I just kind of wanted to just kind of what that means?
Sure. Thanks, Daniel. In the Q3 of last year, we had a number of our customers in the U. S. That helped us in the completion of our 50 state VOC transfer to get to the full U.
S. Fifty state compliance. So there were revenues in the Q3 of last year that included those purchases that aren't there this year. So those are the shifting buying patterns that we see. So I would not suggest to you that this is a systemic issue.
It's more of an event than a trend.
Okay. And then and so that's what you're talking about with the inventory overhang as well then?
Correct.
Okay. And then it just seemed like also that the Americas EBIT was up significantly, I don't know, sequentially year over year versus everything else. I was wondering, I mean, given some of the inventory destocking issues and some of the near term headwinds you had, why that is? I just was wondering why you've been so well with that?
Well, a couple of reasons. Number 1 is that our operating expenses, the leverage was greater in the quarter than before. So I think that's number 1. Number 2 is that the U. S.
Is not going to maximize its GRP, which is our growth reward program this year, which is how our a number of our pay for performance elements are established for our U. S.-based employees. So some of our employee costs accruals are down for the year. But I think that given the state of the business, I think it's because the tribe are managing through different waters pretty well. If you look overall, our household products were down 5% and they continue to decline as part of our total revenue, which we've been talking about for many years now.
Our core business is growing. And if you were to take out the currency fluctuations, our core business is growing at a reasonable rate. So there's a lot of noise, I think, in the reporting and there has been particularly because of currency for a while, but our core business is doing well. And we'll continue to work towards our long term goals, which we're still very comfortable with and intend on delivering on over time.
All right. Cool. Thank you for the color.
You're welcome.
Ladies and gentlemen, that does conclude our allotted time for questions. We thank you for your participation on today's conference call and ask that you please disconnect your line.