Ladies and gentlemen, thank you for standing by. Good day, and welcome to the WD-40 Company first fiscal quarter 2016 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. To register to ask a question at any time during this call, please press star one on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If at any time during the conference you need to reach an operator, please press star zero on your telephone keypad. I would now like to turn the presentation over to your host for today's call, Ms. Wendy Kelley, 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-40 Company's President and Chief Executive Officer, Garry Ridge, and Vice President and Chief Financial Officer, Jay Rembolt. 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 November 30th, 2015. These documents are available on our investor relations website at investor.wd40company.com. A replay and transcript of today's webcast will also be made available at that location shortly after this call. On today's call, we will discuss certain non-GAAP measures. The descriptions 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, January 7th, 2016. 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 Garry.
Thank you, Wendy, and good afternoon, everyone, and thanks for joining us. Today, we reported net sales of $92.5 million for the first fiscal quarter of 2016, which was a decrease of 4% from Q1 of last fiscal year. Net income for the first quarter was $12.1 million compared to $10.8 million in Q1 last fiscal year, an increase of 12% year-over-year. Diluted earnings per share for the first quarter were $0.83 compared to $0.73 for the same period last fiscal year. As we review our results for this quarter, we will be doing so under the umbrella of our 55:30:25 rule and our strategic initiatives. While global sales continue to be negatively impacted by changing foreign currency exchange rates, our gross margin has increased to nearly 56%, which has resulted in record net income and diluted earnings per share for the first quarter.
Before we dive into the financials, I'd like to take a few moments to update you on our strategic initiatives. It's a new year and a great time to get off to a fresh start. In this world, we only have a few things. We have time, we have talent, we have treasure, and we have technology. None are abundant, so it's really important for us as an organization to focus on where we see the biggest opportunities. I'd like to take just a few minutes today to remind you of what those opportunities are for WD-40 Company and what our long-term targets look like. Strategic initiative number one is to grow WD-40 Multi-Use Product.
Every day, our tribe members wake up with one thing on their minds, take the blue and yellow can with the little red top to more places for more people who will find more uses more frequently. We ended fiscal year 2015 with global sales of WD-40 Multi-Use Product of $292 million. Our long-term target under this initiative is to double our sales of WD-40 Multi-Use Product over the next 10 years. That's a target of approximately $600 million. How? By doing exactly the same thing we've been doing for the last 10 years. We're going to make more end users aware, and we're going to make it easier for them to buy in 176 countries and territories worldwide in 62 different trade channels. Strategic initiative number two is to grow the Specialist product line.
Once we've built brand 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-40 Specialist. We believe we can grow WD-40 Specialist to approximately $125 million in revenue over the next 10 years. In the first quarter, sales of WD-40 Specialist, they were $4.3 million, which represents a 2% increase over the first quarter of last year. We are optimistic about the long-term opportunities of WD-40 Specialist, as we've shared. However, there will be some volatility in sales levels along the way due to the timing of promotional programs, the building of distribution, and various other factors that come normally with building out a new product line. Strategic initiative number three is broaden the product and revenue base.
Our goal under this initiative is to leverage the recognized strengths of WD-40 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 the WD-40 BIKE product line. In the first quarter, we continue to make great progress with these products and are excited about their contributions to our maintenance product revenue in the future. Strategic initiative number four is to attract, develop, and retain outstanding tribe members. Our goal under this initiative is to attract, develop, and retain talented tribe members. At the end of the first quarter, we had a total of 436 tribe members globally. I get up every morning and I think about two things, our people and our brand. Bottom line, if we want to maximize the productivity and profitability, we have to engage our employees.
Our long-term target under this initiative is to grow employee engagement to greater than 95%. Strategic initiative number five is operational excellence. We've refreshed this initiative slightly to reflect our operational objectives. It encompasses continuous improvement by optimizing resources, systems, and processes, as well as rigorous commitment to quality assurance, regulatory compliance, and intellectual property protection. We will measure ourselves against this operational excellence initiative by executing against our 55:30:25 business model, and by making improvements to processes and systems while safeguarding the blue and yellow can with the little red top. That completes the update on our strategic initiatives. Let's move on to the details of our first quarter results, starting with sales. Consolidated net sales were $92.5 million in the first quarter, down $3.8 million versus last year. In the first quarter, we generated approximately 35% of our sales in currencies other than the US dollar.
Changing foreign currency exchange rates continue to be a significant headwind for us. If we were to remove all foreign currency exchange impact, our consolidated revenue would have been $96.8 million, up slightly over the first quarter of last year. When you take both translation and transaction exposure into consideration, changes in foreign currency exchange rates reduced our total net sales by around $4.3 million in the first quarter. Consolidated net sales were reduced by about $3.7 million due to the impact of the strengthening of the US dollar against the functional currencies of our subsidiaries. This is what we refer to as translational-related exposure or constant currency, and it impacts reported results in Canada, Australia, China, and the EMEA segment. In addition, consolidated net sales were reduced by about $600,000, primarily due to the weakening of the euro against the pound sterling.
This is what we refer to as transaction-related exposure, and it only impacts reported results in our EMEA segment. Let's take a closer look at what's happening in the individual segments. We'll start, of course, with the Americas. Consolidated net sales in the Americas, which includes the United States, Latin America, and Canada, decreased to $44.4 million in the first quarter, down about 1% from last year. On a constant currency basis, sales in the Americas for the first quarter would have remained constant at $44.8 million when compared to the prior year. Sales of maintenance products increased about 1% in the Americas, primarily due to sales increases in the United States, driven by promotional activities and initial distribution of our new WD-40 EZ-REACH product. In total, maintenance product sales increased by about 4% in the U.S. during the first quarter.
This increase in the U.S. was primarily offset by declines in maintenance product sales in both Canada and Latin America. Maintenance product sales in Canada were down 15% during the quarter. These declines were due entirely to changes in foreign currency exchange rates. In its functional currency, the Canadian dollar, sales of maintenance products increased by 2%. Maintenance product sales in Latin America were down 6% in the quarter due to the timing of customer orders. We sell all our products in U.S. dollars in Latin America, so currency does not impact our reported results in the region. As a reminder, our maintenance products exclude home care and cleaning products.
We continue to consider our home care and cleaning products, particularly those in the U.S., as harvest brands that continue to generate meaningful contributions and cash flow, but are generally expected to become a smaller part of our business over time. Sales of our home care and cleaning products in the Americas decreased by about 7% from last year. Let's jump across the pond to EMEA. Consolidated net sales in EMEA, which includes Europe, the Middle East, Africa, and India, decreased to $32.1 million in the first quarter, down about 7% from last year. Primarily due to the negative impacts of foreign currency exchange headwinds, as well as the unstable market conditions in Russia. We sell into EMEA through a combination of direct operations as well as through marketing distributors.
Reported consolidated sales in our EMEA direct markets, which accounted for 61% of the region's sales, were flat for the quarter at $19.4 million. However, if we look at our results in local currencies, we saw the following growth in our direct markets. In pound sterling-based direct markets, sales increased by 13% in the quarter. In euro-based direct markets, sales also increased by 13% in the quarter. The sales growth in local transaction currencies was due to increased sales and new distribution, primarily in Italy, France, the United Kingdom, and the Germanics region. Now let's turn to our distributor markets, which accounted for 39% of EMEA sales during the quarter. Distributor market sales decreased 17% in the first quarter due to a 35% decrease in sales in Russia due to the unstable market conditions in the region.
Although market conditions have begun to stabilize, we are experiencing significant declines in the first quarter of this year compared to the first quarter of last year. Now let's move down to Asia Pacific. Consolidated net sales in Asia Pacific, which includes Australia, China, and other countries in the Asian region, decreased to $16 million in the first quarter, down about 6% from last year. Changes in foreign currency exchange rates had an unfavorable impact on sales. On a constant currency basis, sales in Asia Pacific would've been $17.2 million, an increase of 1%. In Australia, net sales in U.S. dollars were down 18% compared to last year. Changes in foreign currency exchange rates had a negative impact on these results. In its functional currency, the Australian dollar, sales were up 4% for the quarter. This growth was due to increased distribution and the continued growth of our maintenance products.
In China, net sales remained relatively constant compared to last year at $2.9 million. Changes in foreign currency exchange rates had a negative impact on China results. In its functional currency, the Chinese RMB, sales were up 3% for the quarter. The growth was due to increased distribution, particularly in southern China, and higher sales levels resulting from promotional activities. We are optimistic about our long-term opportunities in this region, although we expect a lot of volatility along the way due to the timing of promotional programs, the building of distribution, shifting economic patterns, and varying industrial activities. In our Asian distributor markets, net sales were down about 1% compared to last year. The decline in sales was driven primarily by the timing of customer orders. The Asian distributor markets are not impacted by currency since we sell our product in U.S. dollars to that region.
I'd love to turn over to Jay, who will continue with the review of the financials.
Thanks, Garry, Happy New Year to everyone else on the call today. Let's review our newly revised 55:30:25 rule. That's the measure 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. Finally, the 25 represents EBITDA. If our gross margin is 55% and our cost of business is at 30%, our gross margin will be 25%. Excuse me, our EBITDA will be 25%. The 55 or our gross margin. In the first quarter, our gross margin was 55.6% compared to the 51.6% last year.
Gross margin was positively impacted by 260 basis points from major input cost changes and 160 basis points from various other items. These gross margin improvements were partially offset by changing foreign currency exchange rates, which had adversely impacted our gross margin by 20 basis points. Let's start with the major input costs, which include petroleum-based specialty chemicals and aerosol cans. Crude oil is one of the primary feedstocks of our petroleum-based specialty chemicals, in the first quarter of last year, crude oil was priced at roughly $85 a barrel, which compares to roughly $45 a barrel during the first quarter of this year. It takes time for the changes in the cost of crude oil to make its way into our supply chain and ultimately into our financials, we're now seeing more of the benefit of continued lower crude oil costs in our gross margin.
It is impossible to predict what crude oil will cost tomorrow or next year. Falling oil prices have been a net positive for our gross margin, when the cost of oil goes up in the future, we'll most likely see pressure on gross margin. Our new long-term gross margin target of 55% is not contingent upon oil staying at any particular price point. We cannot control global market dynamics such as the price of crude oil or fluctuations in currencies. We will continue 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 of 55% over the long term. Let's talk briefly about some of those other items that impacted gross margin in the first quarter.
We had isolated price increases that we had implemented in the last 12 months, had a favorable impact on gross margin of 40 basis points. These were implemented in Asia Pacific in the third quarter and to a lesser extent in EMEA in the first quarter of this year. Gross margin was also positively impacted in the first quarter by 40 basis points due to lower distribution and inbound freight costs, particularly in the Americas segment. Lower promotional discounts had a net favorable impact on gross margin of 30 basis points. The cost of promotional activities such as sales incentive, trade promotions, and cash discounts that we give to our customers are recorded as a reduction to sales. The timing and magnitude of these activities can cause fluctuations in our gross margin period to period.
Gross margin was also positively impacted by 50 basis points due to sales mix changes and other miscellaneous costs. These improvements of gross margin were partially offset by changing foreign currency exchange rates. In the first quarter, foreign currency exchange rates adversely impacted the gross margin by 20 basis points. This is because in EMEA, our cost of goods are primarily sourced in GBP, while approximately 45% of our revenues are generated in EUR, 30% in GBP, and the remaining 25% in USD. The EUR deterioration against the GBP more than offset any benefit from the strengthening USD. As a result, revenues in total were worth less in GBP, thus decreasing our gross margin. A look at the 30, our cost of doing business. In the first quarter, our cost of doing business was approximately 35% compared to 34% last year.
In the first quarter, the reported revenue decline as well as increased earned employee incentive accruals negatively affected our cost of doing business percentage. While our target is to have our cost of doing business at 30% of net sales, we plan to continue to make investments to support our fifth strategic initiative, that is operational excellence. This includes investments in quality assurance, regulatory compliance, and intellectual property protection in order to safeguard the blue and yellow can with the little red top. We expect to get closer to our target of 30 over time as revenues continue to grow. For the first quarter, 77% of the cost of doing business came from three areas. People costs, or the investments we make in our tribe. The investments we make in marketing, advertising, and promotion. In the quarter, our A&P investment was 6.1% of revenue.
Freight costs, the cost to get our products to our customers. That brings us to EBITDA, the last of our 55:30:25 measures. EBITDA was 20% of net sales in the first quarter, compared to 18% in the first quarter last year. The increase was driven primarily by the improvements to gross margin. Net income for the first quarter was $12.1 million versus $10.8 million in the prior year. Changes in foreign currency exchange rates had an unfavorable impact of $500,000 on the translation of our consolidated results this quarter. Diluted earnings per common share were $0.83 in the quarter, compared to $0.73 for the same period last year. Diluted weighted average shares outstanding decreased to 14.5 million shares from the 14.7 million shares in the prior year quarter. A word about capital allocation.
We continue to focus on returning capital to our shareholders through regular dividends and share repurchases. On December 8, 2015, our board of directors declared a quarterly cash dividend of $0.42 per share, reflecting an increase of 11% over the previous quarter's dividend of $0.38 per share. With this rise, we have increased our dividend for five consecutive years for a total increase of 48% over that time period. Based on today's closing price of $94.58, the annualized dividend yield is 1.8%. During the first quarter, we repurchased a total of 92,000 shares of our stock at a cost of approximately $8 million under our share repurchase plan. Our latest share repurchase plan became effective March 1, 2015, and it provides authorization to acquire up to $75 million of the company's outstanding shares through the plan's expiration date in August 2016.
As of November 30th, we had $51.2 million remaining under the plan. Over the last five years, the company has repurchased over $185 million in shares. With that, let's turn to our fiscal year 2016 guidance. We've updated our guidance to take into account today's foreign currency headwinds and our crude oil price tailwinds. Assuming foreign currency exchange rates remain close to current levels, net sales growth is projected to be between 4% and 6%, or between $393 million and $401 million. Gross margin for the full year is expected to be above 54%, and advertising and promotion expenses are projected to be in the range of 6%-7% of net sales. Net income is projected to be between $47.5 million and $48.5 million. Diluted earnings per share expected to be between the range of $3.30 and $3.37, based on an estimated 14.4 million weighted average shares outstanding.
As a reminder, this guidance does not include any future acquisitions or divestitures and assumes that currency exchange rates and crude oil prices will remain close to current levels. That completes the financial overview. Now back to Garry.
Thanks, Jay. I had said it before, but it warrants repeating. I believe the vision-crushing ritual of the pressure of quarterly earnings is not the measure of success. A company must have a clear and compelling vision, a set of core values that drive the culture. Values must be clearly acted upon. A clear set of strategic drivers must determine how time, talent, treasure, and technology are invested to achieve the stated outcomes. In summary, what did you hear from us on this call today? You heard that foreign currency exchange rates continue to be a headwind and reduced our net sales results by approximately $4.3 million in the quarter. You heard that the U.S. is performing well and is in line with our expectations, with a 4% growth of maintenance product sales in the first quarter.
You heard that our EMEA direct markets continue to grow in their local transaction currencies by 13% in the quarter. You heard that falling crude oil prices continue to be a tailwind, and that we are seeing positive impacts in our gross margin. You heard that our net income and earnings per share both set new records in the first quarter. You heard that we increased our dividend by 11% last month, and that we have increased our dividend over the last five years. Today, instead of a quote, I thought I'd end the call in a different way. I'd like to share this thought with you. At WD-40 Company, every single one of us comes to work every day to do something we love.
We get to inspire people and to create positive, lasting memories. It's the most wonderful thing in the world. In fact, the fun part is trying to figure out all the different ways we can do that. Thank you for joining us on today's call, we'll now turn it back to the operator.
Ladies and gentlemen, if you would like to register a question, please press *1 on your telephone keypad. Please make sure your mute function is turned off to allow your signal to reach our equipment. If your question has been answered or you wish to withdraw your registration, please press the # key. One moment, please, for the first question. Our first question comes from the line of Linda Bolton-Weiser with B. Riley. Please proceed with your question.
Hi, guys. Happy New Year.
Happy New Year, Linda.
I guess my first question is, obviously, you're finally kind of showing the big benefit of the lower petroleum-based input costs in your gross margin, and it looks like to me you're reinvesting, as you mentioned, your SG&A ratio was a little bit higher than I would have thought. I guess my question is, when oil, if it ever does, kind of go back up, then your gross margin may come down some. How do you reverse, or how do you make up for the fact that the SG&A additions, I assume it's people, you can't really reverse that. I guess I'm a little concerned that you're kind of adding a lot of cost structure because you do have this tailwind, but later on when it reverses, you can't reverse the cost side. Can you kind of explain that a little bit?
Sure. Two things. The SG&A ratio to revenue is impacted by, one, the revenue, and currently our revenue rate, particularly because of exchange rates, is down. That is having an impact on it. Secondly, the investments we're making, in fact, are not in people, and as Jay shared with you, they're around things like quality assurance, regulatory compliance, intellectual property investment. We are very focused and we are very determined around our goal of 55%. As you saw in the quarter, we were above that. Certainly about 2.6% of that over 55% is around the benefit of oil. If you really think about it, our underlying gross margin against our goal of 55% is currently, if oil was $80, at about 53% or above. You know what we are, and you know how we think about our costs in this company.
We're not on some wild man's dream here of spending before we earn it. We will meet our goal of 55%, 30%, 25% over time, and we're very focused on doing that. I appreciate your concern, but I wouldn't be too concerned.
Okay. Can I also ask just about the sales growth? I think you acknowledged that it wasn't quite up to what you would have hoped and even excluding all the currency, and quite frankly, I think at least relative to my modeling work, it's been like that for the last year and a half. It's hard for me to really dissect. Is it the non-strategic home care piece, or is the maintenance products piece also a little bit below where you would like it to be? Why is that? Is it competition? Is it failure to be able or inability to price more? Why do you think it's not? The economies are still relatively strong around the world. What do you think is going on?
Well, in the U.S., our core business grew 4% in the quarter, and we're very delighted with that. The home care and cleaning products were down $1.7 million in the quarter. Certainly they are down. They were flat, globally down $1.7 million. If you go to Europe, we're seeing growth in the domestic markets, our direct markets in the quarter of about 13%. That got wiped out by exchange rates. Where the softness is, we are still seeing softness in Eastern Europe around the distributor markets. Then we've got the normal timing thing that's going on. I would have liked to seen a little better volume globally in the first quarter. Mainly stuff's moved around, so I'm not really concerned about it. We still believe in our 4%-6% for the year ex currency. That's what the updated was in the guidance.
When you're operating in 176 countries and 62 trade channels around the world, you're going to have things move around from time to time. Our underlying business in our maintenance products area is very solid, and we continue to move along to our goal to double our Multi-Use Product business and to take Specialist to $125 million over time.
Okay. Of that, half a point roughly of sales growth, excluding all the currency, can you break that down between volume and price in the quarter?
Well, there wasn't really much price at all.
Okay.
The only price rise we had was a little bit of GT85 in the U.K. This is volume. It's not price.
Can you just talk about in terms of the WD-40 EZ-REACH launch in the U.S., have you gotten more distribution since we talked about it last quarter, or how is that progressing exactly with the launch?
Yeah, thanks for the question. The initial point of sale results for the WD-40 EZ-REACH remain encouraging. They've actually exceeded our original assumptions. At this time, the product is only being distributed in the United States. We have not yet made the decision of when we will take it globally. We've shipped the product in the United States to The Home Depot in August, AutoZone in September, and Lowe's in October. We'll ship the rest of the WD-40 EZ-REACH product to Walmart this month, and we have several additional customers we expect to ship in the second quarter of 2016. By the end of the second quarter of fiscal year, we should have WD-40 EZ-REACH opened up to all U.S. customers and be able to fill the orders for the product for all of U.S. customers.
Okay. Do you think that means that in FY 2017 you might be able to start selling it abroad?
Certainly, we believe that EZ-REACH has global potential. Once we feel comfortable that we have production and any other bugs that we could find, not that we found any yet, we'll then take it to the more developed markets around the world. I know my friends in Australia are very anxious to get it, I know that our friends in the U.K. and in Germany are very anxious to get it. We would think that that would be the first sort of areas we'll go.
Okay. Are you able to say how much it contributed to U.S. growth? Is it measurable? Is it even 0.5%, or is it just too small?
We do know, but we're not sharing that at this time.
Okay. Then, you mentioned the Specialist growth in the quarter.
Yeah.
I think it was a single-digit number. Is that-
2.3
2.3%.
Okay. That seems a little low. Is that including FX?
Yes. Well, that's net of FX. We had the impact of FX, brought it down to 2.3.
Do you know what it was prior to the impact of FX?
I don't have that. I don't think we've disclosed that. I guess if you think FX was $4 million, and it's probably 5% or 6% more, I'm not sure. If you take FX over total.
Okay.
The thing that's going to happen with this, Linda, and everybody listening to this should hear this. You can, but there's no value in poking at us quarter-to-quarter about Specialist growth. It's going to be like China and everything else. We shared that our sales last year were about $20 million, so we took it from zero to 20 from launch. It's going to bubble around over time as we take it to new places. This is not an overnight sensation. This is a build the brand day by day, market by market. We are very happy with Specialist. We see $125 million with it over time. There's nothing but green lights around it, and it's just a matter of us now being deliberate and solid in our execution around it.
Okay. Maybe if I could just turn to a couple questions for Jay. Just on the tax rate in the quarter, it was a little bit lower than I had modeled in. Should I be modeling 30.5% for the year or something a little bit lower?
We had some changes in activities at the end of last year, which suggest that we're seeing it be under 30%.
Okay.
Slightly above 29%.
Your operating cash flow was actually pretty strong in the quarter. I know it probably moves around by quarter, but was there anything unusual? It looks like the accounts receivable and, or accounts payable and accrued liabilities line maybe was very positive. Is that unusual, or what's going on there?
No, I think that it really has a lot to do with just the timing of sales in a quarter. You'll see a variety of activities on the AR line that will change. There's really nothing significant that's been happening. In some ways, we did have an increase in inventories over the period, which was an offset. Nothing of note.
Okay. Finally, can you just remind me, I know you did mention this before, but if you took the EMEA distributor markets, what % is Russia, Ukraine of that? Is it like half or?
No.
It's a good size.
It's not quite half, no. It was about $10 million in one year, I think, last year. What did you have, Jay?
Somewhere, it's about 35%-40%.
30, okay
is when it is tracking.
The difference is that we hadn't yet, in the first quarter of last year, Linda, we hadn't yet seen the massive drop in Russia. We're not kind of lapping the decline yet. The decline in Russia started in the second and third quarter. We had a pretty reasonable first quarter last year in the distributor markets in Europe because Russia hadn't started to be impacted really yet.
Yeah, no, I realize that. I think it's probably going to be not until the second half of the fiscal that it may grow. I wonder, you said it was nearly stabilized, and that's not the same as stabilized, so it sounds like it's still going down or something.
No. Well, only if you compare. If we look at it now, if we looked at last quarter four against quarter one, it's stabilized. If you look at quarter one against quarter one, it doesn't look good. We are not seeing any further deterioration in the market in Russia subsequent quarters. If you look year-over-year, yes, there is a difference.
Some of that comment was just the general market condition, the general economic condition of Russia, just still a little bit unstable.
Yeah. Okay.
Of the dramatic depreciation of the-
I could sarcastically say I'll push the random excuse generator here, and we'll talk about Asia because we think the bomb went off in Korea, and we'll push another. The world is full of events, and we've just got to manage through these events.
Right. Yeah. Okay. Well, I guess that's pretty good for me now. Thank you so much for answering all the questions.
You're welcome. Bye, Linda.
Our next question comes from the line of Liam Burke with Wunderlich. Please proceed with your question.
Thank you. Good afternoon, Garry. Good afternoon, Jay.
Good afternoon, Liam.
Hey, Liam.
Garry, could you give us some sense on how some of the other non-Specialist brand extensions are doing, and then how the pipeline is for some of these new products?
Well, we don't really have any non-Specialist brand extensions other than GT85.
Right.
3-IN-ONE. In 3-IN-ONE, for example, we've completed the extension of the drip product range that you'll now see in distribution in places like Lowe's. The brand extensions are really coming in Specialist. We're just about to ship, I think, our new Specialist spray and stay gel. I think that goes into the market right now as we speak. There's a couple of Specialist lines going in this year. We're still working on the development of Specialist motorcycle for the U.S. We expect that later in the year. We've got some other line extensions of Specialist planned in Asia Pacific that'll come during the year. It'll be a progressive thing. Other than those, 3-IN-ONEs pretty well set now, and some work on GT85. There's nothing outside of that. We're really concentrating on the core.
Okay. Jay, CapEx was lower year-over-year. Could you give us a sense as to what the CapEx level will be this year, or do you have any additional projects?
Yeah, we're in the six to seven million.
$6 million-$7 million? Okay. Thanks, Jay.
You're welcome.
Our next question comes from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.
Good afternoon, everyone.
Hello.
I was just wondering how long it takes before a new hire contributes to the bottom line, as you are adding training and so on.
Wow, what a wide question. I guess it depends where they work. If they're a salesperson, they're going to start contributing pretty quickly. I don't know. The thing that we measure is revenue per employee. We have a target of $1 million of revenue per employee. We're about 890,000 at the end of last year. You'll see that start to track back towards our $1 million this year. Our horizon, Jay, what?
Well, the $1 million per employee is kind of our interim target, but really looking at $1.25 million-
Yes
For kind of our horizon target.
As we grow revenue, we'll see that. I don't know I could tell you exactly when. It would depend where they go. Certainly, our revenue per employee ratio is enviable.
That is quite a high number, actually. What I was wondering is that, in order to maintain your margin targets, did you get there when an employee is at a 1 million in revenues? Does it take longer than that? At 1.2, they kind of cover all of the costs going into training them and so on.
It depends. If you look at somewhere like China, we've got 53 employees in China with revenue of about 12.5 million in the year. We expect China to eventually be $100 million revenue, so we'll gain the leverage there. Again, I think the point is that our revenue per employee at somewhere between 900,000 and a million dollars is something that we've focused on for as many years as I've been here.
No, thank you. That is helpful. I was also wondering if it looks as though you are growing your direct sales faster than you are growing the distribution sales, and I am guessing, and I may be wrong, but I'm guessing that the profitability of your direct sales is higher and you have more control. Any thought of going direct in a larger fashion in the areas where you are currently pushing distribution?
In fact, our distribution business is more profitable than our direct business in some cases. It's not a profitability question, it's a matter of market potential and size. And we've converted a number of markets from distributor markets to direct markets where we believe that a higher level of investment and focus will bring more meaningful growth over time. We're not planning at the moment to convert any other distributor markets. We are pretty happy with most of our network, but we review that every year. But it's not really based on the profitability of the business in the distributor markets, which is very profitable.
Okay. If I understood properly, it is more because you can invest and then grow that particular market faster.
Correct. For example, in China, when we opened our business in China in a direct way seven years or eight years ago, we were doing a couple of million dollars in China. We knew that China long term was a good opportunity for us. Now, it would be unreasonable for us to ask a distributor who's doing $2 million in sales to employ 53 people to start to build a business. So we went in and opened the business, and then in that period of time, we've grown it to about a $12 million business, and we'll continue to grow it through the investment of people over time.
You are not concerned in China of losing your intellectual property?
I'm concerned about losing our intellectual property everywhere in the world. We're counterfeited in China, but that's just part of doing business. That's why we invest rigorously in intellectual property protection. What is counterfeited actually is the trade dress, not the product. We're not just counterfeited in China, we're counterfeited in Russia, we're counterfeited in Eastern Europe. It's an ongoing investment that we've done for many years, and it's part of the price you pay to be a global brand that people love.
Okay, great. Thank you very much. I appreciate it.
Thank you.
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