Jan 7, 2016
Executives
Wendy Kelley – Director, IR and Corporate Communications Garry Ridge – President and Chief Executive Officer Jay Rembolt - VP and Chief Financial Officer
Analysts
Linda Weiser – B. Riley Liam Burke – Wunderlich Rosemarie Morbelli – Gabelli & Company
Operator
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. [Operator Instructions] I'd now like to turn the presentation over to the host for today's call, Ms.
Wendy Kelley, Director Investor Relations and Corporate Communications. Please proceed.
Wendy Kelley
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 earning's presentation, earning's press release and Form 10-Q for the period ending November 30, 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 of today's date, January 7, 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.
Garry Ridge
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. Its' 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. Everyday our tried members wake up with one thing on their minds, take the blue and yellow can with a little red top to more places for more people that 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 a 176 countries and territories world-wide, in 62 different trade channels. Strategic initiative number two is to grow the Specialist product line.
Once we build brand equity and establish 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 a $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 our 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 GT-85 brands as well as the WD-45 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 safe guarding the blue and yellow can with the little red top.
That completes the update on our strategic initiatives, so 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 U.S. dollar.
Therefore, 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 reduce their 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 U.S.
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.
Now 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 maintain – maintenance – sales and 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 excludes 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 in 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 upon 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 marketing distributors. Reported consolidated sales in our EMEA direct markets which accounted for 61% of the region 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 base direct markets, sales increased by 13% in the quarter.
In Euro base 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 distributed markets which accounted for 39% of the EMEA sale during the quarter. Distributed 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 have 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 remain 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 opportunity in these regions, 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 Asia distributed 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. And now I'd love to turn over to Jay who will continue with the review of the financials.
Jay Rembolt
Thanks, Garry, and Happy New Year to everyone else on the call today. First, let's review our newly revised 55/30/25 rule.
That’s the measure we used 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 finally, the 25 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%. First, the 55% or our gross margin.
In the first quarter, our gross margin was 55.6% compared to the 51.6% last year. Gross was positively impacted by 260 basis points from major input cost changes, and a 160 basis points from various other items.
These gross margin improvements were partially offset by changing foreign currency exchange rates which adversely impacted our gross margin by 20 basis points. Let's start with the major input cost which include petroleum-based specialty chemicals and aerosol cans.
Crude oil is one of the primary feed stocks of our petroleum-based specialty chemicals. And 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.
Though it takes time for the changes in the cost of crude oil to make its way into our supply chain and multiply into our financials, we're now seeing more of the benefit of continued lower crude oil cost in our gross margin. It is impossible to predict when crude oil – what crude oil will cost tomorrow or next year.
The 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. However, 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 and currencies, but we will continue to be focused and delivered 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 were implemented in the last 12 months had an 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 the 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 cost, 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.
But 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 pound sterling, while approximately 45% of our revenues are generated in Euros, 30% in pound sterling and the remaining 25% in U.S. dollars.
The Euro deterioration against the pound more than offset any benefit from the strengthening U.S. dollar.
As a result, revenues in total were worth less than pound sterling, thus decrease in our gross margin. Now, we'll look at the 30, our cost of doing business.
In the first quarter, our cost of doing business was approximately 35% compared to the 34% last year. In the first quarter the reported revenue decline as well as increased earned employee incentive accruals negatively affect that 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. And this includes investments in quality assurance, regulatory compliance and intellectual property protection in order to safe guard the blue and yellow can with the little red top.
We expect to get closer to our target of 30 overtime 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 and the freight cost, the cost to get our products to our customers.
And that three exist 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 of 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 at an unfavorable impact of $500,000 on the translation of our consolidated results this quarter. Diluted earnings for common share were $0.83 in the quarter compared to $0.73 for the same period last year.
And diluted weighted average shares outstanding decreased to 14.5 million shares from the 14.7 million shares in the prior year quarter. Now a word about capital allocation.
We continue to focus on returning capital to our share holders 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. And 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 because 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 30, we had $51.2 million remaining under the plan. Over the last five years, the company has repurchased over a $185 million in shares.
So 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% to 7% of net sales. And 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 in crude oil prices will remain close to current levels.
Well that completes the financial overview. Now back to Garry.
Garry Ridge
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.
So 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 their 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 of 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 way I think positive impacts in their 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.
You heard that we are raising our gross margin and net income and EPS guidance for our fiscal year 2016. So today, instead of a quote, I've 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.
And we'll now turn it back to the operator.
Operator
[Operator Instructions] Our first question comes from the line of Linda Bolton Weiser with B. Riley.
Please proceed with your question.
Linda Weiser
Hi guys, Happy New Year.
Garry Ridge
Happy New Year, Linda.
Linda Weiser
So, I guess my first question is, I mean obviously you're finally kind of showing the big benefit of the lower petroleum-based input cost in your gross margin. And it looks like to me you are 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 I mean, how do you make up for the fact that the SG&A additions, I assume it's like people, you can't really reverse that.
So I guess I'm a little concerned that you're kind of adding lot of cost structure because you do have this tailwind but later on when it reverses you can't reverse the cost side. So can you kind of explain that a little bit?
Garry Ridge
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. So that is having an impact on us.
Secondly, the investments we are making in fact are not in people and as Jay shared with you, they are around things like quality assurance, regulatory compliance, intellectual property investment. So, we are very focused and we are very, very determined around our goal of 55%, as you saw in the quarter we are above that.
Certainly about 2.6% of that 55% is around the benefit of oil. So 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.
So, well you know what we are and you know how we think about our cost 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.
So I appreciate your concern but I wouldn’t be too concerned.
Linda Weiser
Okay. And can I also ask just about the sales growth.
I think you acknowledge 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, year and half. And 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.
And why is that? I mean is it competition, is it failure to be able - or inability to price more or why do you think it's not – I mean the economies are still relatively strong around the world.
So what do you think is going on?
Garry Ridge
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, so certainly they are down, they were flat, globally down $1.7 million.
If you go to Europe, where we're seeing growth in the domestic markets, direct markets in the quarter of about 13% that got wiped out by exchange rates. Where the softness is, we are still seeing a softness in Eastern Europe around the distributor markets and then we've got the normal timing thing that’s going on.
I would have liked to seen a little bit of volume globally in the first quarter, mainly stuffs moved around. So I'm not really concerned about it, we still believe in our 4% to 6% for the year ex-currency, that’s what were the update was in the guidance.
So when you're operating in a 176 countries and 62 trade channels around the world you're going to have things move around from time-to-time, but our underlying business in our maintenance products area is very, very solid. And we continue to move along to our goal to double our Multi-Use Product business and to take Specialist to a $125 million over time.
Linda Weiser
Okay. And of that, like a half a point roughly of sales growth excluding all the currency, can you break that down between volume and price in the quarter?
Garry Ridge
Well, there wasn’t really much price at all.
Linda Weiser
Okay.
Garry Ridge
Because the only price rise we had was a little bit of a GT85 in the UK, this is volume, it's not price.
Linda Weiser
Okay. And then can you just talk about in terms of the 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?
Garry Ridge
Yeah, thanks for the question. We – the initial point of sale results for the 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 products in the United States to Home Depot in August, AutoZone in September and Lowe’s in October. We will ship the rest of the EZ-REACH product to Wal-Mart this month and we have several additional customers we expect to ship in the second quarter of 2016.
And by the end of the second quarter of fiscal year, we should have EZ-REACH opened up to all U.S. customers and be able to fill the orders for the products for all of U.S.
customers.
Linda Weiser
Okay. And then do you think that means in FY17 you might be able to start selling it abroad?
Garry Ridge
Certainly we believe that EZ-REACH has global potential. And once we've 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 and I know that our friends in the UK and in Germany are very anxious to get it, and we would think that that would be the first sort of areas we'll go.
Linda Weiser
Okay. And I mean are you able to say how much it contributed to U.S.
growth, I mean is it measurable, is it even half a percent or is it just too small?
Garry Ridge
We do know, but we're not sharing that at this time.
Linda Weiser
Okay. And then you mentioned the Specialist growth in the quarter…
Garry Ridge
Yeah.
Linda Weiser
I think it was a single digit number, is that…
Garry Ridge
2.3%.
Linda Weiser
Okay. That seems a little low, is that including FX?
Garry Ridge
Yes, well that’s net of the FX. So we had the impact of FX, brought it down to 2.3%.
Linda Weiser
Do you know what it was prior to the impact of FX?
Garry Ridge
I don’t have that, I don’t think we've disclosed that, but I guess if you think FX was $4 million and I know it's probably 5% to 6% more, I'm not sure, to take FX over the [total] [ph].
Linda Weiser
Okay.
Garry Ridge
But you know, the thing that’s going to happen with this Linda, and everybody listening to this should hear this, we're not going to – you cannot, you can but there is no value in poking at us quarter-to-quarter about Specialist growth. It's going to like China and everything else.
We did – we shared that our sales last year are about $20 million so we took it from zero to 20 from launch and it's going to bubble around over time as we take 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 is nothing but green lights around it and it's just a matter of us now being deliberate and solid in our execution around it.
Linda Weiser
Okay. Maybe if I could just turn to a couple of questions for Jay, just on the tax rate in the quarter 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?
Jay Rembolt
We had some changes in activities at the end of last year which suggest that we should – we're seeing it'd be under 30%. So 29% - slightly above 29%.
Linda Weiser
Okay. And then your operating cash flow was actually pretty strong in the quarter.
I know it probably moves around by quarter, but was there was anything unusual, it looks like the accounts receivable and – or accounts payable on accrued liabilities line maybe was very positive. Is that unusual or what's going on there?
Jay Rembolt
No, I mean I think that it really has a lot to do with just the timing of sales in the quarter. You'll see a variety of activities on the AR line that will change.
There is really nothing significant that’s been happening, in some ways, we did have an increase in inventories over the period which was an offset. So, but nothing of note.
Linda Weiser
Okay. And then finally, can you just remind me, I know you mentioned this before but like if you took the EMEA distributor markets, what percent of Russia, Ukraine of that, is it like half or?
Garry Ridge
No.
Jay Rembolt
It's a good size, but it's not quite half.
Garry Ridge
No. It was about $10 million in one year I think, last year.
But Jay…
Jay Rembolt
Somewhere – it's about 40 – 35%, 40%...
Garry Ridge
40%, okay.
Jay Rembolt
Is when it is tracking.
Garry Ridge
And 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, so we had a very – we haven't – we're not kind of lapping the decline yet. The decline in Russia started in the second and third quarter.
So we had a pretty reasonable first quarter last year in the distributor markets in Europe because Russia hadn't started the impact that really yet.
Linda Weiser
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, but I want to – 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.
Jay Rembolt
No, it won't, only if you compare – if we look at it now, if we looked it's last quarter four against quarter one it's stabilized, but if you look at quarter one against quarter one it doesn’t look good. So 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.
Garry Ridge
And some of that comment was just the general market condition – the general economic condition of Russia, just a little bit – still a little bit unstable.
Linda Weiser
Yeah, okay, it does make sense.
Garry Ridge
Because of the dramatic depreciation of the…
Jay Rembolt
I could sarcastically say I'll push the random excuse generator here and we'll talk about Asia because we think that the bomb went off in Korea and we'll push another – the world is full of events and we just got to manage through these events.
Linda Weiser
Right, yeah. Okay, well I guess that’s pretty good for me now.
Thank you so much for answering all the questions.
Jay Rembolt
You're welcome.
Garry Ridge
Bye, Linda.
Operator
Our next question comes from the line of Liam Burke with Wunderlich. Please proceed with your question.
Liam Burke
Thank you, good afternoon Garry, good afternoon Jay.
Jay Rembolt
Good afternoon, Liam.
Garry Ridge
Hi Liam.
Liam Burke
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?
Garry Ridge
Well, we don’t really have any non-specialist brand extensions other than GT85.
Liam Burke
Right.
Garry Ridge
Or 3 and 1. And 3 and 1 for example, we've completed the extension of the product range that you'll now see in distribution places like lows.
The brand extensions are really coming in specialists. We're just about to ship I think our new specialist spray and stick gel I think that goes into market right now as we speak.
There is 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 as specialist plan in Asia Pacific that'll come during the year.
So it'll be a progressive thing but other than those 3 and 1s pretty well set now and some work on GT85, there is nothing outside of that. We're really concentrating on the call.
Liam Burke
Okay. And 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?
Jay Rembolt
Yeah, we're in the $6 million to $7 million.
Liam Burke
$6 million to $7 million, okay. Thanks, Jay.
Jay Rembolt
You're welcome.
Operator
Our next question comes from the line of Rosemarie Morbelli with Gabelli & Company. Please proceed with your question.
Rosemarie Morbelli
Good afternoon, everyone.
Garry Ridge
Hello.
Rosemarie Morbelli
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?
Garry Ridge
Wow! What a wide question, I guess it depends where they work.
If they're a sales person, they're going to start contributing pretty quickly, and I don’t know – the thing that we measure is revenue per employee. And we have a target of a $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 to towards our $1 million this year. But our horizon Jay, what's your…
Jay Rembolt
Well, the $1 million per employee is kind of our interim target but really look at a $1 million to $1.50 for kind of our horizon target.
Garry Ridge
Yeah, as we grow revenue will see that. So I don’t know I could tell you exactly whether it depend where they go, but certainly our revenue per employee ratio is enviable.
Rosemarie Morbelli
Yeah, so there is quite a high number actually. And what I was wondering is that in order to maintain your margin targets, do you get there when an employee is that at $1 million in revenues or does it take longer than that, that’s one point two, they kind of cover all of the cost going into training them and so on?
Garry Ridge
Well 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 a $100 million revenue, so we'll gain the leverage there but again I think the point is that our revenue per employee at somewhere between $900,000 and a $1 million is something that we're focused for as many years as I've been here.
Rosemarie Morbelli
Okay, thank you, that is helpful. And 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 maybe wrong, but I'm guessing that the profitability of your direct sales is higher and you'll have more control.
Any thought of going direct in the larger fashion in the areas where you are currently pushing the distribution?
Garry Ridge
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 converted a number of markets from distributor markets to direct markets where we believe that a higher level of investment and focus will bring growth – more meaningful growth overtime. We're not planning at the moment to convert any other distributed 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.
Rosemarie Morbelli
Okay, so it is if I understood properly it is more because you can invest and then growth with that particular market faster.
Garry Ridge
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 would be – was a good opportunity for us. Now, it would be unreasonable for us to ask a distributor who is doing $2 million in sales to employee 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 at the time.
Rosemarie Morbelli
And you are not concerned in China of losing your intellectual property?
Garry Ridge
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. So, and 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 just – it's part of the – the price should pay to be a global brand that people love.
Rosemarie Morbelli
Okay, great. Thank you very much, and I appreciate it.
Garry Ridge
Thank you.
Operator
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.
Thank you.