Oil-Dri Corporation of America (ODC) 2006 Q1 法說會逐字稿

Good morning. My name is Mary Ann, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Oil-Dri Corporation of America first-quarter conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Ronda Williams, Manager of Investor Relations. Ms. Williams, you may begin your conference.

Thank you, Mary Ann. Good morning, everyone. Welcome to our first-quarter earnings teleconference. Before we get started today, I would like to remind you that the discussion today will contain certain forward-looking statements regarding the Company's performance in future periods. Actual results in those periods may materially differ. In our press release and our SEC filings, we highlight a number of trends and uncertainties that may affect our performance -- our future performance. We urge you to review and consider those trends and uncertainties in evaluating the Company's comments and in evaluating any investment in our Oil-Dri stock. Thank you. Dan?

Thanks, Ronda, and welcome, everybody, to the first-quarter teleconference. Thanks for joining us at what I'm sure is not the most opportune time. It is sort of dictated by when we release our earnings, so it's right here before the Thanksgiving holiday.

We had what was really a very very positive quarter given all the dynamic activities that went on with Hurricane Katrina and Rita and the impact that had on not only shipping lanes but more importantly on fuel prices and our ability to get fuel and trucks. It was a very challenging quarter, and when Andy, our CFO, walks you through the financial details of it, you will see that there were a lot of reasons to be very proud of the quarter that was delivered. And then from a strategic standpoint, it was equally as positive. So we're very pleased with the first quarter and are very much looking forward to how the rest of the year unfolds.

So that I don't steal too much of Andy's thunder, let's turn it over to Andy and let me also introduce Charles Brissman, who is here our Vice President and General Counsel, as they will all be here to answer questions during the Q&A session. Andy?

I would summarize our first-quarter results as very good considering the very difficult operating environment. The cost of fuel used to manufacture our products increased by almost 100% compared with last year's first quarter. This increase equated to $0.30 per share drag on earnings in the quarter. Record quarterly sales of 47,789,000 were up 8% from last year's 44,121,000. Approximately one-half of this increase was due to higher selling prices.

Net income for the quarter was 1,028,000 with EPS of $0.18, down from last year's $0.22. The quarter benefited from a $0.05 per share non-recurring gain from the sale of water rights in Nevada. Gross profit as a percentage of sales for the quarter decreased to 17.6%, down 4.3 percentage points from 21.9% in last year's first quarter. This was partially offset by a 17% decrease in operating expenses, primarily due to lower advertising and selling expenses.

Starting this quarter, the Company is reporting two business segments, retail and wholesale group and the business to business group. The segments are divided by the type of customers they serve.

In looking at our balance sheet cash flow, I would summarize the ending balance sheet and the first-quarter cash flow as a continuation of good news in this area. Our operating cash flow for the quarter of 1,821,000 was up from 1,028,000 in last year's first quarter. The Company bought back 630,000 of common stock and paid out 559,000 of dividends. Accounts Receivable were only up 1% from last year, while sales in the quarter were up 8%, reflecting a continued improvement in DSO. Inventory was up slightly higher than the sales increase because of the higher commodity prices we were paying. Capital expenditure additions of 3,035,000 in the quarter were 1,238,000 in excess of depreciation and amortization. About one-third of the capital additions related to a land purchase to expand the Company's mineral resources. Cash and equivalents at 10/31/05 was 18,366,000, down slightly from last year's 18,941,000.

Back to you, Dan.

Thanks, Andy. Excellent. And I would say the one number I just want to reemphasize and maybe put it in a little different perspective is that fuel number. As Andy mentioned, it was a $0.30 per share drag on the quarter -- just the fuel to process our clay. Not the fuel that powered up our mining equipment or the fuel that then we used or had to pay an outside carrier to deliver our product. That all went through the roof as well.

Just isolating the processing fuel, if you think about it, last year in the first quarter we made $0.22 a share. This year in the first quarter we incurred an incremental $0.30 per share of processing fuel drag, so just pure apples-to-apples. Last year's first quarter instead of being a plus 22 would have been a negative 8, and we were able to deliver a positive 18. And that is why we perceive this to be not only a very positive quarter along our road towards achieving our long-term vision, but also even on the short-term stop along the way. We were obviously not thrilled with the gross margins, but we're very happy with our ability to pass through some price increases during the quarter, control costs, deliver some profit knowing that a lot of price increases are coming along the way here in the second quarter, and to the extent that fuel prices stabilize and they seem to have been stabilizing well north of anything we saw before the fiscal year started, but at least south of their peak during the hysteria of the hurricane. So we do feel very confident that we will be able to do better as the year unfolds. So we feel good about the quarter, and we feel good about the year.

Mary Ann, at this time what I would like to do is open it up to Q&A because I would rather than me get on my soapbox, I would rather answer and respond to the issues that are concerning our investors. And as always, I encourage everyone to ask basically one question. Obviously if there are tangents to that question, you can follow up with them. But then when you're going to ask a totally new question, please go to the end of the queue, which will allow other people to get their questions in and get on to their Thanksgiving holiday.

So, Mary Ann, can we open it up to Q&A?

(OPERATOR INSTRUCTIONS). Ethan Starr (ph), private investor.

The press release referred to strategic procurement activities underway. Can you please elaborate on that?

Yes, I mean I will take this question. As you know, because we put out a news release, we reorganized our entire procurement function about well, about nine months ago. It was February 1st that Brian Bancroft, our Chief Procurement Officer, joined us. And for a company our size and really growing from a much smaller business, we never really thought about procurement, which is much more strategic. We were much more into purchasing, which was a lot more tactical and reactive. And Brian has brought his wealth of experience. He has built a team around him of insiders from Oil-Dri and also brought in a couple of people from the outside who are now taking a very proactive strategic approach towards working with our vendors; identifying which ones are strategic to our business, meaning they are very critical -- the dollar spend is of a magnitude that they could impact the bottom line one way or the other depending on which way they go -- and are working through what he calls a six step process. So you can imagine the things that we buy in large quantities are things like packaging and freight and items in our cost of goods sold like that. We also have a lot of MRO purchases that we make, and Brian and his team have already shown their muscle in our capital expenditures. As you know, we are spending anywhere around 6 to $7 million a year on CapEx, and that spend has also come under his influence.

And so we are seeing a lot of benefits of it. Just like a lot of other companies but mostly bigger companies, he is also reaching out into Asia and finding ways to outsource some of our packaging needs and so forth. And it is really great that he has joined us at this time.

Robert Smith, The Center for Performance Investing.

Happy holidays to you guys. Can you tell me something about the land purchase?

Charlie, do you want to take that?

Where and why?

Bob, we purchased some acreage and mining rights around our Georgia facility. From our standpoint, this was sort of ordinary course, you know, reserve replenishment and upgrade. They are particularly appealing to us because they are around one of our largest facilities. In terms of the dollars and the potential additions to reserve, I would not call it material in a federal securities law sense, but we feel very good we were able to make good on the opportunities that materialized down there.

I'm not too clear as to how many people are on the call, so I will get back in the queue.

Zack Ripstein (ph), Petruro Capital Research (ph).

Two questions and one is not really my question because you guys did not go over it and you usually do, but if you could give us the tonnage metrics that you used to provide on the last call as I thought that was pretty helpful and interesting? And then on the CapEx, could you break out maintenance versus growth or is it all maintenance?

Okay. I will take the tonnage metrics, and then, Andy, I will turn it over to you for CapEx. Yes, you are right, and this is a metric that we watch very closely. And I will give you some historicals just to put in context what was achieved in the first quarter. Looking back we sold just under 250,000 tons in the quarter, which was on par with our prior four to five years. So again tonnage being relatively flat, although it was up over the prior year by about 3%.

The key metric is the net sales per ton just taking the sales we're able to achieve divided by the tonnage we shipped, and obviously that averages out to our net sales per ton. And we continued our very healthy trend, which was I will go back, let's say, to '02, it was $158 in the first quarter, 161 in '03, jump to 174 in '04, was at 187 last year in the first quarter in '05, and this year we delivered 196. And I think you will continue to see that number go. In fact, we should break 200 for the first time ever as the price increases and the fuel surcharges that are being put into place to just try and defray some of these fuel costs start to kick in. So I would think by the second quarter you will see another nice job. So that was again a continued positive trend. Does that answer your question on tonnage?

It does. You used to give cost, too. Can we just do the same division exercise?

I don't remember -- I don't have cost, so if we ever gave cost, someone else must have done it. Because the sheet I track is I track the sales per ton.

Okay. Maybe I'm confused. But anyway we can obviously come to our number, but thank you, that is a great run-through of the numbers.

Okay, great. And, Andy, will you cover the CapEx?

Sure. I would say, as I mentioned in terms of our CapEx additions, about a third of the CapEx related to the land purchase. Of the remaining, it was pretty close to half and half in terms of maintenance and ROI.

And is that number kind of was this a heavier -- it was heavier if you were to sort of linearly track CapEx. Obviously there is a land purchase in there, but is this sort of the high point of the year, midpoint of the year or about the same?

I think the CapEx for the rest of the year will probably be relatively close to what we are spending on depreciation and amortization.

Okay. So then this is anomalous? Right, okay. Thank you.

(OPERATOR INSTRUCTIONS). Blaine Marder, Loeb Partners Corporation.

First, a clarification then a question. Your restatement of segments, will you file an 8-K or give us some historical segment data as you are presenting them now?

Andy, I'm -- you are our segment guy.

Dan, this is Charlie. This is probably up my alley. (multiple speakers). Actually the way a segment change like this is implemented under FAS 131, we're not going to be restating anything. Beginning with the 10-Q for this quarter, the historical periods that are presented in our SEC periodic reports will be reclassified using our current Q segment, and so you will see those historical periods presented apples-to-apples using the two segments. So if you in this first quarter 10-Q, the historical period at 731 '05 will be represented.

Okay. So I will have to wait a year to have full kind of apples-to-apples comparisons year-over-year?

Yes.

Okay. I see what you are saying. Maybe it actually would be helpful from projection -- I mean that is what we do is we project -- it would be easier if you would give us some historical at least four quarters worth of data anyway. Something to think about.

And then the question is, Dan, you sound like gross margins sequentially for the rest of the year should be better. Where are you with the hedging policy now?

Hedging do you mean on fuels?

Yes.

We're where we always are, which is we lock in roughly 50% of our fuel needs during -- before the fiscal year starts so that we can accurately set our budget. So fortunately this year it turned out to be a good thing because fuel prices went up after that. But we really don't do it to beat the market. We just do it to take volatility out.

Okay. And the natural gas chart looks like it has come off and continues to kind of go down. Even today, it is down. But what is the timelag between I see the natural gas price in the market and where it would hit your results?

Well, we would be locking in -- I guess we are locked in half, so we have taken out half the volatility, but we're at the mercy for the other half. So I think we disclose this in a footnote that we're locked in around $8 in MMBtu for half of our needs, and I think gas I did not check it today, but maybe you just did, what is it at? Is it 11 or 12?

11.42.

There we go, 11.42. So half of our purchases are going to come in the 8 range from where we use gas, and the other half is going to come in at the spot price. So the program has worked in taking out the volatility. Now when we go into lock in for FY '07, wherever those futures are that is what that 50% will be locked in at. So I would say we are absorbing half of it this year, and we will absorb the other half next year. That is probably the best way to look at it.

Okay. Am I reading you correctly that you feel that gross margins sequentially should make some ground for the rest of the year?

Yes.

(OPERATOR INSTRUCTIONS). Robert Smith, The Center for Performance Investing.

Can you give me some color on the additives for the concrete?

Yes, it is actually not for concrete, though. It is -- well, I think -- have we told what the application is? Whatever, we will call it building materials. (multiple speakers). But yes, it is for building materials. And yes, there you go. And we are still in test. It is still very positive. I think I said this last call and I'm just hanging my head on it, it is obviously more hope than it is fact. I'm hoping that as methodical as they are in testing a new additive, that is how long they would be to ever want to replace it, and I guess you would want them to be this methodical. We're talking basic building materials, and if they just changed on a whim, that would not be good if they ever made a mistake. So they are obviously very slow to change, but they are very interested in what we have.

And interestingly enough, we did not bet on all this, but it's come out to play, the higher the fuel prices, the more interested they are in what we have to do because we are helping them with their process efficiencies, and cost control becomes more important to them. And the relative cost of our additives compared to what their inputs are, now the delta starts to shrink because they tend to use more fuel in their processing than we do. So --

Who are they?

Well, the brick manufacturers. The major brick manufacturers. We're in test with many of them.

Can you give me an idea as to how long the tests will run.

You know, I wish I knew. We went through one test with a major producer, and I was actually down at the plant on the day of the trial and spent a lot of time at the plant manager, and he was very excited with what he saw, liked the results from it, but then needs to now take it to the next level, and you try and mail them down but it is not so easy. I guess all I can do is just generally say we have continued to be very positive about it. We have that whole new division, and this is the cornerstone of that division and the general manager and his key salespeople are very bullish. It's just, is it going to have a material impact on '06? Probably not. Is there a chance that it could on '07? Yes, I would say there is a chance. You know, the farther out you go, the more bullish I would say.

Are we talking more in terms of a number of months as opposed to a number of years?

Because it is new and this is groundbreaking, there is no track record for me to say, oh, the last time one of these type of products was launched it took two years to adopt. There is nothing like that. So it is sort of uncharted water. So unfortunately your guess is as good as mine on how long the uptake would be. I think the only thing we can all hold our hope for is we don't get rejected. Once you're rejected, it is sort of the game is over. We have not been rejected. We have actual customers, smaller players, who are buying from us and daily using our product, which is great.

How many brick manufacturers are you speaking to?

That we're selling to?

That you are speaking with?

That we're speaking with, probably about 14. Yes.

Blaine Marder, Loeb Partners Corporation.

I'm looking at free cash flow in the working capital line. Last year for some reason your working capital hurt in terms of cash flow I think because of an increase in other current liabilities. And then again I think in the first quarter, where do you see it for the year? Do you see it being a positive contribution or a negative as far as working capital?

Andy, I'm going to let you take that one.

Your question related to current liabilities?

No, working capital as a whole if I was to add up your current assets and current liabilities. Last year it was a negative. This year do we swing back positive, or is this hard to tell at this point?

I think it is hard to tell, but yes, I think the trend that you described I think has been typical.

Okay. So in addition to your CapEx and your income, you would have a little bit of benefit from working capital?

Correct.

The only thing I would say that might counter that is you need working capital as your business grows, and we were very happy to deliver an 8% growth in our business in the first quarter. Frankly I see that continuing or growing as the year unfolds. So could we finish up higher than that? Yes, there is a chance, and so then that would consume potentially more inventory, more receivables, that type of thing.

Right understood. And the growth was about half-price and half volume you indicated?

Yes.

Yes.

Robert Smith, The Center for Performance Investing.

Can you give me an idea of the average cost of the unhedged natural gas in the first quarter?

Well, let me tell you this, this is the number I have that will I think knock your socks off. In the first quarter a year ago, we spent $2.4 million on fuel to process our clays, and in this year in the first quarter, we spent 4.8 million hard dollars.

Okay. I understand that, but I'm trying to get some angle on the movement in natural gas prices. In other words, it peaked at around 14, and it is now at 11 something. I was just wondering what your average cost of the gas was in the first quarter?

I have it on a per ton basis. I don't have it on an MMBtu. Andy, I don't know if you have that, but I don't.

Do you have an idea?

I don't.

I don't either. I think if you went back and took a look at what gas was during the quarter, I think you -- (multiple speakers). Yes, I think you could take the natural -- what is the price for natural gas over the last 90 days on it, and that is a noble thing.

All right, so I will do the exercise. Okay, thanks for the dividend boost. I think it's a smart move. I certainly welcome it. Congratulations on that.

Well, thank you, and as always, your input I take it to the board. So --

At one point you're going to say that we have increased the dividend for the 20th consecutive year.

That would be nice, and you know that my father and sisters would be as happy as you are.

Okay. Let me just circle back to the short fall in the first quarter, which was -- what you have to make it $0.09 or something? I assume you guys feel that you can do that over the remainder of the year. Is that accurate? I know you are not making any annual forecasts anymore, but I would like to have a feeling that you think you can do that?

You said make up $0.09?

Yes, wasn't it $0.09?

I'm not --

It was $0.05 from the land --

Okay. I just did not know where you were pinning your numbers on. You have already hit the nail on the head. We are not giving forward guidance. We really don't want to give forward guidance. But other than I think in terms of pennies per share and all that, I think what I have said is we continue to see that our business is strong, so the top line should be good. We are seeing the gas prices are leveling off, even coming down a little bit not versus pre-8/1, but at least versus post Katrina and Rita which is good news for us. We have incremental price increases. We have incremental business coming online.

So the second quarter hopefully I'm going to use my Safe Harbor, hopefully will be better than the first. The third will be better than the second and the fourth as Blaine kind of picked up on. We believe that you will see margins incrementally expand as the year unfolds. So if we do that and when the top line comes in, then yes, the bottom line will be there, too.

Okay. Do you want me back in the queue?

Sure. Let's see if anyone else has a question.

Ethan Starr, private investor.

How is Poultry Guard doing?

You know, it is doing well. It is delivering money, and in a business as small as we are, it has an impact on the bottom line. It is certainly not doing as well as we would like, and it's not doing as well as some of our competitor's products are doing.

So the good news is the actual use of a litter amendment is growing, and our share is hanging in there. But we like to be one of the major players in every market in which we compete, and we are currently not in Poultry Guard. So what our GM, Steve Azzarello, who is running that division is struggling with with his team is, what is keeping us from moving into the upper echelon of this category, and do we have the technical know-how or the marketing muscle or whatever he thinks the levers that need to be pulled are, do we have the wherewithal to make that happen?

If we don't, you know then this will forever be sort of a niche not that important product line. If we can solve that riddle, this could be a big deal. So he is working on it, and he is bringing the focus to it. Whereas it used to just be a subset of a whole other division, now it is one of his primary focuses.

So it is finally getting the attention it deserves. I don't really have an answer for you yet. I just can tell you the questions are being asked.

Okay. That sounds good. Has it been established that Poultry Guard works against more than just ammonia? Does it work against other pathogens?

It does. It does, and so it is finding different uses. It is being used in different parts of the grow out to combat pathogens, darkwing beetles, all that nice stuff. And so it does have a niche. It is just we want to be more than a niche.

Okay. How is the Pro's Choice line doing?

Pro's Choice is doing well. I think the concern of the whole industry is with gas prices going up, this is a fuel intensive product because you have to process it twice. It's not like cat litter that can just be dried once. This has to be dried twice so that it gets that real hard nature so it does not turn into mud on a ballfield. And so because of that, it is fuel intensive. So the cost of it has gone way up, so everybody is taking their prices up, which is fine.

The issue is, are the municipalities incrementally raising the budgets of the park districts by that amount, and the answer obviously is no. So what does that mean? That means they are going to buy less product because they are going to have less money, and the product is going to cost -- they are going to have the same amount of money maybe, but the product is going to cost more, so they are just going to buy less of it. That is our fear and concern, and it's too early to tell if it's playing out that way, but we just don't anticipate that these park districts are going to be getting all sorts of incremental money because the cost of sports field products has gone up due to fuel. So this may not be a great year for sports products.

The golf side of the business is still very strong. Golf construction and so forth, so that is good. So there is diversification there.

Okay. So you also sell at colleges and universities there?

Yes.

I will get back in the queue. Thank you.

Blaine Marder, Loeb Partners Corporation.

Can you tell us how many tons of reserves that you purchased and are they probable or proven?

Did we disclose that, Charlie?

No, and actually while we did basic due diligence work to know that these were properties we wanted to pick up, we actually don't have the proven versus probable in a 10-K sense yet. And I'm not sure actually we are likely to have that until we do a lot more extensive drilling than we have done so far. I'm talking about work that is months not weeks. So I'm not sure those numbers will appear until next year's 10-K. I don't think we believe that they are going to be material additions to the Georgia reserves or the total reserves that you see at the 7/31/05 in this year's 10-K.

Okay. But the prices you are paying have they been in line with past both sales or purchases? Any surprises in terms of what you are paying for reserves?

No, the short answer to your question is no. But I think implicit in your question is an assumption that probably is not true all the time. For the reserves we purchased, I don't think we feel that there are always comparable transactions that you might look at. But we don't believe that there is sufficient repetition and sufficient velocity to make sort of apples-to-apples comparisons across comparable transactions. We are certainly very pleased with what we had to pay to get these, but I'm not sure you can think of the next step to say that they compare it in some sort of a favorable way with an industry benchmark.

Okay, all right. Thanks.

Robert Smith, The Center for Performance Investing.

This is my question, but as a follow-on to Ethan's, is there any connection that can be made with the efficacy of Poultry Guard and bird flu?

I don't know the answer to that. So --

Dan, I could probably add a couple of sentences.

Great.

Actually a similar question came up about Poultry Guard last year. Though our own research into our product does not suggest that it could be effective against the flu strains that are currently the focus of the popular reporting on bird flu, that is not to say that they would not be effective.

But I'm more interested in preventive stuff.

Yes, again, the answer is certainly not clear to us from what we know of our product's efficacy.

Anything with new products that you might be able to share with us, and is Goss, just a question of a new title? He has been around, hasn't he?

He has been around, and he is sort of the industry expert now in what our clays can and can't do and makes presentations throughout the world. We are very fortunate to have him. This is the first time, though, that he has been running the facility. He has always run parts of the facility. He is now running the whole thing and doing a great job, and we are always happy when we can promote from within, and that has worked.

So any other new products that you might be able to tell us something about?

You know, we launched Perform 6000, which was a new product that came out of our what we call our infinity process. It's the next generation bleaching for the way we do it, and it is being received very well in the marketplace. It is part of the reason why you're seeing incremental growth is that our bleaching business is doing very well. And so that product is out there and has taken us to the next level of oil processing and bleaching.

We have products in the pipeline. I think you are already aware of all the ones that are being out there are being tested. We have a -- well, we have an exciting new product you can look for in the consumer arena. And I don't think that at the moment anyway, it is not material, so, Charlie, I think I can talk about this. This is our alliance with Odor Eaters where we are out there -- it will be right about now actually, maybe right towards after the first of the year when some of these retailers we are partnering up with get through their Christmas season. But we are coming out with a whole new cat litter, scoopable cat litter, were the odor control formulation has been jointly developed with the owners of Odor Eaters. The concept being that people use cat litter to control odors. So you will be seeing that at least to start in places like PETsMART and things like that. So that is exciting.

And the stock buyback, can we expect that to continue?

Yes, we have plenty of shares under authorization. Our problem is there are not many sellers. I guess that is sort of a good problem to have. People are not trying to dump our stock. But there are all sorts of rules under which when we can buy and cannot buy, and so we buy when we can but don't seem to get much.

At this time, there are no further questions. Mr. Jaffee, are there any closing remarks?

Sure. Well, I just want to thank you guys, and again I mean I think I made this comment in the last teleconference, and Bob picked up on it, where I said I believe that '06 is going to be a pivotal year on our road towards achieving our strategic vision, and the first quarter certainly proved to be that for us. You know, there's things that we can talk about, there are things we cannot talk about, but at least we are on track towards delivering what we believe is a good solid step along the road towards achieving where we think we can be in the near-term as a company. And so we expect the second quarter will be another step in the right direction and look forward to presenting that to you 90 days from today.

In the meantime, have a happy and safe Thanksgiving holiday and then over the winter holiday as well in the new year, and we will talk to you in 2006 believe it or not. It seems crazy that it is already '06, but it is. So thanks everybody for your interest and continued support.

Thank you. This concludes today's Oil-Dri Corporation of America first-quarter conference call. You may now disconnect.