Oil-Dri Corporation of America (ODC) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2007 Corporation of America earnings conference call. My name is Carissa and I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's conference, Mr. Dan Jaffe, President and CEO. Please proceed, sir.

Okay, thanks, Carissa, and welcome, everybody, to the first quarter earnings teleconference. I'd like to introduce who's in the room and then we'll go through our Safe Harbor comments and then we'll get into the actual presentation; Andy Peterson, our Chief Financial Officer, Charlie Brissman, our VP and General Counsel, and Ronda Williams, our Director of Investor Relations.

Thanks, Dan. Before we get started we're going to review our Safe Harbor. On today's call, comments may contain 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 important risk factors, trends and uncertainties that may affect our future performance. We urge you to review and consider those factors in evaluating the Company's comments and in evaluating any investment in Oil-Dri stock.

Thanks, and Dan, back to you.

Thanks, Ronda. And obviously a very, very good quarter and one of the most gratifying parts of it is that, while we always need the Safe Harbor provision, a quarter ago we gave the same Safe Harbor and gave some comments on what we thought we would be seeing. And low and behold, a lot of what we said was going to happen did happen and some of the stuff that we were materially different on came in better than we had even anticipated, so that's what makes this quarter so gratifying. As you'll recall, pointed out that we were continuing to actively raise prices. We're hoping that the volume would continue to come in and we're hoping that the cost control measures that we were seeing real benefits on in the fourth quarter will continue into the first quarter and that no new hurricanes would hit. And we were obviously hoping for that for many reasons other than just Oil-Dri and our financial bottom line.

And all of that came to pass in the quarter. So our tonnage came in, our average selling price was up dramatically in the quarter, was up $18 a ton over the prior year's first quarter. And as you'll recall, as I've been talking about the progression every year for about the last five years, it's gone up $10 a ton. F'06 for the year was up about $12 a ton. So to be up $18 is, again, an indication that what we said we were going, we did, which was trying to cover the cost increases with price increases. And as I pointed out in the release, obviously we did that to some extent, as margins not only stopped declining but actually started to come back.

A year ago, we were at 17.6%, this year, 20.5%. But still in '04, we were at 23.5%, so we're obviously still short of where we were. And that's what we've been telling internally our sales people and externally our customers is yes, these increases are necessary and they're helping us defray the costs, but you can see we're a public company and they're in to way fattening our coffers or anything like that. It's merely trying to recover from the hit we took a year ago with Rita and Katrina and the ripple affect of when fuel goes up, everything goes up; packaging processing and the whole deal. So, obviously feel very good very good about the quarter.

I'd like to turn it over to Andy Peterson because I don't want to steal too much of his thunder. He'll go through a financial review, give it back to me, and then we'll open it up for Q&A so that we can address those issues that are top on your mind. Andy?

Thanks, Dan. We had a good first quarter. The results look great in comparison with last year, when energy costs skyrocketed after hurricanes Katrina and Rita. We had record sales of $52.1 million for the quarter, up 9% from last year's $47.8 million. The increase was primarily due to higher average selling prices. The higher average selling prices in combination with our cost reduction efforts led to a gross profit margin in the quarter of 20.5%, up 2.9 points from 17.6% in last year's first quarter. While we are pleased with the significant improvement, we still have a ways to go to get back to our recent historical levels; 21.5% in 2005 and 23.3% in 2004. Operating expensing increased to 15.7% of sales in the quarter from 15.2% last year. This was due to a higher bonus accrual. EPS was $0.24 in the quarter, up 71% from last year's $0.14. Cash provided from operations was $2.0 million in the first quarter, which was up slightly from last year. Dividends paid in the quarter of $754,000 were up 35% in comparison to last year. Cash investments at October 31, 2006, were $25.0 million, up from last year's $18.4 million.

Dan?

Great. And you know, last year in the first quarter, if my memory's right, we had a gain on sale of the water rights and so, operating-to-operating, this was obviously a very strong quarter. Before we open up to Q&A, I just want to tee up one thing that you may or may not be seeing in the future. We're considering narrowing the gap between when we have these teleconferences and when we file the Q and/or the K. This is in part to the feedback you guys have given us, which you hate that these teleconferences tend to be right around holidays, which is how it always seems to happen with this gap. And it also will help us internally allow the audit team and everybody more time. They obviously only bless the numbers that are put in the Q. Those are their final audited numbers, so the narrower the gap, the better for everybody, the more time to do whatever they need to do. So we're considering that. If we do it, we'll obviously let you know and you'll know why it's happening, but that's something that we're considering.

Carissa, I'd like to open it up for a Q&A, and as always, I'd like to encourage everybody to ask your question and then get to the back of the queue. That allows people who only have one question to quickly get their question in and then they can get on to their day. And those people that want to stick around and ask multiple questions can obviously just keep getting back in the queue and we'll stay the full hour.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Ethan Starr], a private investor. Please proceed.

Good morning, great quarter.

Thank you, Ethan. You ought to play Jeopardy. You were the first one to buzz in. You -- I'm glad --

Well, it helps to have the right questions --

There you go.

-- in Jeopardy. So why didn't you buy back any stock in the quarter?

You know, I had a feeling this would come up and we just had other uses for the cash during the quarter. We still have stock open on the authorization and you can surmise what those uses were. Some of them are more obvious than others. You can obviously see that CapEx was up in the quarter. There are other things that we are either planning on or may -- or did do or didn't do. The increased dividend, obviously, occurred during the quarter. So it was just a matter of other uses of cash.

Well, okay, but cash -- I see here in the cash flow statement, do you still -- cash increase during the quarter $1.5 million, so you couldn't have had that many other uses?

Well, it's not burning a whole in our pocket either.

That's for sure.

Anyway, we're -- we'll review it again when the window opens. We may or may not jump back in, depending on what we see coming down the line, both short term and longer term in terms of uses of cash.

Okay. Well, I trust your judgment on that and I hope you're able to continue buying back stock soon. I'll get back in the queue.

Okay, thanks.

Your next question comes from the line of Robert Smith of Center For Performance Investing. Please proceed.

Hi, good morning.

Hi, Bob.

Congratulations on the quarter.

Thank you.

Very agreeable. What's happening in the brick business?

I knew you were going to ask.

Well, why not?

Absolutely. And it's one of the initiatives that we have been able to talk about. We have other that is we really don't feel like we should talk about yet due to --

Can you kind of give me the latest monthly?

I'm ready for you, the quarterly. And you will be most likely disappointed, but I -- it is what it is and so let me not sugar coat it, give you the numbers, and then we can talk about what's driving that.

Okay.

As you'll recall, in the fourth quarter of '06 we mentioned that we did 514 tons. We did only 253 in the quarter -- in the first quarter this year of '07. So obviously down significantly, although greater than the first quarter from '06 a year ago, but that's not really the relevant comparison. I mean, it really is not that seasonal and it's a matter of ramp-up and so, obviously, what you're seeing is a disappointing quarter.

The reasons why. One customer that was in trial has backed off and really didn't see the value in it. We don't believe that the tests necessarily were conducted the right away, where they would see the value, and so we may be back to square 1 with them. The other customer actually is -- not only sees the value, but is expanding the SKUs on which they're going to use the project, but they were into other SKUs, as I've mentioned in the past. There's really three different types of brick. You've got the buff, you've got the red, and you've got the coated. We can work on buff and coated, but in the red you get that spectacled look. They were doing a lot more red in the quarter and so it went offline for a while, and I think they even took a shutdown or something. But anyway, they're back on. They're an active customer and so we're continuing that.

The good news on the forward horizon is we have shifted our focus a little bit. When we started out, we felt that maybe these smaller independents would be easier to penetrate. I think that was probably true, But the flip side is they're not as sophisticated and they're not necessarily as -- because they don't have the number of plants and don't have the critical mass, they don't necessarily see the same dollar benefit by adopting something like ours, which means you pay more and you get more. Then a lot of the independents are more -- for lack of a better term -- living hand-to-mouth, and so they don't necessarily have the luxury of pay more to get more. They need now. And so we have focused now on the big guys and penetrating them, doing the brick shows, making contacts. We have inroads, we have some mixes that we're working on out at our research lab that they've given us and so forth. And so, we are still cautiously optimistic that this -- you know, that this will take off at some point in the future. But I wouldn't bet that the second quarter will be some -- will be hugely better than the first quarter.

But you do want to see considerable progress in the second half of this new fiscal year?

Yes, and I think the considerable progress has to come from the big guys, the major three players. They have to show some real interest, a willingness to try it, maybe an even adoption would be great. And then the -- it's just sort of, we hope, logic and common sense that if one of their plants adopted it, they would be way more likely to then take it to other plants. Whereas when you're dealing with independents, it's all ones. That's the only plant they have for the most part, and so it starts the selling cycle all over. If we penetrate one of the big ones, we believe then the ramp-up rate will be a lot faster.

And just circling back again, so I'm gathering previously, have you made any new hires? Have you hired anyone?

Bob, on that front, the answer is no. They're still looking. However, they're also thinking of an alliance with a major distributor in this area -- in this arena, where we could tap into their expertise, and so they're reviewing the options there.

But that's very much on the front burner?

Very much on the front burner.

Okay, I'll get back in the queue. Thanks.

Thanks.

[OPERATOR INSTRUCTIONS] We have a follow-up question from Ethan Starr, private investor.

How much of the revenue growth in the quarter was due to increased volume and how much to price increases?

We did an analysis on that and it broke out roughly 70/30. 70% this -- In the past it's been running about 50/50, but now you saw more increase and that increase was almost entirely due to prices. So, in the $18 a ton, about 70% was price increase and about 30% was selling of the higher-priced goods.

Okay. A follow-up to that, in the press release, you stated that we still have not yet rebuilt lost margins from several years ago. I'm just -- when you say several years ago, are you referring to '04 or earlier or what kind of margins are you referring to?

You know, I'd sort of look at '04. We made 23.3% for the year and we made 21.5% in '05, so we're not even there, even. So that's sort of my target range.

Okay. What's happening in the new product and R&D front?

Oh, well let me tell you all about it in detail. o, you know, Ethan, I'm not going to talking about, but we're very excited. We have stuff. If we had nothing, I would tell you we have nothing. Well, we don't have nothing. We have something and we're excited about it. And I would say -- probably the better question is when do you think you'll be able to tell us something about it? And I don't know, probably towards the end of the fiscal year is a realistic time frame for when there'll have been enough activity where you'll probably have found some stuff and the cat -- no pun intended -- will be off the bag. So nothing to talk about at the moment.

Okay. Well, I guess the cat's still got your tongue.

You got it.

In last quarter's teleconference, you indicated the higher CapEx spending this year and in Q4 of last year was due, in part, to expanding capacity on specific a product line. And I know you don't want to tell us which product line or factory you're adding capacity to, but is it possible you could tell us to the extent to which you're adding capacity for the line? I mean, for the money you're spending are you doubling capacity, tripling it, up by 50%?

We're doubling the capacity of what is our highest-margin, fastest-growing business. And I can tell you this because I don't think this is letting any -- giving a competitive giveaway here. We're getting an added benefit, which we hadn't anticipated through this capacity, through the whole biofuels initiative. I mean that -- there are a number of applications where our clays are being used and hopefully will be used even more in the future in the production of either ethanol or biodiesel and we're very focused on that. We've got people really focusing on that. We have our sales people. You know, we were already into all these [edible] oil refineries and it's basically the same people now who are making biodiesel and/or ethanol. And so the customers of ours, we know them well, and we're selling product and hoping to sell them more product and this added capacity -- we couldn't have gone after this opportunity if it weren't for this added capacity. But sometimes in life, it's better to be lucky than good and this one was lucky, because we didn't even have this in the financial model when we made the decision to double the capacity.

Okay, well. Always nice to be lucky and good.

Yes.

Going back to the end of year 2006 cash flow statement, could you please explain why in fiscal '05 the other line in the cash flow's investing activities showed $3.7 million flowing in but in fiscal '06 that same line showed $4.15 million flowing out?

I can guarantee you I don't know, but we can see if Andy -- do you want some time to? Let Andy dig through that and hopefully before the end of the call we'll have an answer.

Okay, that's a big shift. It's almost an $8 million shift.

Help me -- I'm looking at the cash flow statement. Where are you --

Cash flows from investing activities in the other line and it's from the end of fiscal year '06 cash flow statement, showing the end of '06 and end of '05.

I'm looking here at the 10-K and I don't see an other line --

Well, it was in the last --

-- on cash flow rom investing activities.

It was in the last press release.

So basically what we did is we -- as you look at the 10-K, we've lumped some of the activities.

I guess so. Let me get back in the queue.

Yes, I think it's the -- The biggest one is, Ethan, is -- when you talk about the other line is when you get down to the bottom, you come down to cash and equivalents and if you look at the balance sheet, basically in terms of our cash, you've got investment in treasury securities --

Oh, sure.

-- and cash and cash and equivalents.

Yes.

And typically what you find in the investment activities are the purchases and sales of those.

Of course.

And so that -- I think that is what that was.

Okay. I'll take a look at the 10-K for that, then. I have more questions, but I'll get back in the queue and let Robert Smith ask a couple.

Okay, good. Thanks.

You have a follow-up question from the line of Robert Smith. Please proceed.

Yes. I recall you mentioned that Ken Turner had actually turned profitable. Is that true to my recollection?

Yes, their priming business is profitable and their R&D segment that he's investing in new applications and now technologies is unprofitable.

So bottom line, it's still in the red?

Yes, still in -- no, I think it's pretty break even to in the black a little bit. He sells funding. In fact, a year ago we had a dividend off of him, right? I don't know if we're going to get anything this year. It's immaterial.

He's self-sustaining.

Where does that appear in the [inaudible]?

Well, the ownership position was written off to zero, so that's nowhere in the numbers. Did we get a dividend? Where does that show?

Yes, but I mean, where would you taste --

Other income?

Bob, yes, it'll be cash in other income and we're talking about minuscule amounts.

Okay. I just wanted to know for future reference.

Yes, it would show up in other income.

So again, this question of profit margin improvement getting back to historical highs, do you see that as within reach, say, in two or three years?

Pending things that are outside of our control again --

Understandable, sure.

Sure. If the future plays out the way we see it today, yes, that's our expectation. It'd be north of what we delivered this quarter and probably max to south of the high watermark of 23.5%, 23.7% I see we'd hit one quarter. Somewhere in there. And then, obviously, if any of these new initiatives hit, the big one that we're focusing on has margins north of 50%, but you have to spend to get it. It's going to -- I'm not saying that's all going to go to the bottom line. But from a growth perspective, that could certainly -- as you start to blend that in that could start making things look good, too.

Well, again, it sounds encouraging what the thrust of the business is in developing these specialty products with higher margin throw-offs. And I encourage you because in essence, you will be changing the complexion of the business and it'll cause, I think, if not -- well, it could cause some excitement in the Street about the Company.

Well, we're certainly excited.

Again, I'm very willing to take the long-term view.

Great. Well, thank you.

Your next question comes from the line of Ethan Starr.

How are [catalyzer] sales at retail doing? With the higher prices, are people shifting more to private label?

We haven't seen that. So it's so small at retail -- I mean, you're talking $0.10 a bag here, $0.10 a bag there -- that we have not seen any shift in consumer purchasing attitude.

Well, that's encouraging. I'm surprised, given past -- shifts in the past, but interesting. I was kind of surprised during the quarter to read the press release that Wade Bradley left the Company and just wondering if you can enlighten us as far as the progress on finding someone to take his place, just on the call.

Just that we're taking as an opportunity to rethink our organizational structure and what level of person we want to bring in and obviously looking internally and externally. And we were sorry to see Wade go, but like anything else in life, you've got to turn lemons into lemonade and so our commitment is we're going to make it a good thing.

Okay. Are you working with a search firm?

Not a the moment we are not.

Okay. To what extent are manufacturing costs fairly fixed across your various product lines regardless of margin? Does it cost significantly more to manufacture a higher margin product, or is it roughly the same for everything?

It tends to go -- usually when you're getting a higher margin, you're putting more into it. It's taking more processing, more inputs, more something, so they tend to move hand in hand.

Okay. But at some point, it's still relatively fixed to some degree, or not?

Oh, well certainly. And certainly, anything to do with the mining aspect and all that, that's all fixed and then it's just the processing that can tend to be more variable.

Okay. Well, I remain very excited about the future of the Company and look forward to the next call. Thanks so much for answering my questions.

Thanks.

Your next question comes from the line of Robert Smith. Please proceed.

Is there anything that we should know about or be looking at in the current quarter that might affect the bottom line that would be a surprise? I'm more concerned about any negative on the immediate horizon.

I mean, we're all concerned about anything this that could happen. Charlie, I almost defer to you. I know --

Yes, Bob, as a lawyer, my ears prick up at that question. If we were -- if we were looking at anything that caused us on the profitability and magnitude scale to be concerned, you'd be hearing about it, because we take the federal securities laws pretty seriously. There's lots of variables in the business and I'd actually urge you, if you haven't -- but I'm sure you have -- and everyone else on the call, to take a look at the risk factors we've included in this year's 10-K. This is the first time the SEC's requirements talk about risk factors was applicable to us and we took very seriously the exercise of the SEC requires. There are a lot of variables in the business. But sitting here today after a good first quarter and almost one month into the second quarter, we're not seeing anything that we feel we've got to alert you to. But as you've seen in prior quarters, whether it's natural disasters or unanticipated buying or inventory decisions from large customers, you never really know what can happen. But I think we feel we're looking at a less dramatic landscape in this second quarter than we were a year ago.

And anything in the Ag area that I should be -- well, watching, so to speak?

Just this whole bio push. I mean clearly the more corn that gets planted, yes, there's going to be a big GMO piece of it, but the more acres there are that are planted towards corn, we participate on the corn/rootworm side. So it may help to, let's say, lessen the negative slope in that business and our Ag carriers business. We're hopeful for that.

And the soy bean crop?

Everything we're seeing is that it's coming in as anticipated. I know ADM just put out a news release saying that they're going to be dedicating more resources towards refining soy bean oil and, again, due to the bio initiatives, biofuels.

Okay.

So we're seeing -- I mean, talk about being in the right place, this is where you want to be with Bush's commitment to having a greater percentage of our fuel requirements as a country come from internal sources and biofuels being a big piece of that equation, it would be hard for us not to benefit from that.

Okay. Well, thanks for that encouragement and I guess I'll let you go now. It may be an early day.

Yes, it's great. Hey, I guess when the news is good, you don't take as many shots.

Well, no, I mean -- believe me, I welcome the opportunity to see the pluses and the minuses and to examine them and don't be afraid of -- I'm not afraid of the down periods. Each business has its own story and history, so --

And I appreciate -- I did do an investor lunch in New York and I appreciate that you came to that. And I did one in Boston and, Ethan, you came to that, so I appreciate that. And I would say anyone on the call, if you're interested in these, we tend to do them in New York, Boston, and Chicago, let Ronda know and we'll build the list and let you know when they're taking place. But that, I'm certain, helped you round out your information curve, too.

Yes, and next year -- I mean some point probably later in the year, I'd like to see you looking and address a dividend increase.

And we just increased, but --

Sure, I know that. But I would like that process to continue.

Okay.

Okay, thanks so much.

Great. Thanks, Bob.

[OPERATOR INSTRUCTIONS] Sir, you have no further questions at this time.

Great. Well, it was a good quarter and we're cautiously optimistic the second quarter will look good as well. We'll be here to answer your questions at that time. We do have our annual meeting coming up next week and I really wouldn't encourage anyone to fly in for it. It's not going to be like the sage of Omaha or anything, where there'll be thousands of people and tons of questions and a lot of good stuff. It's all going to be just what you've heard today and we're not unveiling anything dramatic at the annual meeting. So next time we'll be at you will be in three months with the second quarter teleconference. So thanks very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.