Oil-Dri Corporation of America (ODC) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2008 Oil-Dri Corporation of America conference call. My name is Cara and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

Now I would like to turn your presentation over to your host for today's call, Mr. Dan Jaffe, President and CEO. Please proceed, Mr. Jaffe.

Welcome, everybody, to our first quarter of fiscal '08 teleconference. As usual, we have the usual suspects here. We have Andy Peterson, our Chief Financial Officer, and Charlie Brissman, Vice President and General Counsel, and Ronda Williams. And as always, I never know what Ronda's title is; today is no different. But I do know that she will do the Safe Harbor. So Ronda, will you do that for us?

I will be the Safe Harbor statement lady today. Thanks, Dan. Welcome, everyone, and thanks for joining us on our first-quarter teleconference. 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's stock.

And with that, I will turn it back to Dan.

Thanks, Ronda. And as usual, we will keep our format, which is we will go through a little recap of our -- from our vantage point of what the quarter, the highlights and interesting points were. And then we will open it up for a Q&A. And as always, we would like you to sort of prioritize your questions, ask you most important one first and then get back to the end of the queue so that everyone has a chance to ask some questions. And then those who want to stay on the line and ask more can do it, and those who want to get on with their day can do that.

So Andy, will you give us the play-by-play for the quarter?

We had a strong first quarter in both the retail and wholesale products group and the business-to-business products group. We had record sales of $55.3 million for the quarter, up 6% from last year's $52.1 million. The increase was primarily due to higher average selling prices.

The higher selling prices in combination with our cost reduction efforts led to a gross profit margin of 22.5%, up 2 points from 20.5% in last year's first quarter. While we are pleased with the improvement, we still aren't yet back to recent historical levels, where we had 23.3% in fiscal 2004.

Operating expenses were 16.0% of sales, which was up slightly from 15.7% in last year's first quarter. Net income was 4.5% of sales, which was up from 3.2% in last year's first quarter. EPS was $0.35 in the quarter, up 46% from last year's $0.24.

Looking at balance sheet and cash flow, no cash was provided from operations compared with $2.0 million provided in last year's first quarter. This was due to a higher cash bonus payout of $2.9 million earned in fiscal 2007 and $3.2 million in higher accounts receivable and inventory balances, primarily relating to the 6% increase in quarter sales. Dividends paid in the quarter of $834,000 were up 11% in comparison with last year. Cash and investments at October 31, 2007, were $27.7 million, up from last year's $25.0 million.

Back to you, Dan.

Thank you. And I want to highlight or put a little more color on some of Andy's comments. To zero in, Andy mentioned that the average selling price was up during the quarter. And this is a metric that we follow very closely and that we have communicated pretty consistently for the teleconferences going back and back and back. And you will recall that we roughly finished fiscal'07 at -- it rounds up to about $216 a ton. We were just under $215 in the first quarter of '07. And we were just under $225 in the first quarter of '08. And you pick any period of time you want, but you can go back, I'll go back five years or so, it was $174, $187, $196, $215, and now $225. So you see a steady progression there.

And tonnage was actually up in the quarter, if you go back -- well, over the same time period, tonnage in '04 was a little bit higher. It dropped in '05, then went up in '06. It was flat in '07 and now back up a little bit in '08. It still was under 250,000 tons for the quarter. And if you are going to do 1 million tons in a year, it's always nice to do 250,000 in a quarter. However, quarters two and three are always bigger than quarter one. We are hoping that same trend plays true. So we still believe that we will eclipse the million-ton mark for the year on higher average selling prices. And so that is always a good thing.

Andy referred to our margins of 22.5% and compared them to the 23.3% in '04. And they are lower. However, 22.5% of a much higher selling price does yield a higher GP per ton. So for instance, in '04, when we did achieve those 23.3% margins, we were making about $42 a ton. We broke the $50 a ton mark in this quarter. So that was a good thing. So it is nice, as we are able to get that percentage back where it needs to be, and as you are raising prices, you are actually making more on a per-ton basis.

That, then, allowed us to make net income per ton of greater than $10, which we haven't done at any point in time on my sheet. My sheet goes back to fiscal '00. But it was basically from '00 to '03, it bounced around from negative $1 a ton to a high of $3 a ton. It then went to $4.88, $6.66, $5.22, $7.80 a year ago, and now to hit $10 a ton obviously feels good. The team responded incredibly well. It was a challenge that we gave them at our global sales meeting, was if you could just add $2.50 a ton, on 1 million tons, you literally could increase our profits by a third because we made $7.80 a ton for the whole year in '07.

And the team rose to the challenge. The net income was up $2.30 a ton, from that $7.80 up to roughly $10.10 in the quarter. So it just shows that moving the needle a little bit when you do as much volume as we do really has a big impact on the profitability of the Company.

So we felt good about that. And really, the most positive thing, and we keep saying it, is we all believe that the best is get to come. The future will prove out whether or not we are right or wrong, but we know we have a lot of new business that we are still working on the packaging before we can roll those things out. And those didn't show up in the numbers yet. Those will start rolling out toward the end of this quarter and the beginning of the third quarter.

And then you have heard me refer to our all-in initiative. And I am still not going to tell you what it is. But it is still in investment mode -- it is deficit spending. We are just spending, doing all the research work and trial work necessary to support the claims and the value that we have seen in the lab on the product, and so to support, obviously, a higher selling price and higher margins, because it will be delivering such value to the future customers.

And that will all get launched towards the end of this fiscal year. So that won't have any positive impact on fiscal '08. It will only continue to have a negative impact on fiscal '08. Yet we are able to deliver the results we are while investing for the future. So that feels very good.

And finally, during the quarter, we -- I guess it was actually after the quarter end, but before the release, we held our annual investor lunch in Boston, and I just want to thank those investors who took the time to either come to Boston -- some came from New York, some came from D.C., and some just came from probably Dedham, or wherever they live in in the Massachusetts area. But we had a good turnout and a lively discussion, and I appreciate you guys taking the time to do that.

So at this time, I would like to open up the phone lines to the Q&A. And again, I want to encourage everyone to ask your most important question first and then go to the end of the queue.

(OPERATOR INSTRUCTIONS). Jim Schwartz, Harvey Partners.

Some questions on cat litter. Can you just give an update on how the light-density Cat's Pride is doing? And also, on the natural product that you guys showed the recent advertisement, just curious what the customer response has been so far.

The light-density has really unlocked a lot of value. It is not obvious to most people that there could be that much technology going on in a scoopable cat litter. So I'm glad you asked about it. But basically, if you take the same size jug, the exact volume, call it a 2-gallon jug, and you pour our Cat's Pride Scoopable into it, it weighs 14 pounds. You fill it with sodium bentonite, which is a much heavier-density item, and it weighs 20 pounds. Yet we all know, or once you hear it, you will agree, nobody is weighing in cat litter. Nobody is putting their cat tray on to a scale and weighing in.

So because the Department of Weights and Measures has mandated that it is a dry solid, it needs to be sold by weight. While they are buying it by weight, they are using it by volume. And this used to be a big problem for us, because people would see our 14-pounder at Wal-Mart and other major retailers, and it may have been $1 even $2 a jug cheaper than that competitors' 20-pounder, but when the price per pound got calculated, they would perceive that the 20-pounder was a better value, even though they are paying two more pounds for the same amount of fill, same tray, same everything.

So our marketing team really did a great job of trying to -- you've got to still report the pounds, there is no doubt about that, but we communicate the usages and the fill rate, that it is the same fill as 20 pounds, and clearly, some of the consumers don't get it, I am sure. But a lot of consumers are getting it, because it is the number one-selling single SKU at the major mass player, and you guys all know who that is.

And it is really a -- the product works, works very well. It may be that a lot of people like the flushability aspect, again, because of our technology. You can't flush sodium bentonite. That would literally just clog your pipes and fill your house up. You can -- our product is certified safe to flush. And then I think a lot of people are getting the light-density.

So, Jim, I don't know if that answers your question, but it is powerful. Most people make their decision at shelf, and our packaging is meant to communicate that value the best that we can.

No, that's great. And just one more follow-up, just while we are on cat litter. Just the Taft, California, plant, I am just curious what sort of barrier to entry or competitive advantage does that give you guys in California transportation-wise, I guess, versus the competition.

It has been very, very valuable for us. There is no doubt about it. We were supplying the Western United States from Blue Mountain, Mississippi. And that was not freight-advantageous for us. We used to have to fill boxcars up, send them to warehouses, break them down and then ship them in truckloads. It was the only way to try and get even remotely cost-efficient, and we weren't.

When we made the Taft acquisition, we were able to transfer a lot of business out of the Midwest over to California. So that plant is operating at record tonnage levels, at least in the last decade record. So that has helped our operating efficiencies. And then we have been able to take a lot of freight out of the equation, which has made us that much more competitive.

So much so that we allow a lot of our customers to pick up at the plant, and they take advantage of that, because we are so local to the major L.A. market. And in this category, freight is a huge component of the final cost of goods. And so that has been a major competitive advantage.

And Charlie, you can respond to this comment, but I think putting up new clay plants in California is about as close to an oxymoron as you can get.

I would agree, Jim. Our Taft facility is in the lower half of the San Joaquin Valley. It is an area -- first, we are in the nation of California to begin with, and we are in an area of California that has incredibly complex state and federal air quality regulation as a result of spillover from the Los Angeles area. We operate very easily there. But the notion that in our business somebody is going to invest new capital behind the siting and permitting that would be required to open another fossil fuel-burning plant in any industry in Southern California, I think as Dan says, is almost nil. That was part of our years-long quest to get a facility in California. Now that we are there, we feel that with each passing year, it is a unique advantage that we have over most of our competitors.

[Robert Smith, Center for Performance Investment].

I lost I think the first seven minutes of your call, because when I called in they said the passcode was not the correct code. So anyway, I guess the person I was speaking to initially was asleep. So I don't know what I missed, but --

You didn't miss anything. It was just Andy presenting.

I guess I came in when you were talking about all-in. But anyway, so what did you guys spend for all-in in the first quarter?

We are not breaking out that spending. I just made the general comment that our all-in initiative to date is negative.

I heard that.

We are not breaking out -- fortunately, it's not material, because we now make enough profit where it isn't. You can go back a few years, it would have been material a few years.

How come I didn't know about the Boston meeting?

I don't know how come you didn't know about the Boston meeting. Would you have come up to Boston? I will do a New York. I will probably do one again in the fall, is my guess.

I would come.

Well, next time we will make sure we get you on the Boston list. But I know that you live in -- you live somewhere in the New York area.

Yes, I live in New York. I prefer New York, but I would travel to Boston.

We will keep you on the list for the future.

But only if I got a bag of cat litter.

We will give you a 50-pounder.

So I guess, did you say -- in the press release you said something about the second quarter would be a continuation more or less of the strength in the first quarter. At least that's was what you were looking for. Is that good? I mean, is that accurate?

Yes, to the best of our vantage point at this point. The point I made, and you may have missed this, was that the team truly believes the best is yet to come, that what you're seeing is good and we are very happy with it, but it is not like we believe we're firing on all pistons. We have new cat litter business that we have already been awarded. It just hasn't started shipping yet because we are working on the packaging with the account. The all-in initiatives are a deficit mode at the moment. And so we believe you will see volumes start to pick up. Prices hopefully continue on the trend they are on. So you put the two together and you have a multiplier effect that is positive.

Do you have any idea how many people are on this call now?

About eight.

So I will get off and back in the queue.

Yes, we probably have eight active, and then we get a lot of people on the Web who don't want to ask questions. They just follow it along. So yes, get back in the queue.

(OPERATOR INSTRUCTIONS). Robert Smith, Center for Performance Investment.

I didn't think I would be back that soon.

You're back.

I don't know -- are we going to go on this one question, and then I have an intercept that asks for my name and affiliation? What do you guys think?

Go ahead. Ask your --

It is Charlie Brissman. We are not going to give you 40 minutes of Q&A if it turns out you are the only investor who is still asking questions. But give us one and a follow-up, and we will see what happens.

I just want to run through the products that I have asked for traditionally. Would you just comment briefly on [Camturner]?

All I can tell you about Camturner that is new is that we are still in active discussions with them. We actually have a new product idea that is very far-flung at the moment. I wouldn't value it at all. But at least it's not dead. Camturner is not dead. I wouldn't put in your valuation model at the moment, but at least it's not dead.

How are they doing overall?

I don't know.

Keep in mind, that investment is written off as a financial reporting matter. And I must tell you it is written off as an emotional and practical matter. And we are really not in a position -- they are not publicly traded, and we are just not in a position to sort of share with you, even if you were following along with them, what their performance and what they are doing is. They are absolutely immaterial to Oil-Dri's performance in its foreseeable future.

It is a wildcard.

A wild -- wildcard.

Those are very smart, hard-working people, but I mean, to even call it a wildcard is assigning it sort of a visibility over the near term that doesn't exist in our minds.

Brick?

Probably the same boat as Camterter.

That is poor. Okay. I will get back in the queue.

Brad Evans, Heartland.

Dan, can you just talk about the weaker U.S. dollar and how you think that might impact your business over the foreseeable future?

I hate to be Pollyanna-ish or try and profit on other people's demise, but for us it is a good thing. It makes us -- I don't know. Well, 100% of the clay we mine comes out of the United States. So it just makes our clay, what we call our blue zones, where we can profitably sell our clay, it just expands our blue zone. So it is a good thing.

And conversely, if anybody, not that they are even getting close, but if anybody is mining clay in the EU or anywhere else, frankly, and they are doing their blue/pink zone analysis, their blue zone got farther from the shores of the United States. I don't believe it's that close to start with, but it got farther from the shores rather than closer as the U.S. dollar has weakened. So does that make sense?

Do you think it's had a material impact on the business in the last couple of quarters? Or is it still something you think to impact the business going forward?

I don't think it is material in the sense that it is monetized. I think what it does is -- I have use the term moats before, of the Atlantic and Pacific Oceans, and it just made them deeper and wider. If the U.S. dollar quadrupled in strength, could someone sitting in wherever afford to ship to the U.S.? I still don't know that they can get here. But going this way, it's a slam-dunk loser.

And this mostly impacts your B2B business, is that correct?

Yes, I think that is an accurate -- yes, it is not going to excite us to start trying to sell cat litter in far-flung places of the world.

Just my follow-up question is on the business-to-business side of your P&L. For the ag carrier area, what percent of the business is ag carriers today?

It's getting smaller and smaller. We don't break it out. But it is clearly getting smaller and smaller. Sport, turf and ornamental, and flowability aids are becoming a greater share of that division.

Do you see anything on the horizon that could reignite growth on the ag carrier side? For example, if some of the CRP acreage or marginal acreage gets opened up for corn or other row crops, could that stimulate ag carriers, even if GMO seeds are used in that acreage?

I think it could lessen the slope of the decline, because we could have a continuing smaller share of a bigger pie, which would minimize the damage. But I think clearly, the technology has been accepted. GMO is the wave of the future. They are always making them set aside acreage in the traditional technologies so that they can avoid resistance, things like that. But its heyday is behind it. I don't see it coming back.

(OPERATOR INSTRUCTIONS). Robert Smith, Center for Performance Investments.

So you mentioned gross margins and that the best is yet to come. Do you have a -- or could share with us what a target, a reasonable target is in gross margins that you would be shooting for?

I think I've referred to it before. I think from the core business standpoint, it is not unreasonable for us to shoot for 25%, something in that range. Now, the new products, when you layer those in, we are shooting for well north of 25% because we couldn't afford to do all the research, all the marketing that it is going to take, all the infrastructure that it is going to take. So the business would be a big loser if all we get are 25% margins.

So clearly, that business is going to require higher margins to support the effort. But from a core standpoint, I would say the 23% to 25% range is sort of what we believe is a healthy range. If you start pushing past 25%, you might start hurting the volume. If it's south of 23%, we don't feel we are being adequately compensated for all the things we have to do to get the clay out of the ground and to the customer, so somewhere in that range.

And the all-in initiative would be a gross margin target of what?

We haven't disclosed that. We are not going to. I will just tell you north.

Well, okay, naturally. And you will be able to speak about this in the next, what, six months?

I mean, if you want me to minimize the benefit to the Company, sure. No, until it is material, until we have to break it out, I just don't want to --

No, I mean about sharing what it is.

No, I am not going to share, not until I have to, basically, because I just don't think it helps you as an investor and it doesn't help us as a company.

Anything happening in biomass or ethanol?

Yes, we will continue to participate in biodiesel. Ethanol is continuing. We are actually participating in ethanol, but on a smaller scale and at lower value in their chain. So we are still bullish on biodiesel and we are bullish on ethanol. But it is just -- it is going to take time.

It was wonderful reading the [tag-in] that said that you have paid dividends since X year, and that dividend has been increased for the last four years, I think you said. So that is the way to go. I love to see that.

I appreciate that.

I remember when we went over that ground a while back, and I think it was a really sound suggestion.

My dad and sisters agree with you.

Brad Evans, Heartland.

So a few bookkeeping questions. The tax rate, 27.5% in the first quarter -- is that a good number to use going forward?

Yes, I think that is a good number.

And your capital budget for this year?

I think it is going to end up being pretty similar to depreciation, probably 8.5, 9, something like that.

The one caveat I will throw on that, because I was talking to Cofsky, our VP of Manufacturing, and frankly I am not even sure exactly -- we are doing some capital investment for a customer. And it is going to be paid back over time and all this kind of stuff. So it may show up in our capital numbers for the year. That is incremental, I think, Andy, to our -- and our expected ordinary capital. So it may bubble a little bit over depreciation for that reason. But it is going to have a good return on it and be a good investment.

So you should generate a little bit of free cash flow this year, it looks like. You obviously have a balance sheet that is in pretty good shape, Dan. Can you just talk about your prioritization of the use of free cash flow and the liquidity on the balance sheet between raising the dividend, M&A activity and share buybacks?

Yes, I would say order of operations, the dividend is something we always -- we tend to always look at on an annual basis, so maintain or increase is a fair expectation. And we are continuing to be focused but disciplined on the M&A front. But something could happen. We hope it would, but I don't see anything on the horizon at the moment. But you never know. And from a buyback standpoint, I don't think we have much in our plan for right now because we are trying to stay or be able to be opportunistic if and when an M&A opportunity opens up. So I wouldn't put much in your model for buyback.

If I could just follow on on the M&A side, would you be more inclined to look for opportunities on the B2B side, or would it be on the retail area? Or are you agnostic?

We are sort of agnostic. As long as we are true -- I think it would be fair to say we will be true to our mission of creating value from sorbent minerals. So you won't be seeing anything that doesn't fit through that screen. And as long as it fits through that screen, which side it comes on, yes, we are agnostic.

Congrats on the nice quarter. Thank you.

Robert Smith, Center for Performance Investment.

So in the past, Dan, you have said you sponsored some work at universities. Could you say anything about any active programs that you have currently?

No, again, because that would tip our hand on a lot of where we see our future offense coming from.

How many projects would you say you have funded, I mean, currently funded?

I don't even know, so that's an easy one for me to dodge, because I don't know the answer.

Wait a minute -- if you don't know, who knows?

I don't know. Somebody better know. Ronda, do you know? Nobody in this room knows.

No, I mean, the good thing about what is happening at Oil-Dri is we are a team. This is not the Dan Jaffe show. So I don't know. I mean, I can tell you -- if I pulled all the GMs together and they could each tell me, oh yeah, we are doing a study on this, and don't forget, Dan, we're doing two studies on that and so forth, but the good news is we've got a heck of a team. You guys are not investing in me. You are investing in the team.

So is the work being done in state or--?

I don't even know that.

Is Dick still in touch with Camturner?

Dick, my dad?

Yes.

No, he probably hasn't talked to John in five years.

Well, if I don't get back on, I want to wish you a wonderful holiday season, and thanks for the quarter. It was excellent.

Thank you. I wish you the best, too.

And we have no further questions at this time.

Excellent. Thank you, everybody. I do want to put an exclamation point at the end of a comment I just made, which is, it may get blurred because I get to talk about the great results, and that is because they are great results. When they are bad, I will make sure the whole team is in here and they will be presenting on these calls.

But seriously, I do this to allow them so that they can put 100% of their focus on growing and running their businesses. So this is sort of my contribution to the team, is just to allow them not to have to do this kind of thing.

But in no way do I want anyone to misunderstand who is making this thing happen. Really, it's 800 people strong now, which is great. And from my immediate vantage point, it's about 14 to 16 people that I work the closest with. We call it our TGIF team, because every other Friday we get together and have our Thank God It's Friday morning teleconference. We will have ours tomorrow morning again. And everyone will pull together, and then we communicate out to the whole Company.

So that is the great thing about what is going on in these results, is that we are able to attract and retain very seasoned, very talented players. And my father would be the first one to say, it is night and day. And it isn't to minimize or disparage any of the team he worked with. But he was the heart and soul of Oil-Dri. It was a tiny little company when he started. They were doing $1 million in sales. They had three full-time employees.

And it has completely morphed into a real big international enterprise, with a real team, and it's really fun. We are at a good time. We believe the best is yet to come. And I was able to bring [Tom Swank] -- his schedule allowed him, so he was in Boston with us. He was at the Boston presentation. I think those people got a real glimpse into some of our senior managers. He did great job there. And maybe it is the kind of thing -- I know we have our annual meeting and the entire team will be there, and they will be available for Q&A. So I would always encourage you guys to make our annual meeting. I think this one's next Tuesday.

December 4, 9AM at the Standard Club.

Yes. So that is a chance to really assess for yourselves what I am saying. And then every so often, when we do these investor lunches, I will try and always bring somebody from the senior team to be there. But that is really where your investment is going. And fortunately, it is going very well.

So thanks, everybody, and I wish you a happy and healthy holiday season, and we will be back to you in another quarter.

This concludes your presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful weekend.