Oil-Dri Corporation of America (ODC) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the third quarter 2008 Oil-Dri Corporation of America earnings conference call. My name is Karen, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

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

Thanks Karen, and welcome everybody to our third quarter and nine months investor teleconference. Let's start, well first we can introduce all the participants. Andy Peterson, our Chief Financial Officer is on the call, as is Charlie Brissman, our VP and General Counsel, and Ronda Williams, who heads up our Investor Relations.

Ronda, will you please take us through the Safe Harbor Provisions?

Certainly. Thanks, Dan. Welcome everyone, and thank you for joining us for our third quarter teleconference.

On today's call, comments may contain forward-looking statements regarding the Company's performance and 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 again and back to you, Dan.

Okay, thanks, Ronda. Before I turn it over to Andy for his general comments, what we usually call our play by play, and I add some color, let me just start with sort of a real 50,000 foot comment, which is we tend to be our own most critical graders, but the reality of it was, this really was a very good quarter.

As I have said many times before, Bud Selig, long time Board member, has always espoused that nothing is good or bad except by comparison, and if you compare the results of this quarter to a lot of other things that are going on in the world today, in the financial markets, and so forth, we had a pretty good quarter, so yes, we would like to have done better, but the reality of it is, we did well.

Andy, why don't you take us through the details, and then I will have some more general comments afterwards.

Thanks, Dan. We had a strong third quarter revenue growth in both the retail wholesale products group and the business-to-business products group. We had record sales of $59.5 million for the quarter, up 12% from last year's 53 million. The increase was due to higher average selling prices and increased volume. We were disappointed in the 18.6% gross profit margin in the quarter, down from last year's 21.8%. Margins were negatively impacted by higher fuel packaging and transportation costs.

Operating expenses were 13.8% of sales, which was down from 16.1% as a percentage of sales in last year's third quarter. Net income was 3.4% of sales, which was down 3.8% in last year's third quarter. EPS in the quarter was $0.28, the same as last year's third quarter.

Through the first nine months of Fiscal 2008, $6.1 million of cash was provided by operating activities, compared with 10.1 million in the comparable period last year. This was due to a higher cash bonus pay out in fiscal 2008 that was earned in fiscal 2007, and higher Accounts Receivable and inventory balances relating to the 12% increase in sales. Dividends of 2.5 million paid in the first nine months of fiscal 2008 were up 11% in comparison with the prior year.

Cash and investments at April 30, 2008, was 27.1 million, up from last year's 24.9 million. Cash and investments were $20,000 higher at April 30, 2008, than notes payable including current maturities. Therefore,net of cash, we were debt free. Certainly a great position to be in in today's environment.

Back to you, Dan.

Great. Thanks Andy, and I want to amplify a couple of the comments that you made.

First of all on the net debt front, leverage is a great thing when the hockey stick points up, as we all know, because we all have stocks in our portfolio, and when the hockey stick starts to flatten out or actually point down, that leverage can be just as dangerous as it was positive on the way up.

Looking back at our historical trends, when we closed the year 2000, 7/31/2000, our net debt stood at $38.6 million, and so to get into a cash positive position 7.5 years later is pretty impressive, and shows that the financial strength and the cash generating strength of this business, because during that period of time, we reinvested in our business through capital expenditures, we made acquisitions, we acquired the Taft Plant in 2000, we increased our manufacturing capacity, one of our single most important lines by 50% 1.5 years ago.

And we have increased the dividend at least $0.01 a share. We did more than that when we did the stock split. We actually increased it by 25% at that point in time, so at least once a year we have increased the dividend throughout that whole period of time, and yet we have been able to take our net debt down from $38.6 million to effectively zero. So we are very, very proud of that.

Andy referred to the margin and yes, there is no getting away from the fact that the margins are not where we would want them to be, however I listened back to our teleconference from just three months ago and pretty much a direct quote was, we said we won't see much progress in margin improvement in the third quarter, and you may see some in the fourth quarter, if the cost pressures have plateaued, and clearly they haven't.

Three months ago and I don't have this number specifically, but my memory tells me three months ago, oil was sitting at around $105 a barrel, and this morning it broke $130, so in no way were we predicting a near 25% increase in the cost of oil, which ripples through to our business in many different directions in just three months. Again this is just sort of directional, not specific, but about 4 or 4.5 years ago, the total cost of drying our clay, the fuel dollars that we spent to dry our clay was roughly ballpark $7 million.

We are expecting in the next 12 months that number is going to be closer to $27 million, so you can see how dynamic this situation has been, and through it all, we have been able to do what is the most important thing, which is maintain our volume, really increase our volume with many of our most important customers, and so that was one of the more positive parts of the quarter, that yes, it would have is been great if we had raised our prices faster, if we had perfectly predicted oil six months ago, and been in a great position to communicate that, those predictions to our customers. That is really not reality.

We were always going to be in some sense in a hindsight view when costs are going up this fast, because you can't go to your accounts three months in advance, and say that we are predicting a 30% increase in fuel, so we are raising your price precipitously. They will laugh you out of the account, and find someone else to buy from, you are almost always in a position of playing catch up, but the good news is that the volume is coming in. The $59.5 million in sales was a record for a quarter.

We actually broke $20 million for a month for the first time in the Company's history, and so we are working with our trusted customers, and getting price increases in place, and you will start to see the decline level off, and the improvement start to ramp back up on our core business.

At the same time, we are still moving full speed ahead with our new product launch which as I said a quarter ago is going to coincide with our new fiscal year, and so we are looking forward to that, and finally as I said a quarter ago, we were all hoping that given our no debt position, high cash position, and the state of the marketplace, we would find some opportunistic acquisitions.

We did make one in the last 30 days, it was not material from an SEC standpoint, so we didn't have to disclose it in and of itself, but it is generally going to mean maybe $4 million in revenues in our core business with someone exiting the business, and we were the likely acquirer, and we were able to find a price that was fair to us, fair to them, and pretty seamlessly transition their business over to us, and we won't keep all of it obviously, if we in our models, we can keep half their business, that would be great, and we will see how that shakes out, but it further validated that we were the acquirer of choice, and that there are acquisitions out there to be made, if we stay disciplined and stay opportunistic.

So those are my general comments. As always I would like to spend the majority of the time responding to your questions and answers, and Karen, at this point, turn it back to you, but I would like to encourage everybody to prioritize and ask one question, and then go back to the end of the queue.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Ethan Starr. Please proceed.

Good morning. With the acquisition on the cat litter side, or the industrial side?

It was on the industrial side.

Okay. Thanks. Can I have another question?

Sure, that was a short one.

Why was the CapEx in quarter so much lower than usual, and will it continue going forward?

Andy, do you want to field that one?

Yes. No, that won't be an example of what it will be like going forward. I think in fact it will certainly pick up from that level in the fourth quarter, and we expect it to be picking up quite a bit next year.

Okay, why was it lower this quarter?

It is all about timing.

Okay. I will get back in the queue.

My general comment on CapEx would be that I think it is going to start being higher than we have seen, and not because necessarily we will do more, but the cost of steel has gone so crazy, that doing the same project, just keeping the infrastructure of our plants where it needs to be, is costing more today than it did 12 months and 24 months ago, so the days of underspending depreciation and amortization for the next 12 to 24 months may be over.

Your next question comes from the line of [Joseph Credney]. Please proceed.

Yes, I have a question specifically regarding the bleaching side of the business. I noticed that you do plan to increase prices, but I noticed that one of your competitors, BASF specifically increased 25 to 35%. Do you expect to match that, or be similar?

You know what, Joseph, that is news to me. Did they put out a general increase? Because I haven't seen that. I mean I know there is selected stuff, but boy if you had anything, I would love to get a fax of that. I haven't seen them announce a general across-the-board 25 to 30% increase on bleaching.

Yes, I saw it several weeks ago, but I think it was put out even a couple of months ago.

Okay, I would love to get a hold of that. I will Google it, and try and find it myself. I haven't seen this. Usually these things come across our wire pretty quickly, but anyway, we are out there working with our customers, raising prices.

At the same time, a lot of our prices, freight is a big piece of the equation, and there you get fuel surcharges and things, that are pegged to diesel, and so you are getting increases even above and beyond your product increases, you are not making any money on that, but at least you aren't losing it, it is basically the transportation Company's that end up with it, I guess the oil companies end up with it, so yes, we are absolutely committed to maintaining our margins in the bleaching business.

Okay, thank you.

Thanks, Joseph.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of Ethan Starr, Private Investor. Please proceed.

I am wondering how the Cat's Pride Natural line is doing wholesale and retail?

Too early to understand it's velocity at the moment, but from a retailer acceptance standpoint, very positive. Wal-Mart is taking it on in a significant number of stores in their new planogram, as are many of our partners in the grocery trade, and so we won't, it is just now starting to fill the pipeline, so we won't know anything about movement for probably really three, maybe even six months.

Okay, it sounds like it will add at least hopefully seven figures in revenue a year?

Yes, I mean certainly. If cat litter is such a big market that if you aren't doing that you are delisted. If your velocity isn't enough nationwide to generate that, you won't have an item, so yes, that is a very reasonable expectation.

Okay, I will get back in the queue.

Ladies and Gentlemen, (OPERATOR INSTRUCTIONS). Your next question is a follow-up from Ethan Starr, Private Investor. Please proceed.

I guess it is such a great quarter no one else has questions. How often do your contracts in the cat litter side of the business, prevent you to increase prices to keep pace with gas prices?

Most of our business is at will, meaning there is no written contract, you are quoting on the business, and there is usually an annual committment, but there is nothing written in stone there, so if things went crazy, I think mid-year, we are certainly going to take a look at this on a mid-year basis, because this is about as dynamic as it has been, and I think the accounts will work with us, if the facts afford a mid-year increase.

We have heard anecdotally, food companies have not only taken two but three increases in the last 12 months, because food prices have gone so crazy, due to corn and all of the other inputs, so these are dynamic times.

I was talking about private label and co-pack relationships.

Private label same deal, co-pack even allows for it, if the facts support it.

Okay. Back to the acquisition. How much money did you spend for that?

Charlie, I will let you handle the specifics of whatever you think we can say or can't say.

Yes, it was about 1.3 million, Ethan.

Okay. Will there be a public announcement around August 1st of these new products you have mentioned?

No. I mean, no, not until it is material. As I said a quarter ago, until we materially have to disclose what we are doing, I would rather not. It is better for you, it is better for us, so there won't be any announcements August 1.

Okay. Well, I will let somebody else try to ask a question, but I will maybe get back in the queue. Thanks.

Okay, thanks, Ethan.

There are no additional questions at this time. I would now like to turn the presentation over to Mr. Daniel Jaffe for closing remarks.

Well, I hope this is an indication that everybody has bigger fish to fry than Oil-Dri at the moment, because I think the quarter came in pretty much as we predicted three months ago . Fuel was going to go but basically predicting it was going to be higher, and that is exactly what happened.

I would say looking forward, we are just in the process as we always are of completing our forward buy strategy, on up to half of our fuel requirements, and obviously it is ugly. It is much higher than a year ago. We have factored into our pricing expectations and our cost models, but having said that, there is every indication that I think it is going to keep going up, so Fiscal '09 is going to be a dynamic year.

The team is responding very well, totally receptive to taking the facts out to our customers, working with them to find prices that keep us healthy, keep them healthy, and ultimately keep the consumer healthy, and so this is something we are watching literally on a day-by-day basis, we are not reacting to it, because you don't want to over react, but we are certainly reacting to it on a month-by-month basis.

Like I said, I have every expectation that we are going to have a second round of price increases in fiscal '09 really for the first time that I can recall, that we have done it in selected basis where we had to have specific inputs went up, but I think pretty much across-the-board we are going to need a second round of increases above and beyond our 8/1 increases, and those would probably go into effect the end of January, sort of February 1 at our mid-year point, but we will keep you posted.

The good news is the volume is coming in, the opportunities both from a new product launch standpoint, from an acquisition standpoint seem to be presenting themselves, and so we will continue to keep you posted going forward. So thank you for your support. It was a good quarter, and we are looking forward to finishing the year strong, and heading into a new fiscal year with a lot of

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