Oil-Dri Corporation of America (ODC) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2008 Oil-Dri Corporation of America earnings conference call. I will be your operator for today. At this time, all participants are in listen only mode. We will conduct 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 call over to Mr. Daniel Jaffe, President and CEO. Please proceed, sir.

Thank you, and welcome everyone to our fourth quarter and fiscal year end teleconference. We just concluded our 67th fiscal year in business and as always I'd like to introduce everyone who is here. Andy Peterson, our CFO; Charlie Brissman, our General Counsel; and Ronda Williams, our Director of Investor Relations. Ronda, you've got some Safe Harbor comments for us?

Absolutely. Thank you, Dan. Welcome everyone and thank you for joining us for our fourth 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. And just to remind everyone on the call today, it will last a half hour, so please prioritize your questions so that everyone can get their most important questions in first. Thanks, Dan, over to you.

Great. Before I hand it over to Andy I'll exercise my executive prerogative here and give some color before he even gets into the play by play. We're very pleased with both the quantitative and the qualitative results of the accomplishments of the fiscal year, and as we manage our business for the long haul, it's sort of hard to even measure things in 12 month periods, certainly we can't even do it in quarterly but going back even farther you'll see in the news release there's a chart that takes you back to F'04 but I go back even farther when I look at various metrics and one of them I want to highlight for you is the second metric down which is notes payable minus cash and equivalents. We call it debt, net of cash and you'll see we actually finished the fiscal year with more cash than debt, $684,000 more in cash than debt.

What makes that number so impressive is that if you go back to fiscal 2000, we had $38.6 million of net debt meaning we had $38.6 million more in debt than we had in cash, so you move forward eight fiscal ears and you end up cash positive and you say okay, well that's fine but did you invest in the business, if you just tighten your belt so much that you don't try and grow, then that's not nearly as impressive results. The fact is since fiscal 2000, we've invested over $110 million back into our business and paid down or not all paid down, paid down debt in part, also just accumulated cash in excess of debt to that swing of $39 million. You're talking almost $150 million of cash that was generated during that period that was put towards things like capital expenditures. We spent $61 million in capital expenditures during this time period.

You've got the Williams Mill, the Taft Plant acquisition, actually I think was on top of that, the acquisition of an LVM business, floor absorbent and Ultra-Clear business we made in the fourth quarter of this fiscal year. We've launched new products and we've invested over $19 million in research and development to better fulfill our mission of creating value from sorbent minerals. The better we understand our mineral the more likely we are to be able to meet or exceed the expectations of our customers. At the same time we've rewarded our shareholders, we've paid out over $21 million in dividends during that period of time and we've either maintained it every year or in the last four and five years we've raised that dividend pretty significantly, and we've paid out $18 million of bonuses back to our internal stakeholders. SO $150 million later, we're cash positive. I think that speaks volumes as to the long term sustainability and viability of our business.

You guys have heard me mention it many times but one of the metrics we focus on is our average selling price per ton, because we're in the business of shipping tons to our customers and trying to maximize the value we get for our non-renewable clay mineral and they're in the business of using our product and shipping dollars back to us to pay for those goods and services. So if you just go back seven years, they were paying us about $155 a ton, and during the most recent fiscal year that just closed on July 31, we eclipsed $226 a ton. So up over $70 a ton and very interesting that the tonnage was almost identical. I mean it's a 1.031 million in '01, it was 1.028 million in '02, and it was a 1.026 million in '08 so it's pretty much the exact same tonnage, one million tons, times an extra $70 a ton or an extra $70 million that was generated during '08.

Now, before we get too happy with ourselves the fact of the matter is our margin still declined in '08, and Andy will highlight the financial metrics and so we're very much focused on not only repairing it but getting back to the targets we set for ourselves but it's clear we are creating value from absorbent minerals using the tortoise and the hare analogy, Oil-Dri is the ultimate tortoise, we think in long term chunks, we're into the earth moving, really basic things and so in today's environment with the backdrop of all of the things going on in Wall Street and everywhere else it's a really good time to be a turtle. There's no doubt about it and in the dot com boom it wasn't so fun to be a turtle. The hares were all blowing past us and now we would like to think that just by putting one foot in front of the other and making good long term investments back into our business that seven, eight years later we've not only kept up with the hares but passed many of the hares and I've recently spoke to over 700 of our Oil-Dri employees and we only have 800 of them so I literally hit almost 90% of them to deliver the message of how well the business is doing, how financially strong we are, and one of the analogies or examples that I pointed out to them was Lehman. In our plants everyone around the country has followed the Lehman mess and how 158-year-old business could pretty quickly be cratered and there are probably many reasons why but one of the biggest reasons why was leverage. They were levered at 30 to 1. Their debt to equity ratio was 30 to 1. Oil-Dri's is at 0.3 to 1 so they were 100 times more leverage than Oil-Dri and those of you who are long time followers of Oil-Dri this is ging to blow your mind. You can just run the map.

If we wanted to get levered to 30 to 1, we would have to go out and borrow over $2 billion, little Oil-Dri and as absurd as that sounds and as crazy as that sounds respectable companies were doing just that and nobody was blinking an eye until these respectable companies go to the government with their palms up and look to get bailed out, and as I closed with the Oil-Dri employees, I said unless you get too comfortable that okay they are just an outlier, the Lehman Brothers and the AIG's of the world and there really aren't many companies, certainly there aren't any household names that look like those guys, the fact of the matter is there are a lot of companies that look like those guys. I did a little search just for the fun of it and GE is levered at 20 to 1. We would have to borrow over $1.5 billion to look like GE. I mean, I don't even need to put any more adjectives on that. The fact of the matter is we are very happy that we have the capital and financial structure that we have. Could we use a little more leverage? Maybe and if the right opportunity comes up certainly.

We've shown in the past we're not debt averse, yet reasonable levels but the one lesson that my father taught me from a very early age was you always match the length of the opportunity with the length of the investment, i.e. you don't borrow short and invest long in illiquid assets that when things hit the fan, you can't get out of. That's exactly what these guys did. They borrowed short, invested long and got themselves caught in a whipsaw so the debt we do have is long term, fixed in nature. Our cash is invested in T-bills and so we are as turtlely, if that's an adjective as you can be, but we don't apologize for it. We puff our shell out and we're proud of being the turtles we are. So I'll get off my soap box, but in today's environment, it's almost hard not to step back and look and see what is everyone else doing, what are we doing, what should we be doing like them but what shouldn't we be and we're pretty proud of our discipline in this environment. So Andy I'm going turn it over to you for the play by play.

Thanks, Dan. We had a strong fourth 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 10% from last years $54.2 million. The increase was due to higher average selling prices and increased volume. We were disappointed in the 18.9% gross profit margin in the quarter down from last year's 22.2%. Margins were negatively impacted by higher fuel, packaging and transportation costs offset by a $300,000 reduction in cost of sales due to the sale of emission credits. Operating expenses were 13.4% of sales which was down from 18.2% as a percentage of sales in last years fourth quarter. Net income was 4.1% of sales which was up from 3.8% in last years fourth quarter. EPS in the quarter was $0.34 up 17% compared to $0.29 in last years fourth quarter. The sale of emission credits positively impacted fourth quarter EPS by $0.03 this year compared with a $0.06 positive impact in last years EPS due to the proceeds of life insurance policies on former key employees.

In looking at the balance sheet cash flow, cash provided from operations in fiscal 2008 was $11.3 million compared with $16.9 million in the prior year. Higher accounts receivable in inventory balances relating to the 10% increase in sales reduced cash from operations by $6.1 million in fiscal 2008. Dividends paid for the year of $3.4 million were up 11% in comparison with the prior year. We finished the year with cash in investments of $27.8 million compared to last years $30.0 million. Cash and investments exceeded notes payable by $684,000 at July 31, 2008. It's a great time to have such a great balance sheet, such a strong balance sheet. Thanks, Dan.

Thanks, Andy, and before we open up just a couple of more comments. Our stock price at least last time I checked it was up to about $12.25 from a low of about $11.60ish. At that range, our PE now is under 10 and our dividend yield is over 4.5, so it's interesting valuation to say the least. We would like to open it up and as always we would like to encourage everyone to ask, prioritize your questions, ask your most important question first, and then get back to the end of the queue which will allow everyone to at least get one question in before we hit the time bell.

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

Congratulations on a nice year. I'm wondering how is the current economic and credit environment affecting Oil-Dri sales and receivables and might the credit squeeze force any competitors to sell out or shut down?

Well, in looking at it in terms of our customers, I don't think we've seen a change. Our customers are relatively large companies that I think are doing pretty well. As it relates to how our competitors are doing, Dan?

In general, you would think that the smaller, the weaker the player the more regional the player is going to be more impacted so you can draw your own conclusions from that , but clearly, we like our position going

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

Thanks, Ethan.

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

Hi. I'm amazed that you guys turned the market the way you did. It's amazing.

Are you telling us we turned it up or down?

Up.

Oh, okay, today.

Wasn't that the reason for the strong rally this morning?

I don't know. If you can figure out the reason for anything, I'm all ears.

Okay, well, congratulations on a good year. So you mentioned in the press release about becoming more aggressive with new products so what can you tell us about that?

Just that we've been investing heavily. What we call our 2008 all in initiative launched on time and on budget. We're just now getting it out to the marketplace, getting the necessary registrations. We have very high expectations for that. We are already investing in the 2009 all in initiative which will be launched some time toward the end of this fiscal year. Additionally and I think I mentioned these on prior conference calls. We did launch a couple of cat litter items. Cats Pride Natural to go with the Green movement and Cats Pride Complete to go right after multi-cat owners who want the best odor control and those have been received very well and are doing well. So knock on wood so far, all new product launches are moving in the right direction.

So Dan, what is all in?

All in is just a term that obviously you know what the general term is but for us it focuses us. When we were trying to do everything we tended to get nothing done so we identify one real big opportunity a year that everybody can rally around and put our resources behind and make sure that we nail it both from a manufacturing standpoint but also from a support standpoint, a marketing standpoint, and it clearly is going to be in line with our mission of creating value.

But you haven't said what it is or have you?

We haven't to you. Those internally all know what it is.

Okay, so when can you do that?

Well it's like anything. I mean you want us to maximize your investment so the earlier we start cheering before we get into the end zone, the greater chance the defense is going to tackle us.

No, no, all I'm asking is when do you think you might be able to tell us something about it?

Charlie can answer that better than I can because it comes down to an SEC materiality.

Bob, as you've heard us say in prior years, our general approach on these new product initiatives is we don't even think about talking to the investment community about them until the disclosure rules tell us it's time to talk about them. So we hope a lot of time doesn't pass because it will tell us we're off schedule in how we've envisioned these initiatives moving forward but you heard Dan say our 2008 initiative is off and running. We're queued up with the 2009 initiative. As soon as we have to talk about them with you we will and it will be a great day for Oil-Dri and its stockholders.

Okay sounds very mysterious to me.

Yes. But Bob, I'll just say this, I mean I think over the years, most of you have picked up part of the Oil-Dri personality is to not sort of beat our chest and say look at us very often, Dan's remarks at the opening of the call today are about as far as you're ever going to see us go and that's only because the way we're running our business is so very different from the vast majority of American businesses that are currently in the news.

Yes, but in the past when the practice comes to the market you've shared what it was with us.

Well, I'm not sure I'd agree with you. We've certainly had occasions where either the nature of the industry or our branding efforts brought the initiative to the public's attention before we would have wanted to and then we talk about it as well.

Okay. And I don't want to belabor it. Good luck.

Okay, I don't want to belabor it, good luck.

Your next question comes from the line of Jim Schwartz. Please proceed.

Hi, guys.

Hi, Jim.

Just curious, Nationwide Distribution that you guys have, has that become a pretty sustainable advantage in this environment and who else that you compete against has the kind of nationwide distribution you have?

Are you referring specifically to cat litter?

To cat litter.

Yes, it's a huge source of sustainable competitive advantage for us. The only other player that has a similar layout although not the same would be Nestle Purina, and they focus on branded products as you would expect so from a private label cat litter standpoint, we have by far the best geographic layout in a area of private label, phrase is even more important to private label than it's going to be for branded because it tends to be lower prices and lower margins so that's a good competitive position for us to be in.

Okay, and then just last question, with natural gas in the 6s now from the 13s and as important as that is, for you guys, when do you think we start seeing some kind of help on the gross margin line going forward? How long does it take to kind of trickle down?

Yes, I mean, it helps you should start seeing because it certainly, even though we forward by half of our needs we're pretty much at market for the other half so we are taking advantage of the lower spot prices, we're actually buying some contracts out into the second quarter and third quarter because it's still below what we've budgeted for which is good news, so certainly you're going to see help right away. The question is how high do you want the help to be before you're impressed with that help and also, how do you measure the help? I've come to two realizations. You can look at percentages which is certainly one way to look at it but as you start to gross up the sales for all of this fuel, the per ton number is also relevant, i.e. you make 25% on 200 hours of time you're making $50 a ton. If you make 20% on $250 a ton you're making $50 a ton, so obviously we can't ignore the percentages but we also can't just assume because gas has run up that we could maintain the margin willy-nilly on every product we have as gas runs up. That's not likely.

To put it another way for you that makes it most extreme, five years ago the gas bill for the Company, the fuel bill for the Company to dry our clay was about $5 million or $6 million. When the gas was at 12, $13 it was looking at it was going to be $29 million just five years later. Well, making 20 points on $5 million is $1 million of gross profit, making 20 points on almost $30 million is $6 million of gross profit just on your fuel. So it is a tempering factor on the percentage although it should not at all drag down the per ton. So we're looking at both metrics on either metric we weren't happy with '08. The percentage it was down from 21.5 to 19.8, the per ton was down, we tell you how many tons we're doing so you can calculate it and we made $46.50 a ton in '07, we were down to 44.89 in '08. So clearly, our first goal is to get the per ton number moving in the right direction which will help the percentage and so a long winded answer but there's a couple ways to measure progress.

Thanks, Dan. Thanks, guys.

Okay, thanks, Jim.

(OPERATOR INSTRUCTIONS) We have a follow-up question from Mr. Ethan Starr. Please proceed.

Yes, the press release stated that Oil-Dri will be building its infrastructure to support growth in the coming fiscal year and I'm wondering what infrastructure are you investing in and how will these initiatives affect total capital spending for the short and long term?

Let me get your second answer first is I'm glad you brought it up because while we're trumpeting the fact that we are cash positive here at fiscal '08 year-end, we will hopefully not be cash positive in fiscal '09 year-end because we have CapEx on the works that has high return on investment. We've got these growth opportunities we're investing behind, and so I think it would be highly unlikely that we'll finish '09 in that same position but for all good reasons. I don't really foresee that we'll be taking on more debt. I just see we'll be using up some of our cash war chest to go after these opportunities. So that's sort of the expectations going forward.

In terms of what we're specifically doing, I don't think we're going to get into the specifics of our projects but just to remind you as always we have our return on investment disciplines in place for capital expenditures and we target an ROI of north of 20% and these projects all meet with that unless they're health and safety related and then obviously you have to do them regardless of the ROI but most of these are ROI type projects and really would help the future profitability and growth of the business to help support that. So all positive stuff. Okay, what's the CapEx budget for fiscal '09? Can you share that?

I think in the 10-K, we say it's about $5 million over kind of what our recent efforts are, so we've been spending 7.5, so 12, 13 kind of number.

Okay. And one other quick question. Oil-Dri appears to be making a significant strategic investment in the animal health and nutrition area. You've hired a number of new employees and stuff. Can you add some more color to that?

That's just B to B and keeping with our hope of obviously keeping the core business which a lot of it is retail, wholesale, healthy and growing but you can all see, one-third of our sales but two-thirds of our profits comes from B to B so clearly we're able to add more value, create more value in B to B. Our products work very well in the animal health world. They bind microtoxins which are things like apotoxins and [derellonol], which would inhibit the animal from achieving its potential and we're not talking companion animal, we're talking about livestock production animal so this really is a global business. That one we can sell throughout the world and we have a great team of people in place and they're very excited about growing that business because it is, it's growing the market itself as best as we can tell and there's no Nielsen or IRI, so it's hard to get your arms around but it appears in the past five years it's had a compound annual growth rate of right on around 18, 19% and it's continued to project that forward as regulation and food safety and so forth grows and it increases throughout the world then obviously taking out things like toxins is a big deal. So yeah, this is great. This is a value-added use for Oil-Dri clay.

Okay, great. Just the only other thing I'd say is I would urge you to buyback stock if you feel you have the cash to spare to do that.

Good, thank you, yes. At these prices, sure.

Okay, thank you.

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

I love reading that you comment about the dividend. I hope you continue to increase the dividend annually. I think it says a lot about your philosophy in the business. You guys still hedging about half of the natural gas cost?

Yes. Long term we're hedged at half and then short-term we take opportunistic reads and if we can buy spot prices even a month or two out we'll do that if it's at a price that's to us is sort of below where we've set our prices at then it's going to help us with margin so yes, that's exactly what we're doing.

Is the CapEx increment basically machinery and equipment as opposed to bricks and mortars?

It's both.

It's both, okay.

I will tell you the good news about we mentioned earlier we're doing the same million tons but now we're getting $226 a ton instead of $150 a ton so the business has been able to grow accordingly. If we had done the opposite, if we had held our pricing at $155 a ton and still tried to get to 232 million tons we would have had to sell almost 50% more tonnage and that incremental tonnage would have meant more CapEx, more plants, more permitting, quicker use of our clays, all negativity. I mean, we wouldn't be having any kind of results so the beauty here is we've been able to support the growth of the business with almost the identical infrastructure. As you know, we built that new bleaching facility a few years ago and that went very well. That business is strong as you can tell from our leases. So the tack we're on of trying to maximize the value for every ton we ship for many reasons appears to be the obvious tack and the right tack.

Dan, in the past, the new products have a lot of promise but really didn't click, so I hope this all really works for you guys.

Good. Thanks.

At this time there are no more questions in queue.

Great. Thank you, just to wrap it up, I appreciate everyone conforming to the format. It keeps the focus, keeps it paced appropriately. We next time will be back at you after the first quarter results and just like you, we are all hoping we'll be able to show some not only continued top line growth but prepare for the margins and bottom line benefit as well. So thank you for your support and we look forward to talking to you at the end of the first quarter.

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