Oil-Dri Corporation of America (ODC) 2009 Q1 法說會逐字稿

Welcome to the first quarter 2009 Oil-Dri Corporation of America conference call. My name is Latasha 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) I would now like to turn the call over to Mr. Daniel Jaffee, President and CEO. Please proceed, sir.

Thank you, Latasha, and welcome, everyone, to our first quarter teleconference. Joining me today, Andy Peterson, our CFO, Charlie Brissman, our General Counsel, and Rhonda Williams, heads up our investor relations. And I know, Rhonda, you want to do a Safe Harbor.

Absolutely, thanks, Dan. And welcome, everyone and thank you for joining us today. 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. Thank you. And Dan, back to you.

Thank you, Rhonda. And as always, we'll have some introductory comments, some opening comments by me, but then we want to dedicate the majority of our 30 minutes responding to any questions and concerns you might have. So at that time, we'll open it up, and please prioritize as to your most important question first and then get back to the end of the queue just so we can make sure everybody has a chance to hit their top one or two questions. I think I'll turn it over to Andy and let him go through the play by play for the quarter and then I have some sort of 50,000-foot comments I would like to make. So, Andy?

Thanks, Dan. We had a strong first quarter revenue growth in both the retail and wholesale products group and the business-to-business products group. We had record sales of $63.1 million for the quarter, up 14% from last year's $55.3 million. The increase was due to higher average selling prices and increased volume. We were disappointed in the 19.6% gross profit margin in the quarter, down from last year's 22.5%. Margins were negatively impacted by higher fuel, packaging, and transportation costs. The cost of kiln fuel to dry our products was up almost [50%], or $2 million, from the prior year. Operating expenses were 13.8% of sales, which is down from 16.0% as a percentage of sales in last year's first quarter. Net income was 3.6% of sales, which was down from 4.5% in last year's first quarter, and EPS was $0.31, a decrease of 11% compared to $0.35 in last year's first quarter.

Looking at the balance sheet and cash flow, cash used in operations in the first quarter was $2.6 million compared to flat in the prior year. Higher accounts receivable and inventory balances relating to the 14% increase in first quarter sales reduced cash from operations by $3.5 million. Cash from operations in the first quarter is negatively impacted by paying out the incentive bonus from the prior year. Cash expenditures of $3.6 million were up 64% from $2.2 million in last year's first quarter. Debt payments were up $4 million in comparison with last year's first quarter. Dividends paid of $919,000 were up 10% compared with last year's first quarter. The company repurchased 40,834 shares of stock at a cost of $644,000 compared with no purchases in last year's first quarter. Our average costs for the shares repurchased was $15.78 per share. Cash and investments at October 31, 2008 was $16.8 million, down $10.9 million compared to last year. Notes payable of $23 million was down $8.1 million compared to last year. Back to you, Dan.

Thank you, Andy. And as you said, we were disappointed with the gross margin. As we put in the news release, while we were successful in implementing price increases really in every product group, they weren't enough to cover their tremendous cost increases. Saying this was a dynamic volatile environment is an understatement. If you look, I mean we recorded the greatest year-over-year increase in our per-ton selling price ever in the company's history. I mean I keep these stats going all the way back. Our average selling price is actually up nearly $20 a ton in this year's quarter versus a year ago and yet margins still went down, which shows you that we were shooting constantly at a moving target. So, yes, short-term for the quarter, margins were down.

The long -- nobody knows what the long term looks like anymore, so the near-term costs seem to be stable to declining. We are still rolling out some price increases in selected businesses particularly in the retail and wholesale group, where you see our sales are growing at double digits but the profits were declining, they were down in the segment by 27%. And so clearly we have not yet covered all the cost increases that we incurred since our last round of increases six months to 12 months ago. You tend to price protect those customers for a one-year basis. And so we're still having to recover. So even though we're having discussions with accounts and they say in the short run costs seem to be down. When you take them back to a longer term horizon, a year or two years, and show them where costs have gone and where our pricing has gone, it doesn't take a math major to see that margins are declining, ie, we have raised prices to a lesser extent than we have incurred cost increases. So we are still out there needing to take some price increases, even in this environment.

And so it was dynamic to say the least. The good news is the volume came in when the tons came in, our tons were up in the quarter. A year ago we did about 246,000. This year, we hit almost 260,000 tons in the quarter. So the volume came in and when that happens, you can manage your way back towards financial health. If the volume doesn't come in, now you're in a totally different scenario. Now you're out there trying to recapture lost volume. So the good news is our relationships are still very strong with our accounts and we're working with them to, over time, repair the margins. So near term and long term, we're still very bullish on our business.

We also unveiled finally what our all-in initiative was at the annual meeting yesterday, we showed those of you who could make it, appreciate it, we showed an infomercial around it. It's our new Calibrin-A and Calibrin-Z Animal Health products. These are [mycotoxin] binders. We have been participating in a segment of this business historically with our condition aid product. Many of our customers have used ConditionAde outside the US as a toxin binder, and for [aplitoxin] which tends to be more focused on poultry, a little bit on dairy cows, but really the major application was on poultry. We never really competed in the [zeralinon] binding segment, which tends to impact swine production more and that's where our Calibrin-Z now goes for.

So we, through a lot of time and energy and a lot of R&D, all of which has been expensed as we've delivered results for the last two years, we also have been able to invest in this growth opportunity. So we've done a lot of studies to prove the efficacy of our products and are very excited by the fact that not only our products able to propel to the highest levels of health and safety from a regulatory perspective, but also from an efficacy standpoint, are as good or better as anything that's on the market today in binding those mycotoxin, both aplitoxin for Calibrin-A and zeralinon for Calibrin-Z, this is a big market and it's only getting bigger. It's a -- the toxin binding market worldwide is estimated to be $300 million and growing at 15% to 16% a year. Our current share of that market through our ConditionAde entre is 2% to 3%. Obviously we hope to not only convert our ConditionAde customers over to Calibrin-A and Z, but also because we're now participating with zeralinon segment, because we've put a lot of data and research behind the efficacy both aplitoxin and zeralinon binders, we believe that we'll be able to grow the business.

We've been also attracted a lot of talent. We have a lot of doctors in veterinary medicine now on our payroll led by, as we announced, Vice President, [Ron Cravens], who is leading up the team. He's got 25, 30 years experience in Animal Health and nutrition, probably if you go all the way back to his time spent on farms or so forth, you could probably go 40, 45 years of experience and very excited with what he and his team have going. Obviously with all the usual disclaimers, it could amount to nothing, but we obviously believe it's going to amount to something. And as we go forward, we'll keep reporting on our progress. The good news is this is not like a consumer product launch where you're going to do a lot of TV, a lot of media and we've been coming at you saying, okay, forget about earnings for fiscal '09. That is not the case. This is a pay as you go. The core business is healthy and helping to fund this launch, as has been funding it all along. And so it's all accretive, whatever we get, and all incremental. So we're really excited about this opportunity. At this time, I would like to open it up to questions and hopefully some good answers from our panel here. So Latasha, if you would facilitate that, I would appreciate it.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of John Barr. Please proceed.

Yes, I'm a new shareholder and very excited about what you guys are doing. I was interested in new product. You talked about getting -- having 2% to 3% of -- with condition aid. What, what do you think we can expect over the course of a couple years with Calibrin-A and Z in terms of market share?

Yes, John, it's a good question, and probably one that we're not going to answer with too much specificity, only because, first of all, we don't know, and second of all, it's all speculation at this point. I think from our vantage point, historically we had two people company-wide really involved in selling this. We had really little or no R&D effort. We had no data behind it. All we had was sort of anecdotal customer field inklings that our products did what we thought they were going to do. Fast Forward now, we spent two years and multiple millions of dollars doing field studies in Brazil and the [Delmarva] region, really throughout the world. We've got I think eight now DVMs either on our payroll or through contract employment and all very excited about this, talking to our distributors, talking to our end users. So from my vantage point as a major investor in this company, it just defies logic to think that we've maximized this opportunity.

So how high is up? I really don't know, but I would be stunned if all we did was convert our existing customers over to this. I would call that a defeat. I mean we all expect that this is going to help us, especially given that now we're getting into a whole new toxin market, [zaralinon] market that we're very bullish. That's all I can do. Who wants to throw numbers out? It would all be speculation at this point.

Are there other things you need to do in the channel other than support them with the DVMs?

Yes, I mean certainly, we're in trade shows throughout the world and we're supporting them with promotional materials, and also it's languages where we've got this info measure that is very powerful. But at the same time we also need to keep doing and we are researching on how do we improve the products we have, because always need that next generation, what's new, what's exciting, but then also going after other toxins and so forth. These aren't the only ones. These are the major twos, but there are others. Dr. Cravens has a great three, five and 10-year vision for this business, and we're, like I said, we're excited.

And do you think the gross margin structure here is above the corporate average?

Yes, I think that's a safe assumption.

Okay, great. Thank you.

Thank you.

Your next question comes from the line of Ethan Starr, private investor. Please proceed.

Yes, Dan, the 10Q mentions a purchase of land in the first quarter. And I'm wondering where was this purchase and was the purchase made to increase clay reserves?

I don't specifically -- we're always actively acquiring land in our attempt to increase our reserves. So I'm pretty sure -- I know I signed off on stuff that hit the quarter and that must have showed up in the Q. So specifically which region, we're doing it in all of our core plant areas.

Okay. Well, thank you. Look forward to next quarter.

Okay, thanks, Ethan.

(OPERATOR INSTRUCTIONS) I show no further -- I do have a question just queued up. Brad Evans, Heartland. Please proceed.

Good morning, everybody.

Hi, Brad, how are you?

Okay, thanks. How about yourself?

Doing well actually.

Just thinking about the gross margins as we move forward throughout the year, is it fair to say that we can expect to see some gross margin expansion as a result of falling raw material costs?

Yes, I mean I would say if the cost profile stays even relatively consistent with what we're currently seeing, yes, that is a safe assumption. If all of a sudden things spike up for whatever crazy reason we always take a long-term approach, so we're not just going to immediately put, as I say, put our customers in cardiac arrest. But if the profile stays the way it is, yes, you should see quarter after quarter inching back along towards, towards where we were historically.

Dan, could you just give us a little bit of color as to how volumes across various products have held up since late September in terms of -- just give us a sense as to how the business has held up in light of the deteriorating economic situation for the country?

Yes, no, that's an excellent question and I there's always a big element of luck in business and I think from our vantage point, there's a lot of luck in the sorbent mineral business in the sense that our products tend to be not discretionary or luxury purchases. They are day to day uses in core things, like pet ownership, companion animal. Where are we skewed? We're skewed more towards the end of the market. We really have it all covered. Relationship with Clorox takes us into the premium end, no doubt, and fresh step with healthy, which is good, but certainly out direct relationships deal with our brands, which tend to be popular prised or the fact that we focus so heavily on private label for our major partners, like a Wal-Mart. Clearly those brands, those private labels have more relevance in a down economy than they do in an up economy. So I think that had a large reason why our volume came in so strong and we're continuing to see orders going forward equal to or better than the past. So we're not seeing any deterioration there, fortunately.

Over on the b-to-b side you think about it. The clays that we sell to ADM and Cargill and companies like that to purify edible oil, people still need to eat and they are not changing their eating habits. They may not go out as much. I'm sure that's happening, but you still got to ingest the same calories pretty much you were before. So that business is still steady. It tends to be more dependent on what's the quality of the oil crop than in these ranges anyway what's going on in the economy. So that's good news, our ag products.

I would say if there's areas that might get effected and we won't know really until the spring would be things like our ball field products where we sell to municipalities. Their budgets have to be decimated and so are they going to be as active maintaining their ball fields for their little leaguers and their community programs? Probably not. I mean we don't have really a forward buy mechanism where we can see that weakening yet, but if you made me predict, I would say that's probably going to be soft. And then certainly in the traditional Oil-Dri, which doesn't represent a huge percentage of the company anymore, but back when it represented 100%, my father tells me, when there was a recession, you would see 20%, 25% declines in the volume of the company. Will we see a 25% decline in our Oil-Dri floor absorbent? We're not seeing it yet, but I would be surprised if we didn't see some decline. You got Detroit hurting. I heard usually they are expecting 15 million units sold and now they are down to 10 or 11 million units. They are off 35%, 40%. Some of that will trickle into the supplies, parts manufacturers, the whole deal and those who use our products. But not enough to where I would materially change our own projections for the year.

I know we don't give guidance, but I can at least give guidance on our lack of guidance, which is that we are still on plan. We still feel as good about our ability to deliver the plan today as we felt three months ago when we didn't give you guidance. So hopefully that gives you an inkling into our thought process.

If I can just sneak in one more, thanks for the color, I appreciate it. I think it's impressive that you've been able to hold your SG&A line. It was actually down a little more than 1% year-over-year, so congratulations in controlling costs. With respect to that line item, should we continue to see -- I would imagine that at some we've been down now four quarters in a row on a year-over-year basis in terms of absolute dollars. I guess at some you're going to go up against some more difficult comparisons. So we should start to see maybe some modest growth in terms of SG&A in absolute dollars as we move forward?

Maybe, but hopefully only in the effort to roll out more profitable products. So certainly nothing in the core business. We've got that managed well. Without getting on my soap box, but I think you guys have investors have a right to understand and I think if we all ask these questions, some of the insanity going on in America wouldn't be going on. We all fly coach, from me all the way through. We use online purchasing vehicles like priceline to book our hotels, book our cars. I mean we are very frugal with the company's money. It's -- even though you could say, oh, it is your money, it isn't. The Jaffee family controls just 30% of the equity and we take it very seriously, that 70% of the money in this company is from non-Jaffees, and everyone from myself all the way through spends the money very wisely. When it's our personal money, well, then that will be our decision, although we tend to be frugal there, too, but we wouldn't have to be. But with the company's money, we're very tight. So the SG&A is what it is, but I can tell you, we're not lavish with anything we do.

Okay. Well, congrats on a very nice quarter. Thanks.

Thank you, Brad.

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

Hey, Dan. Nice job.

Thank you.

Question for you on Calibrin-A and Z, could you go through two things for me? Number one, the type of clay that's used and how it differentiates from the other clay that you might have. And then I guess when the swine or chicken, when they ingest it, do you kind of just chuck it into the feed, is it given to them specially? How is the delivery process done? And then I'll come back with one more.

Okay. Good questions. In terms of the type of the clay, I think as an investor, what you really want to get at is how proprietary or how unique is it to Oil-Dri, because I don't want to get into the specifics, it would be like giving you the formula to Coca-Cola or something like that. It's very proprietary. I mean we spent a lot of time and a lot of money surveying our literally hundreds of millions of tons of reserves to find a -- it's not inexhaustible. Nothing's inexhaustible, but in the order of magnitude of financial impact of this company, it will be a great day when we run out of this clay, because it will mean huge sales, huge profits for the company. So within a 10-year window, inexhaustible quantity of reserves, which we then specifically mine and segregate and then we actually process them in a different location, especially processing them each differently. So Calibrin-A is processed differently than Calibrin-Z.

So you couldn't use A to effectively go after zeralinon and you couldn't use Z -- you wouldn't want to go after [aplitax] because it's priced higher. It's more specific to get the zeralinon. That's more of a special application. So from an investor standpoint, very, very proprietary, very unique. And then obviously really what gives people the confidence is the data, is the support behind it. I mean you think about any pharmaceutical product you buy personally. Someone could create an exact duplicate of it, but if they haven't proven that it works or that there's no data or support behind it, how likely are you going to be to ingest it or feel good about taking it? Having said that, you can get into the whole generic analogy and all that, but in this business we don't know of anyone who has this reserve. We didn't have it anywhere else. Actually if you had made us predict going into this product two years ago would this be the area we would find it, we wouldn't have.

So it was even a surprise to us, which was nice. We put a whole suite of products into the studies, and this one, we would not have predicted would have won. And not only did it win, but it was a slam-dunk winner. So very excited about that. And then regarding the vehicle or how the animal ingests it, it's mixed into their food at like 1/2% inclusion and then goes through their gut, binds the toxins and then they excrete them out harmlessly, so they never get assimilated into the bloodstream, so it's a pretty neat thing.

Well, thanks. And Dan, is it safe to say, I guess gross margin-wise, I guess another caller asked about the gross margin difference between this and your other. I mean obviously private label is single-digit gross margins. This sounds -- this is a $300 market, growing 20% a year. It sounds like the gross margins are maybe upwards of 40%. Probably wouldn't be crazy to think that. How -- I mean how big do you -- if we look out three to five years, how much of the market do you think you could be?

Again, I -- it's all conjecture. We're excited. We wouldn't have done this, we wouldn't have gone all-in on it if we didn't feel like it could be a big deal. But we don't even have a reorder yet. We've got orders because we've got stuff out with distributors, but now they are getting to the end users and so forth. So I would say let's save it for another quarter and first question ought to be do we have any reorders, and we can start talking about that and then start figuring out how big is the snowball and how much bigger is it getting every quarter. At the moment, we've got sales out there. We've got product loaded up in a number of our distributors. We have been registered in about 60% of our existing markets' countries. So we still have registration to go. We're still hoping to knock off China. That's something we can talk about next quarter. Actually we're hoping that does happen maybe by the end of next quarter. It might even fall into the beginning of the fourth quarter, but certainly China's one of the next big countries that we're looking to get our products registered in, but we're registered in Mexico, Brazil, in the Philippines, Thailand, Korea. So it's really a creep, crawl, walk thing, but it's exciting.

That's great. But I assume this was a pull product, not a push. I mean you didn't just hire scientists and get this done because you thought it conceptually was great. I mean you did it because there was some kind of demand that you were --

The $300 million of demand, but they are currently buying other products as well.

Right.

So it's going take time. They are not just going to convert on a dime. They make a rational decision based on data, based on efficacy, based on performance. The people you sell to tend to be nutritionists who are saying, okay, I'm not buying this because it's a clay, or I'm not buying this because you want me to. I'm buying it because it delivers value to me, hence -- or apprapo to your conversation or question on margins, it's a value-based scenario, not a cost-plus base scenario. So, yes, the margin expectations are higher because we're sharing in some a sliver of the value. There's so much value out there with the way these products work. So it's I would say just keep hammering questions each quarter, but more along the lines of, okay, where are you registered now, we had repeat orders, what's the snowball doing?

Great. Thanks, again, Dan, and great job on SG&A as well.

Good, thank you.

Thanks again.

Well, I think we're at our half-hour point. I hope everyone who wanted to ask a question got a question in. These are very dynamic times, but as I always say, it's the best time in not only my short, although now I've been with the company 21 years, but even my father's horizon, he just celebrated his 50th year with Oil-Dri. It's really the best time ever to be a turtle or a tortoise. We're the ultimate tortoise in the tortoise and the hare race and we never apologize for that, because the tortoise win. Every time I read that story the tortoise always crosses the finish line ahead of the hare, yet you ask most people and they all want to be a hares, and I scratch my head. But at the moment, not a good time to be a hare, a great time to be a tortoise and we're inching along, but I think you see we try anyway. Every time you look up, we've made some progress. So looking forward to talking to you again in a quarter and let's have a happy and healthy holiday season. So thanks for your support.

This concludes the presentation. You may all now disconnect. Good day.