Oil-Dri Corporation of America (ODC) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the second quarter 2009 Oil-Dri Corporation of America earnings conference call. My name is Erica 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 toward the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Daniel Jaffee, President and CEO. Please proceed, sir.

Thank you, Erica, and welcome, everybody, to our second quarter teleconference for Oil-Dri. We're very pleased with the quarter. Let me introduce everyone who's here on the call. Due to the miracles of modern technology, we have our CFO, Andy Peterson, down in our Georgia facilities, Charlie Brissman, our Vice President and General Counsel, and Ronda Williams, our Director of Investor Relations. And Ronda, will you cover the Safe Harbor?

Yes, thank you, Dan. 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. Thank you, Dan. Back to you.

Thanks, Ronda. And as Bud Selig, our long-time Board member has said to us, nothing is good or bad except by comparison. And so obviously our results while good in comparison to prior year's results are also very good in comparison to a lot of what's going on, not just in the United States but globally, in the economic environment, so we'll walk you through it. We're very pleased with what happened. Andy, love to turn it over to you at this point and have you go through the play-by-play.

Thanks, Dan. We had sales of $59.1 million for the second quarter, relatively flat compared with last year's $58 million. We had a gross profit margin of 20.1% in the quarter, up slightly from last year's 19.6%. The cost of kiln fuel to [dryer] products was up 30% or $1.1 million compared with last year's second quarter. Operating expenses were 14.1% of sales which was relatively flat compared with 14.2% as a percentage of sales in last year's second quarter. Net income was 4.0% of sales which was up from 3.6% in last year's second quarter. EPS was $0.33, an increase of 14% compared to $0.29 in last year's second quarter. Through the first six months of fiscal 2009, $1.9 million of cash was provided from operations, down from $2.7 million in the comparable period last year.

Capital expenditures of $7.8 million were about double last year's $3.8 million, as we spent money building a new manufacturing process scheduled to come online in the fourth quarter of this fiscal year. Debt payments were $4.1 million in comparison with last year's $100,000. Dividends paid of $1.8 million were up 9.5% compared with last year. Cash in investments at January 31, 2009, was $16.8 million, down $11.9 million compared to last year. Notes payable of $23.0 million was down $8.1 million compared with a year ago. Back to you, Dan.

Thank you, Andy. I want to highlight some of the trends you referenced and add some of my own. I relistened to our teleconference from the first quarter. And a forward-looking comment we made was that if gas prices stay where they are or relatively near where they are, that we would start to see a slow but positive reaction in our margins -- progression in our margins, gross margins in particular. And we did see that. We made 19.6% in the first quarter, 20.1% in the second quarter. Our per ton profitability was better. I would say if we saw any softness in the quarter, it was in our tons sold which were down slightly from a year ago. And when we got in the covers, it really doesn't look like it is recession-driven.

For instance, in one of our businesses where our products are used to bleach edible oil, the oil crop is very good this year. That's sort of a random event. Some years it is good. Some years it is not good. That's good for the oil producers, not so good for the bleaching earth producers because there is an inverse relationship there. The worst the oil, the more clay they have to use to achieve the clarity and color removal that they're looking for, chlorophyll and color removal. And so, when the oil is naturally good, they use less clay. So, while our market share is as good or better than it was a year ago, at each refinery, they're using less clay.

So, that's an area we were down in the quarter, but again, we don't feel like we've lost any accounts and we don't feel like we've lost share. It's that the market has naturally reacted to the quality of the oil. I really want to spend the majority of the time responding to your questions. I have a lot more information, but I'm guessing you're going to ask questions in and around what I'm sort of prepared to talk about. So, rather than me try and guess what it is on your radar screen, Erica, why don't we open it up to Q&A. But as always, let's prioritize, ask your most important question first then go to the back of the queue, because we're adhering to our 30-minute format and we're going to reserve the final four minutes for closing comments. So let's open it up and answer questions that are on our investor's minds.

Thank you, sir. (Operator Instructions) Our first question comes from the line of Ethan Starr, with private investor. Please proceed.

Good morning. Congratulations on a nice quarter.

Hi, Ethan, thank you.

I'm wondering, have you been getting reorders for your new Calibrin products and also what percentage of ConditionAde users have switched to Calibrin?

Okay. I'm prepared to talk about Calibrin. And the answer is yes. Where we have originally first got the product registered and then sold, we have had repeat orders and so that's very positive. The end user reaction to our products is very encouraging. Put it in relative terms for you, in the first quarter, now that the cat is out of the bag, no pun intended, we sold $88,000 of Calibrin products in the first quarter. We sold $204,000 of Calibrin products in the second quarter. So, almost more than doubling, a little less than a tripling. So, clearly, the snowball is rolling.

At the end of the first quarter, the new products, Calibrin-A and Calibrin-Z, were registered in 50% of our historic ConditionAde market. So, we were registered in 50% of those countries. We're now at 69% at the end of the second quarter. So, we made some good progress continually increasing the countries who registered. We added Japan, Guatemala, Peru, Hong Kong, Colombia, Costa Rica and Panama in the most recent quarter. That adds to the markets that we were already registered in at the end of the first quarter which were countries like Brazil, Taiwan, Mexico, Thailand, the Philippines, South Africa and El Salvador. So we're in good shape. The one glaring hole in our registration profile at the moment is China.

Rightly so, they are taking a much more critical look at products in and around the food chain as they have had all sorts of issues in their country, and so that process is going to take longer than we or anybody would have anticipated. If and when China gets registered, we anticipate it will at some point, that would add another 11% to our regulatory profile of approved profile. So, that's good news. As to what percent have converted, I don't have that information handy. So, I don't really know, but as I continue to report the quarterly trend on sales, and I will do it so we all get a feel for how the snowball is rolling, it will become pretty obvious as to how much of the old business has gotten converted to the new. Because we're still selling ConditionAde as we convert our customers over to Calibrin-A and Calibrin-Z.

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

Thanks, Ethan.

(Operator Instructions) Our next question comes from the line of Robert Smith with Center For Performance. Please proceed.

Hi. Good morning.

Hi, Bob.

First of all, I would like you to reconsider the 30-minute time frame because I would like to get my questions in if I had more. Anyway, that's something for you to decide. My questions center on your statement about the capital expenditure for a new product line or whatever. Can you just give me some color on that?

Sure. We're not giving too much specificity around it. But we're excited about it. It is our next all-in initiative. You've heard me use that term before in the past and Calibrin-A and Z, it took us a couple of years to unveil that all in initiative. This one is the next one beyond that. And it is what we are calling an engineered granule. It allows us to tailor our clays to do very specific things for our customers with a very high degree of uniformity, way greater than what mother nature would produce on her own. And so there are customers where uniformity is very important, dust control, very important, ie, no dust, not even some measurable dust, but no dust. And in those applications, this new engineered granule fits very well.

Obviously it continues along our progression of creating value from sorbent minerals. This would an next step. It could well have -- we call it a platform technology. It could well have benefits in every business we're currently in, we could foresee using this technology to meet customer demand and needs in a myriad of businesses. So we're very excited about it. Is it going to change the world in fiscal '09? For sure not. We should be able to start reporting some initial sales and interest in fiscal '10, because you have to get into trials and get the product approved with various customers. So, it is going to take a little while. But we're very excited about it. It is another internally generated opportunity that, again, had we not been spending the money on R&D, these opportunities would never crop up. But because we do invest so heavily back into our business, we're able to find new ways to ring some value out of our minerals. So, we're excited about it.

At the moment is it more away from consumer?

Definitely more skewed toward B-to-B, but dreaming in color, could you see it? Maybe. The [brom] of uniformity in the consumer area is you don't want product that rolls and things like that. I mean these are perfect spheres, and so I'm not so sure it would make a cat litter or not but it is definitely skewed toward B-to-B right now.

Okay. I'll get back in the queue.

Okay, thanks.

There are no further questions at this time. Mr. Jaffee, you may proceed.

Well, Bob said he might have had more questions. So, Bob, again, I think the 30-minute format works well, because what we're doing is getting the information out there, the calls have been way more concise. Let's see if Bob or Ethan have another question. If not, I have one sort of closing tack that I would like to take, and then we'll wrap it up.

We have a follow-up question from the line of Robert Smith with Center For Performance. Please proceed.

I have a number of questions here.

Well, keep going, Bob.

Okay, so I notice a kick up in the inventory level. With just a slight increase in sales. Anything with that?

Yes, I mean all good. We are scheduling some shutdowns to work on dryers. Some of our dryers are 50 years old and need work. And so we're ramping up inventory so that we can continue to meet consumer demand while the dryers go down in the end of the third, beginning of the fourth quarter in a couple of our locations. So, we did this at another dryer a year ago imperceptibly to the customers, and we believe that, again, we will not miss any orders as we build up inventory and then take our shutdowns.

Okay. Next, accounts receivable. I just see one line. Have you done anything with reserves? Is there any question about any questionable reserves -- any questionable accounts?

The devil's always in the details. And let me give some top line comments, and then Andy, I would be happy to have you give specificity around my general comments. But we have dug into it because while our percent current is fabulous and our profile is very good and we're not seeing delinquencies and/or defaults, we're certainly mindful to what's going on out in the external environment. So, we're keeping our finger very close to the pulse of our accounts seeable. When you get into the details, you do see that historic accounts that we're paying in a certain profile, while they're still "current" or within 30 days, are pushing it a week or pushing it five days. And when you do that, it does show up in your ultimate DSO and your accounts receivable. Andy, do you want to put any details around my generals?

Yes, no, I think you captured it, Dan. I think in terms of how current are our receivables, and I think they're as current as I've ever seen them. There's almost nothing out very far, but I think a lot of our customers and I think a lot of companies across the world are stretching a few days in making payments. In terms of delinquency, we are in great shape and I would say we're better than our recent past has been.

Okay, so this is not a problem.

No.

Okay. Next, I notice you bought 300 shares of stock. Is that true?

You mean the company bought back 300 shares?

Yes.

Sounds right, give or take a couple.

All right.

Our aggressive buyback program.

I would love to see a dividend increase. There are very few companies in position to increase dividends this year. I think you are. And I would love to see it. It would say a lot for the enterprise.

Yes. I don't disagree with you. I would say in this environment, maintaining the dividend is also very positive. We always take this up in June. Some of it will somewhat be a function of where is the share price. I think our current dividend yield is 4.1% or something like that. And is that an adequate number. So, don't want to predict what the board is going to decide. We always take it up in June. But as I've said before, so this is nothing new. You can bet, that my father and my sisters are very much as interested in the dividend as you are. And so --

I'm not that interested in getting more cash for myself. What I'm saying is there are a lot of screens that say, companies that have increased dividends for X number of years. For you to be in that list is extremely important in my opinion for you to get exposure and visibility. That's where I'm coming from.

Okay. Good point. Dually noted. Wait, Charlie has a comment.

Bob, if I can go back one question. It is Charlie Brissman. In case you have the vision we were waiting for 300 shares to come on the market and repurchase them in the quarter, the 300 shares I believe were tendered by an employee as part of paying withholding taxes on stock options, he or she was exercising. And the appropriate accounting and reporting treatment is to show that as shares bought back. We were not sort of randomly poaching 300 shares in the market.

Okay. Yes, they kind of turned my head when I saw the number. So, speaking about natural gas prices, I mean they've been coming down. How does this play into current and future operations as far as what you can see ahead?

That is what I was hoping this question would come up because as the largest investor in the company, our family is, this is what I look at in the short radar screen. And this is publicly available information. You could cull this out of our queue and figure out where are we hedged and where is spot and what's the delta and how much do they use. And I'm not sure if we've reported exactly how many MMBTUs. We've always talked about while we hedge at 50%, if they have this many contracts, what's the general magnitude of what these guys are doing.

So with that backdrop that gives me the coverage to give you some specificity to your question, our hedge price in the first quarter was $11.15. And while it was $10.65 in the second quarter, our actual gas, or fuel expenditure per MMBTU went up. You say how did that happen? It happened because we also have oil in our tanks and the oil in our tanks was bought at a higher MMBTU cost than the $10.65 hedge. When you blended it all together, we ended up over the first quarter average. So, okay. So, not a great benefit to the fuel profile in the first quarter from a kiln fuel standpoint, and that's very important to clarify and I'll explain why later. But okay, going forward, third quarter and fourth quarter our hedges drop again to remind you from $11.15 in the first quarter, $10.65 in the second quarter, $9.23 in the third and $9.23 in the fourth. It drops, vis-a-vis from the second and third quarter almost $1.40.

And MMBTU, again, if you just use the kind of data points I've given you in the past, that we tend to hedge around half and we talk about are we above or below and all of that kind of stuff, you can kind of guesstimate that we use somewhere around two million MMBTUs a year. So we're using around 500,000 a quarter depending on the volume in that quarter and the mix obviously. Some of our products use more gas than others. Some use less and blah blah blah. So, at 500,000 a quarter, if you're $1.40 cheaper going from the second to third quarter, that's $700,000 of incremental pretax income, which, when you do all of the gyrations of tax rates and shares outstanding, that's an incremental $0.07 a share right there just from the second to third quarter. And so, yes, the expectations are through the third and the fourth quarter that the fuel profile should be better from a kiln fuel standpoint.

And then obviously we tend to hedge in fiscal year chunks. So, going into the next fiscal year, should we see another stair step drop? And the answer should be yes. For two reasons. Number one, the hedges are less. And I think we've already reported what little bit we've hedged into fiscal '10. But we've sort of adopted -- we've basically adopted the philosophy we don't know what we're doing which wasn't a tough philosophy to adopt because the facts speak for themselves. We never said we got into the hedging program to try and beat the market. We were just trying to take volatility out. And from that standpoint, it has worked as you see. We've had a nice progression of EPS over the years. And so it has allowed us to manage our business, keep our customers have having to react to daily, weekly or monthly fluctuations in gas prices so that we can set our prices and live with what we've got. And it has even worked this year from that standpoint.

However, you look at a company like Southwest Airlines who seems to get this right a lot and do a lot -- they probably have a lot more invested and a lot more risk managers than we do on their payrolls, and while they were making a lot of money with hedges the last few years, they've announced they're actually going naked going forward. That they believe the futures market is unnecessarily punishing the investor, i.e., currently as you mentioned, gas is under $4 in MMBTU for April. It is like $3.90. And if you go out a few months, five, six months, the futures are at $6. That's a 50% premium. If you go back six months, if you tried to forward by April six months ago, you would be paying $6 right now or a 50% premium. So, I think Southwest is rightly identified that.

It's a long-winded way of saying we're going to be more naked than we've been in the past. We're not going to hedge at 50% for fiscal '10. At the moment we're sticking it around 20%. And then we'll use other fuels. We've still got to burn the oil in our tanks and stuff like that. But we're riding on that logic that the forward markets are unnecessarily punishing the investor, the hedger, the guy who's actually --

But if you could lock in at $5 or $6 in comparison to $9, $10, $11 as to what you -- in the prior comparative periods, you would really throw some fancy numbers.

That would be great. However, the flip would be -- let's say you lock in. It stays at $4 or goes at $2. You're at a major competitive disadvantage. Our market is fairly rational that our customers get the scenario. The only thing they don't really get is what we're at now. And luckily, it hasn't hurt us too bad. But think about it. To be locked in high when the market is low is not a great position to be in. To not be locked in at all, in a rational market where you will then be able to adjust prices, is not a bad position to be in.

You don't want to be totally naked because you can't immediately do it. Like I said, you would put your customers in cardiac arrest. But so, anyway, your point, listen, if we all had a crystal ball, we would be doing other things, that's for sure. We kind of feel 20% on gas plus our oil tanks is going to be a good position heading into fiscal '10. We'll be sitting here a year from now and if gas is at $15, again, what we'll be saying is out we're out raising prices. I mean, that's just -- so, I don't see how anyone got hurt.

Okay. Are you saying then that in a competitive market place if gas stays low, the customer says we want you to lower prices?

What would you say?

Yes, I would.

Okay.

Especially Wal-Mart.

Well, you got it. So we don't want to be at a competitive disadvantage.

Okay, I read you. I hear you.

Okay, good. Quick wrap-up just on that point was I made the point this is just on kiln fuel. On things like freight or diesel, we're not hedged. We just -- we go -- we have a third party contract carrier. And so that's been coming down. So, the freight profile has been great. And we have taken advantage of that savings.

Where can I find more about Calibrin?

I would just -- for the fun of it, I always do this, I went out to the Yahoo! chat room, and if you look at the Oil-Dri chat room, someone has put a link out there that takes you to an infomercial that we did which we're proud of. I would click on it. I did it last night just to make sure the link worked and it did. Click on it. It'll take you three minutes and you'll learn a lot about our product.

Okay. Thanks a lot. Good luck, guys.

Okay, thanks, Bob. Good. Well, Erica, we're into the wrap-up session. Again, I want to thank you guys. It is a good time to be a tourist, as we've said. And we like our position, low debt, lot of cash. We can take advantage of opportunities internally, externally if they show up. And we're not smug or unmindful to what's going on in the market place. On the other hand, we don't want to be fearmongers or just use a get out of jail free card and say, well this business is down because of the economy. We're not seeing that at the moment.

You look at our products. Cat litter, okay. I mean people are not getting rid of their companion animals, thank God. I think they find more solace from a pet in this environment than they would in almost any other environment. So, I think they would be less likely. However, would they trade down? Would they go from scoop to coarse? Maybe. We're not seeing it in the IRI numbers, but certainly within their segment, if they're a coarse user, go for the lower price item? I think they would. And we're seeing that. That's where we compete. We do private labels. We do the popular-priced brands.

So, we think, actually, we're better targeted for this environment. However, even on the high end where we participate in our [co-pack] relationships, we're seeing that volume strong. So, cat litter, knock on wood, is looking good. Our other businesses tend to be tied to the food industry. A lot of them. So, whether it is the animal health products that are used or directly bleaching edible oils and things like that, those markets are steady. People are still eating, and so that's all good.

Do we have a couple of businesses that could be impacted? Absolutely. The industrial business, tied to Detroit, tied to the rust belt, you would think would start to show some weakening. And it has and maybe that's something we could pinpoint as to why there's some weakness there. I continue to think that like products like our -- products that clarify jet fuels and things like that, well are the miles flown going to be down? Sure. I saw the major airlines are continuing to take capacity out. You can probably see some softening there.

But it is not -- we're so diverse. Our markets are so diverse that up down, sideways, will be up, some will be down, some will be sideways, net-net we're sticking to the business is looking good both in the short and the long term. We're happy to be in it. Frankly, in this environment, we're happy to be employed. So, that's all good. And enough of my ramblings. Thanks very much for your continued support, and we'll be at you again in three months for the third quarter, and we will talk to you then. So, thanks very much.

Thank you for your participation in today's conference. This concludes the presentation. Everyone have a great day.