Oil-Dri Corporation of America (ODC) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the second quarter, 2010, Oil-Dri Corporation of America earnings conference call. (Operator instructions)

I would now like to turn the conference over to your host for today, Mr. Daniel Jaffe, President and Chief Executive Officer. Please proceed, sir.

Thank you, Madge.

Welcome, everybody, to the second quarter and six-month teleconference for Oil-Dri. As always, joining me in Chicago, in the conference room, are Andy Peterson, our CFO, and Charlie Brissman, our VP and General Counsel, and Ronda Williams, who heads up all of our investor relation activity. And Ronda, will you please cover the Safe Harbor?

Thank you. I sure will.

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, and back to you, Dan.

Great.

And we have heard a desire to lengthen our calls. We're not go to do that. We're going to hold them at 30 minutes, but what we are going to do is have less time of us talking, and more time responding to your questions. So that should allow you to -- hopefully, everyone -- to get in one question, maybe more. And so you get whatever it is you want, answered.

I would like to turn it over to Andy, though, just to give a 50,000-foot review, and then we'll open it up to Q&A.

We had sales of $54.7 million in the quarter, down 7% compared with last year's $59.1 million. The decrease was due to lower tons sold. We had a gross profit in the quarter of 23.1%, up from last year's 20.1%. A favorable sales mix of a higher value products, combined with lower cost for freight, packaging and fuel used to dry our clay-based products offset the impact of the lower tons sold. Operating expenses were 16.8% of sales, which was up compared with 14.1% in last year's second quarter. The higher percentage this year was primarily due to lower sales and a higher incentive bonus accrual.

Our effective tax rate in the quarter was 30% of pretax income, up from 25% last year. The change in the tax rate is due to the mix of products sold, which impacts our depletion deductions allowed for mining, and our forecast of earnings for the full fiscal year. For the first six months of fiscal 2010, the tax rate is 29%, compared with 28% for the full year of fiscal 2009.

Net income was 4.1 percentage of sales, up from 4.0% in last year's second quarter. EPS in the quarter was $0.31, down 6% compared with $0.33 last year. In looking at the balance sheet and cash flow through the first six months of fiscal 2010, $13.8 million of cash was provided from operations, up $11.8 million from last year. This was primarily due to the positive changes in working capital components, including lower accounts receivables and inventories because of the reduced sales. Capital expenditures of $4.8 million were down $2.9 million compared with last year, Debt payments of $200,000 were down $3.9 million, compared with last year.

Purchases of treasury stock of $500,000 were down $100,000, compared with last year. Dividend paid in the quarter of $2.0 million were up $150,000, or 8%, compared with last year. Cash and investments at January 31, 2010, was $26.9 million, up $10.1 million compared to last year. We had $5.6 million more in cash and investments, than we had in debt.

Dan?

I move for adjournment. No, not at all. [Laughter]

Madge, I would like to open it up to the listeners, so that they can ask questions. Anything we didn't cover, we'd be happy to cover for them.

Thank you, sir.

(Operator instructions)

And your first question comes from the line of Ethan Stall , private investor. Please

Good morning. Congratulations on a nice quarter.

Ethan, thank you.

I'm wondering, how were Calibrin sales in the quarter, and could you please also share -- consider sharing Verge sales with us as well?

Well, we'll look to cover Calibrin first. You know, it's both encouraging and discouraging. We did not show the progression that we had been showing, but we still had a healthy quarter for our new animal health products. And so, I think Q1, we had $921,000 in sales of the new animal health products, which was up from $451,000 the quarter before. We did just under $900,000 this quarter, around $875,000.

So, would it have been great to have shown more? Sure, it would have. But still very positive. Sat down with Ron Cravens, who heads up -- Dr. Ron Cravens -- who heads up that business, and there is still a lot of encouraging, positive news coming from the field. The single largest market we're not registered in is China, and we feel like we cleared a significant hurdle during the quarter. It's still not the final hurdle. So there's no registration yet in China. But that will open up a huge market to us, that we were registered in with our old products. But you have to re-register with the new. Still very positive on Amlin.

On Verge, the real question is not what was our sale, but are we able to make it? We were still in a start-up mode last quarter, we're still in a start-up mode this quarter. It's a new process. It's really new to the industry, not just new to Oil-Dri. And, again the good new is, we made significant progress. We're still not over the hurdle, where we're able to both meet the quality and the rate of production that we anticipated when we put the plan in. But the good news, we are able to make the quality now, and we're making significant improvements on the rate of production. We will get there, but we're not there yet.

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

Thanks, Ethan.

And your next question comes from the line of Robert Smith, Center for Performance. Please proceed.

Hi, good morning.

So, I got on the call five minutes ago. I missed the presentation?

Hey, if you're not on time, you're late, right? [ Laughter ]

Okay.

You can always catch Andy's comments on the webcast. But, what questions do you have?

Okay, yes, my first question was centering around Calibrin, but I'll circle back to that.

So, you guys bought some property in Georgia. So, can you kind of give me some color as to, was this totally new acreage or was it part of the leased acreage? What was that?

Bob, it's Charlie Brissman. I can answer that for you.

The acreage that we purchased in the second quarter is new acreage, you know, owned in fee by us, and almost without exception, had not been previously subject to lease or any other rights that we owned. Those are new acres going into the reserve pool.

So, you paid about $3,000 an acre?

You know, in all, I think that's about right, Bob.

Yes.

There were several transactions, but it probably does average out to right about that number.

So, what type of clay is this? Is that the high quality clay or the lower quality clay?

It's a range, but I think we feel, and part of the reason we're able to purchase now is -- and part of the reason we're excited about it, is we have not been able to explore every corner of every acre we acquired. Our belief, based on having been down there for decades, and the due diligence we did perform for each transaction, is that we are adding across-the-board on our high quality reserves, both for cat litter and for bleaching earth. There's certainly reserves that of the time. But, on the whole, part of the reason we're excited about the purchases is the vast majority of the tons we expect there are, you know, very much the light density white that we like and the bleaching clay reserves that we like very much.

I was trying to, in some way, put the price tag back onto the reserve position, so that's what prompted my question. I don't know if you follow where I'm going.

This is Dan, coming back. We've sort of circled around this many times.

I know.

They have to come to their own conclusion of whether they value clay in the ground or they just say, well, until it's mined and processed, that's the value.

Yes, and I am following you, Bob, and I guess, you know, nothing goes on our books except the acquisition cost for purchased reserves. And at the end of the day, that's sort of all we can say about it.

The reserves that are reflected on the balance sheet do not have market fluctuations or anything like that, and there are lots of reserves that are available to us that won't have any balance sheet impact at all, because they're either held underlease, or don't otherwise require purchase costs or acquisition costs to be recorded. So for all of those reasons, as Dan was eluding to, we've, as a company, have never tried to do anything other than, say, if we paid cash for it that's what is on the balance sheet. And otherwise, valuation -- in quotes -- of our reserves, you know, is very much in the eye of the beholder.

But, again, so this was more a mix of both the higher value and lower value?

Yes

Or was it skewed to one or the other?

I think mix is all we can do with that quantity of acreage. Yes, it's a mix.

Okay, and then just following the Wal-Mart story.

Is there any way to look at the stores that came back? Is there any geographical question or -- what you can tell us about the units that they've decided to come back to? To the company?

You know, I think as we disclosed one, and just to put it in reference, let's say when we were at the peak of our branded business of Wal-Mart, call that 100. When we got the new store accounts and everything that went into effect in early August, we dropped to 12. We dropped basically 88% of our points of distribution. But that 12 was geographically distributed across 38 of their 42 distribution centers. So, it was -- there really was no geographic rhyme or reason to it. We still were in almost 100% of the US, just not in almost 90% of the stores. And this ad back was the same. Meaning we got added back across all geographies. So,we were at 100, we dropped to 12. Now you can say we're at about 25, 30, you know, relative. So, it kind of gives you an idea. We're not back to where we were or even close to it, but still a pretty strong statement that quickly, into their new strategy, that Cat's Pride has a lot of loyalty amongst its customers. And when they couldn't find it at Wal-Mart, they were going elsewhere to find it.

Bob, I think it's like this, continuing to do so. I mean I have market data, and Wal-Mart doesn't report. So it's like the perfect science experiment, you get the whole thing.

[ Laughter ] And look at the rest of the markets. So I'll give you an idea of the rest of the market for the 24 weeks ending February 7, which is pretty consistent with meaning, post- their new plan event, post-August. So since they put in their new project impact for cat litter, the rest of the market in dollars is down 2% in cat litter. Cat's Pride is up 18.6%. Fresh Step down 3%, Scoopaway down 29%. Arm and Hammer is in second place on that growth level, up 9%. Tidy Cat, Ralston Nestle, is down 2%.

So you can see that, since they put it in, in the rest of the market, we have outperformed the market by a huge percentage, and any of our competitors by a huge percentage. Then when you even segment it more and say, do they really -- what they discontinued for us was mostly scoopable items. So, if you take a look at the scoopable parts of the category, so in that 24-week period, scoopable is down 1.6%, and Cat's Pride Scoopable is up 34% on the 24 week. And even the, you know, the 8 weeks up 26%, and the four is up 24%. So we're continuing, and the market's down 2%.

So we're continuing to dramatically outperform the market, which, again, speaks to the loyalty, maybe not a 180, obviously, but they've pulled maybe a 40 or 50 degree turn, and our goal is to get them to pull the full 180.

When do they review this again?

Whenever they want. That's what's so startling about this move. This was not an orchestrated -- this was not a review period. This was intra-period. Early, if they were using things as once a year. Usually it's once every other year. Because it causes them a lot of pain and suffering, to go through these categories. So to do it that quickly is a real testimony to our brand strength.

So, in essence, it's really the consumer contacting their local Wal-Marts, and saying we missed the product, I'd like to get it back. Is that --

You and I can both just guess, as to what all that was. They don't share that with us. The proof is in the pudding. Bob, if you would go back into the queue, because --

Sure, I will.

Thank you.

And your next question comes from the line of Kim Schwartz from Harvey Partners. Please proceed.

Hey, Dan, how are you?

Good, Jim, how are you doing?

Good, thanks.

Question, just from the summer period of '09 to now, can you talk about the new store penetration for cat litter that you've embarked upon, and then maybe touch on the all-in initiative for this year?

You're saying outside of Wal-Mart, did we increase our distribution dramatically?

Yes.

The way they measure that, they call it ACV distribution, which is all commodity volume, and you can kind of see, in the number of stores in the US -- what, you know, how many of the scanners are you coming across. So for the 24-week period ending February 7, we were -- Cat's Pride had an ACV of 53.9%. And to put that in comparison, the other big guys are all at 98%, 90%, you know, 88%, 98%, 94%. So they're all way up there. We're at 53,9%, and that's up only 1.3%. The dramatic increase has been that we have, the greater velocity in existing points of distribution. It's easy to show increase if we had taken it from 53% to 63%. You'd see almost a 20% bump in movement, just because you're in more stores.

Yes.

That hasn't been the case. What we've done -- we've never tried, really, to be in 100% ACV. Because we want to partner with those retailers that get it, that like having our high-quality, our low-cost and our region-specific marketing program. So, aren't, basically awed by the pyrotechnics of a national program, and understand that their shoppers are local and want to do it. So, the Publixs, the HEBs, the [Gamul's] I mean, you can go around the country, Ralph's, everywhere. Geographically, they're all over the US. But, these are accounts that have always been loyal partners to Oil-Dri and we've been loyal to them. So we have a pretty good share in those markets -- in those accounts. But there's a good 40% of the stores we're not even in.

And how are you working on penetrating those, you know, that 40%? Is that something that -- because with your distribution network, you certainly could get there.

Oh, you can get there. The problem is unless our proposition resonates with them, you just get sharked

Right.

So you pay a lot of money to get on the shelves, and then six months later they throw you out and they put somebody else in. They play the slotting game. I'm not saying they're all like that, the whole 40%. But we've been in the category long enough, where a good percentage of the 40% is looking just to charm you. They're looking to take your check, put you on for a little bit, and then throw you out. And, so what's the benefit? It's Charlie Brown and the football, and they're Lucy. And we've had enough of it.

Right, right.

And that's what we told Wal-Mart. That's why, when we went down to Bentonville, they said " like you're not in 100% of the US". We said, "No, by design, we don't call on 100% of the US" We have specific accounts we don't even call on.

Okay.

Let me finish the story. They were like "really, why?", and we told them that same story. "We've always partnered with you, Wal-Mart, but you won't find us in Kmart." There are a lot of stores you just won't find our products, and, you know, it has as much to do with us as it does with them.

Right. And Dan, just on the all-in initiative, where do you stand this year?

Well, which one -- because now we're like four years into all-in, so I have three different ones on the brain.

Well, Calibrin is here.

Right.

That 's happened.

Verge? You want --

Give me Verge, yes.

I referenced Verge at the beginning. We're really still trying to just -- we can now make the product at the quality that we need in order to really excite the marketplace. And that's -- that's been a major accomplishment in the last three months by the team. They've done a great job. Because, at the beginning, we couldn't even get the quality. It was just chaos. We're starting up a new facility. No wonder.

So, now we can get the quality, but we have to slow the process down in order to do it. Although we've now been able to speed it up from the bottom of that rate. And so now at least we're shipping, we're filling sample orders, we're getting product into the field for testing, so that we're not missing a season, as it were. And we're confident that we keep learning and finding new bottlenecks, that we are going get to the rate of production that we need to justify the capital expense. So, still very enthusiastic about it, and major progress was made during the quarter.

And could you refresh me on the market opportunity that you see there, and why you're going after this?

Yes, the initial market is all around carriers, so -- active ingredients. And I don't want to tip our hand too much.

So I'm not going to give you the exact active ingredients, and the exact things. But they're all around pesticides, that use carriers -- pesticides and insecticides -- that use carriers to deliver an active ingredient to go after a specific pest. And our product, because it can be made to disintegrate slowly, disintegrate quickly, not disintegrate at all, because its uniformity is so great, because it has no dust, they can actually put less active ingredient on the product, get a tighter pattern, and get a greater and faster kill rate. And we've proven it. We've proven it in their field trials, proven it in our labs. And now the question i, on a grand scale, can we replicate what's going on in the small scale? That has huge implications to everyone. It's not just a cost factor, that they can put less of this active ingredient on it. It's also, these are chemicals, so, the narrower the pattern, the less chance you have for any kind of spillover, of having it end up where you didn't want it to be. And so the formulators are very excited about getting their hands on our carrier.

Right, okay. Thanks, Dan.

Thanks.

And you have a followup question from Ethan Stall from private investor. Please proceed.

Yes. Oil-Dri's clay has many agricultural uses. I wondering if it has any uses in aqua culture. Maybe kind of a bizarre question, but I'm just wondering.

No, it's not a bizarre question. We've played in and around that, they're called WDGs, water dispersible granules, you can use them in shrimp production and things like that. And at the moment, not our biggest opportunity on our radar screen but, again,with Verge, definitely an aqua culture potential there.

Okay, so just shrimp, any fish or just shrimp?

All I've heard is shrimp. And shrimp farming.

Okay, different question.

I noticed this in the store recently, I noticed something called Cat's Pride Ultra. Is that a new variant of Cat's Pride?

It was for a specific retailer, to give them a specific size and efficacy that they were looking for. It's -- that's just a product line extension.

Okay.

So they have an efficacy that no one else has?

Well, a different, right, a unique formula that is specific to their chain.

Okay, is it in all that chain's stores?

As far as we know it is. Yes. I think it is. Don't quote me on that one. The intention was to get there. I'm not sure if it's there yet.

Okay. Well, I look forward to future quarters.

Good, thank you.

Thank you.

And you have another followup question from Robert Smith, Center for Performance. Please proceed.

Yes, just circling back to Calibrin. I was kind of disappointed and perhaps you were, too. What happened, and how can we go forward with this?

I was disappointed. Because I would -- it would have been great to continue showing 40%, 50% increases.

Our business doesn't really run in quarters and we got to take a longer look. We're still very positive, talked to the people in the field, talked to Ron Cravens, who heads it up, been out there myself. Still a lot of enthusiasm and excitement around it. We have product line extensions and variations already in R&D, that are going to help expand the markets into which our binders can compete. So, still very positive, very healthy but for this quarter, you know, the disappointment, I guess, numerically, yes it was.

Was it reorders or new orders or -- ?

Ron felt that it was mostly just timing. He felt that a lot of orders came in in the first quarter, that then didn't come in in the second, and he's hoping that the repeat and the repurchases will occur in the third, that didn't come in the second. So I think we've got to take a longer perspective than 90 days and see how it plays out.

Okay, thank you.

Thank you.

By the way, the statement about the dividend increases running seven years, it looks darn good in this environment and I hope we go to eight.

Good. I know that my, most of my family members agree with me. In fact they all --

Okay. I'm a champion.

All right. Thank you.

And, you have no more questions.

Thank you. I would now like to turn the call over to Daniel Jaffe for closing remarks.

Great. Well, Madge, thank you for orchestrating the call.

Guys,thank you for your attention and interest and support in our company. We continue to be very optimistic about the future and, frankly, we're pretty darn proud of the first six months. I mean given the, you know, the blow to the knees we took coming out of the fiscal year, when our brand was challenged as not being a brand or not having loyalty, I think the market is the ultimate arbiter of that, and the market is speaking very loudly that Cat's Pride is a real brand, is a great brand, and they want it and they're going find it. And so we're very, very excited. Not just in the B-to-B areas, but also in the consumer area. This has been a great validation of the Cat's Pride strength.

I look forward to talking to you in three months, and be safe.

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