Oil-Dri Corporation of America (ODC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Oil-Dri Corporation of America earnings conference call. My name is Shantele and I'll be your coordinator for today's call. 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). As a reminder this conference call is being recorded for replay purposes. 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.

Okay, thank you, and welcome, everybody, to the third quarter and nine-month teleconference. Joining me today on the call representing Oil-Dri is Andy Peterson, our CFO; and Charlie Brissman our VP and general counsel; and Ronda Williams, who heads up our investor relations activities.

And, Ronda, would you cover the Safe Harbor, please?

I sure will. Thanks, Dan. 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. [Thanks, Dan, back to you.]

Great, thanks. And before I turn it over to Andy for a snapshot of the quarter and the nine months, let me just cover one thing that seems to be -- or could potentially be a hot topic of conversation, which is our potential involvement in helping to clean up the spill in the Gulf. We have clearly made ourselves available to BP and the governmental agencies there. To date, we've had no direct involvement in that cleanup whatsoever. Indirectly,through distributors, we certainly have sold product into that effort, but from a direct standpoint we have had no involvement in the cleanup. Andy?

Thanks, Dan. We had sales of $56.3 million in the quarter, down 3% compared with last year's $58.1 million. We had a gross profit margin in the quarter of 23.4%, up from last year's 22.8%. The margin improvement was due to a favorable sales mix of our higher-value products combined with lower fuel cost used to dry our clay-based products. Operating expenses were 16.7% of sales, which was about the same as 16.6% in last year's third quarter. Our effective tax rate in the quarter was 30% of pre-tax income, up slightly from 29% in last year's third quarter. Net income was 4.6% of sales, up from 4.2% in last year's third quarter. EPS in the quarter was $0.35, up 6% compared with $0.33 last year.

Through the first nine months of fiscal 2010 $20.1 million of cash was provided from operations, up from $8.3 million last year. This was primarily due to positive changes in working capital components. Capital expenditures of eight point -- or $8 million were down $4.7 million compared with last year. Debt payments of $3.2 million were down $2.4 million compared with last year. Purchases of treasury stock of $2 million were up $1.3 million compared with last year. Dividends paid of $3 million were $200,000, or 8.5% -- or up 8.5% compared with last year. Cash and investments at April 30th was $25.6 million, which was up $10 million compared to last year. At quarter end, we had $7.3 million more in cash and investments than notes payable. Dan?

Andy, thank you. Before I open up to Q&A just some comments on what you presented. I'm very proud of what the team has delivered in the first nine months, and you think about when you make investment decisions you're trying to find something that resonates with you and why is this investment different from other investments. And I would say one of the things that makes Oil-Dri most different as an investment opportunity is our long-term view. You look at all of our fellow companies when the market started -- or the economy started to slip, it was just mass layoffs. It was we're laying off 10%, 15%, 20% of our workforce and we're going to manage for the next quarter, the next 90 days, the next 180 days.

We didn't do that and we got peppered for not laying off anybody. We lost a big piece of business with our single largest account. And as I said back then, one or two teleconferences ago, we're not laying off anybody. We didn't take any increases but we didn't layoff any full-time workers and -- because we're in this for the long haul. Certainly if a year or two or three years from now the business is truly down that much that it requires a reduction in force, well, we're prudent business people, we'll have to do what we have to do, but we're not in it for the long run and then making knee jerk decisions based on very short-term input and I think this nine months has validated that decision.

Yes, had we laid off a bunch of people we'd be up a little bit. You could add a few pennies a share for where we'd be at the nine-month part, but we would have devastated our future prospects. We would have hammered the morale of the people and we would not be nearly in the position we are to capitalize on all of the great opportunities that we see on our horizon. So of all of the things I'm most proud of, it's not even in the numbers. It's the fact that we are different and that we did approach it differently and we did say to ourselves, you know what, let's all band together, we won't take any increases, let's not lay off anybody and let's play for the long term and I'm really proud of that.

So if you're making a valued -- or investment decision based on points of difference, that is the biggest one I can find. As I travel around -- I was at a CEO dinner last night and I do these things frequently -- the thing I see that we are most different is that long-term perspective. It's that most people don't have the luxury. It's not that they don't want to be long term, it's that they have a gun against their head to deliver the next quarter and so they're going to do what it takes to make sure they do it. And I'm fortunate that we've had a lot of long-time loyal supporters, led by my parents, who have a long-term perspective for this business. And the cash generation that we were able to deliver, the fact that we were out there buying stock and we're still building up cash and we're paying a nice dividend, I'm proud of that.

So Shantele, at this point I'd like to open it up to Q&A. As always, try and prioritize, ask your most important question first and then go to the back of the line. We are going to hold it to 30 minutes, and so make sure you get your one or two most important questions in.

(Operator Instructions). And the first question comes from the line of Robert Smith of Center Performance. Please proceed.

Good morning. Dan, can you give us the quarterly figures that you've been giving us for a while on the newer products?

Yes, on the Amlan, I'm ready for you so le --

Okay.

-- here we go. Very happy that we broke the $1 million in sales mark for the first time in the product's trajectory. As you'll recall, the prior quarter we were down a little bit and we felt it was a timing thing, so I'll just give you the last few going back four quarters. We did $450,000 in the fourth quarter of 2009, $920,000 in the first quarter of this fiscal year, then it dropped to that $875,000. We did just under $1.2 million in the third quarter. , so clearly the team is continuing to build momentum with the new product line and we are continuing to gain registrations and gain positive signals that we're going to be able to fill in some of our missing geographies with product registrations which then ultimately leads to more areas to drive sales. So very positive from an Amlan -- from the Calibrin-A and Calibrin-Z mycotoxin binder front in the

And all in?

All in?

Is that a separate thing?

Oh, that was our all-in initiative from two years ago, I think it was. And Verge, which is our engineered granule, is our all-in initiative really this year and is very developmental startup for the -- through the second quarter. Happy to announce it's still developmental in startup but we're making huge progress. The process is being -- we're working out all of the kinks. We're actually taking orders, shipping orders and receiving positive feedback and even repeat orders from customers. So it's still not material. Let's say next quarter I'll probably start to report some of those sales but at least we're in the commercial -- getting closer to the full commercial stage with Verge.

Okay. How many doors have you been able to reenter in Wal-Mart?

Okay, we -- give you a relative thumbnail. When we were at full distribution prior to their most -- to their August change on project impact, we have 8,000 points of distribution roughly. We has a little over 4,000 stores, we had a couple of items in every store. In August we dropped to a 1,000, so we lost 87% of our distribution with the brand. We were then reinstated back up to a total of 3,000 so they gave us another 2,000, but we're still down. I agree with you, it's better than a sharp stick in the eye but we're still down. We lost five-eighths of our distribution and we have been given signals that we could expect when the new planogram comes in in August to pick up more stores. We don't know what that is yet, I don't think it'll be national, but I am -- again, it's a game of momentum and clearly they are seeing what we've said all along was the strength of our Cat's Pride brand with the consumer base and with the national consumer base. So we are confident and hopeful we will be picking up more stores come this August, probably will be able to report that for you next quarter.

Okay, so you said 4,000, 1,000 and 3,000? 4,000 before, 1,000 immediately after and 3,000 now?

No, 8,000 --

Oh, 8,000, okay.

8,000, 1,000, 3,000.

8,000, 1,000, 3,000, okay.

And who knows where August of 2010 will be, but something north of 3,000.

Okay. Is there any way to identify actual product sales in the Gulf Coast to date?

Immaterial, that's all I can tell you.

Right. Are you interested in pursuing this through another avenue that I might be able to speak to you about subsequently later?

Well, Bob, let's -- you've already asked three questions now, let's let somebody else ask a question and then we'll keep going.

Okay, can I call you later?

You can always call me.

Sure, okay.

I may not answer.

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

Good morning, great quarter.

Thank you, Ethan.

Regarding the Wal-Mart sales, the stores you added in the beginning of Q3 any idea how sales of Cat's Pride are in those stores?

Very good. The good thing is what we added were the best performing stores historically, so while we have only gotten back 37% of the stores we feel on an annualized basis we will get back more than 37% of the total business because these are our best performing stores. And so far it's proving out. Our business has been re reaccepted, removing. We actually hired a retail workforce to make sure the product got cut in and everything as quickly as it could, so far so good on that front.

Okay. And the retail workforce is temporary?

Yes, yes, it's -- you can -- they're out there, these firms that go in and blitz and make sure that your product is where it needs to be with the tags, because if the tags aren't there they can't reorder it and so you've got to get all of that right.

Okay. And 8,000 points of distribution refers to just Wal-Mart total?

Yes. They have about 4,000 stores and if you had two items in every store you'd have 8,000 points of distribution.

Oh, okay. The 10-Q mentioned several new opportunities in R&D, can you talk about that?

We've talked about Verge, we've talked about Amlan. You know me, I'm not going to talk about anything else that's really going to ultimately hurt your investment because all it's going to do is alert the competition to what we're working on. So I don't think -- nothing else is ready to be talked about at this stage but just suffice it to say we're excited. If you ask me when could I talk about it, maybe next quarter, maybe the next quarter after. It's pretty eminent, one of them, it's pretty big and we're just not ready to talk about it yet.

Okay. Would the perspective margin be as high as the Calibrin and Verge?

The percentage margin would not, but due to the large potential size of the market that it would go after the total margin would be equal to or greater.

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

Okay, thanks.

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

Yes, hi. So can you give us some color on Calibrin based on the last month or so? In other words, how could we extrapolate this forward?

Well --

How do you think we should anyway?

Look, I give you the quarterly information so we did $1.2 million in the quarter.

How much of it is reorder, so to speak?

Don't know the answer to that.

Is it an important factor?

Well, it's always important if it were just pure pipeline fill, but it can't be. So I really don't know the answer to it but a good percentage of it is repeat business. Most of it is repeat business so the product is clearly moving, it's clearly selling. We have -- are already working on next generations so that we have -- stay ahead of the product life curve. And, like I said, we're expecting some new registrations. Can't talk about those yet, but when we get them we'll tell you about them.

Any seasonality there?

Not much.

Okay. So your run rate is around $5 million now?

Yes.

Okay. Okay, I'll step back.

Okay, thanks, Bob.

Your next question comes from the line of Kathy Buck of Wayne Hummer Assets. Please proceed.

Hi. Wanted to ask a little bit about the national gas hedging. I see in the Q that you put on 360,000 BTU at $5.52 for 2011. How are you guys approaching hedging or what's the inclination here with natural gas prices pretty low?

Yes, the inclination is to stay short in. It seems to be the farther out you go the uncertainty factor -- or the uncertainty penalty seems to hammer you, so we are -- we have been staying close in, maybe going out two, three, four months, and as they roll then going out another two, three, four months. We're very happy with our natural gas position. We're very glad that we are in the ability -- have the ability to burn natural gas. The delta between natural gas and oil is huge and so we've been benefiting from that. That's -- a lot of what you're seeing in the margins is due to the favorable natural gas position.

If some months spiked up and the curve went a little bit more flat, would you guys hedge more aggressively just to lock it in, or are you guys taking -- do you have view when you stay short? Do you know what I'm saying?

Yes. We're not all that savvy at this. We're very open to input and we reach out to people that are savvy to it, but if you look historically how we've done and we look at this. W -- we look at, okay, we've hedged, let's look backwards. Has it been a good thing, a bad thing or a neutral thing for us, it's been a bad thing for us in reality. We're in a -- we did it because we thought we needed the buffer in our cost of goods so that if there was ever a big spike we'd have time to go out to the marketplace and adjust our pricing accordingly. The reality of it is we're in a pretty rational market where our competition is in the same boat we're in, so if we're getting hammered they're getting hammered and we're all going to have to do what we've to do so we're really buying an insurance that we don't need.

Okay, that's helpful.

Yes, so we're staying short. Thanks, Kathy.

Your next question is a follow up from Ethan Star. Please proceed.

Yes, I'm wondering if the regulatory environment in the clay mining industry's been affected by the coal mine accident earlier in West Virginia earlier this year?

Ethan, hi, it's Charlie Brisman. It's a good question and let me take a whack at it. The regulatory environment for non-coal miners was already pretty hostile before the disaster at Upper Big Branch and just maybe the short history is if you go back, unfortunately, a couple of tragedies to the Sago and Crandall Canyon disasters a couple of years ago, MSHA's reaction, perhaps understandable, perhaps not, was one of almost hysterics and the field inspection force really had a very observable change in approach to all mine operators in our view and really went on a citation writing frenzy.

Now, the coal industry for obvious reasons is a lot different than the mining business that we're in, but if you were to describe the current state of play in a sentence, it's MSHA's failure to distinguish between non-coal mining where the safety trends have been positive for a very, very long time and in clay have been remarkably strong for decades, their inability to distinguish that from what has been going on in coal has made the regulatory environment for all miners, including clay miners, very difficult. If there's any hope on the horizon it's that the concerns of non-coal miners have been heard and are starting to be heard, at least based on some public comments we see from MSHA officials, but like many governmental agencies it's a big ship. It takes a lot of time to make even a short course correction.

Okay, that's helpful. I'm hopefull you will -- I'm hoping you can increase the dividend again this year and I'm also, in connection with that, wondering what is happening with the salary freeze, if you can lift that?

We will be addressing that. We put it into effect for the fiscal year, so we'll be addressing that 8-1. We have let our hourly workers know that we are lifting it and that they will be receiving an hourly increase and they obviously received that very well, and our salaried people have the same expectation. So, yes, the salary freeze coming into fiscal 2011, which starts 8-1, will be lifted given no new inputs everything I can see, so that's --

Okay. And how about a dividend, hopeful there, as well?

That's always an agenda item in the June meeting, so I'm sure it'll come up.

Okay, I'll go back in the queue.

The issue will come up, I'm not sure the dividend.

Your next question is a follow up from Mr. Robert Smith.

Hi. Anything of meaning happening in the broad cat litter business that we might know about?

No, not that -- nothing that's out there in the public arena that's significant.

Okay. Can you -- and maybe with facilities, can you put up a wind turbine or anything that might help you?

Bob, it's Charlie Brissman again. The answer is in concept at any of our facilities you could do that. As a practical matter and given the investment required to get up even the first turbine, I don't think that actually would have any financial payoff for us.

Okay, not right now. Because you can resell power to the utilities and things like that. Okay.

Well, I actually have in my prior life experience with independent power development and the dynamics of that market, as you can imagine, are very, very different now than they were even ten years ago. I think from Oil-Dri's standpoint, a co-generation opportunity or something like that isn't something that's even on the long-term thinking list.

Okay, thanks. Good luck.

Thank you.

Your next question is a follow up from Ethan Star. Please proceed.

Yes, wondering if anything's happening with cat litter on the -- with Target Corporation.

Nothing to speak of. We would love -- they're number one on our hit list of companies we don't supply that we would love to supply. We are in there indirectly. We make Fresh Step course cat litter for Clorox and they're in Target, but our Cat's Pride brand is not in there, nor do we make their private label and we would love to do one or both. So we keep knocking on their door and I'll let you know if we get them, but so far we're on the outs.

Okay. Has Calibrin succeeded in being registered in China?

No.

No.

No, not yet. We're still working that process.

Okay. Well, I look forward to future quarters, sounds like good things are happening.

Yes, you're raised a good issue on China. The fact that we're achieving the sales rate we are and we're not registered in China is an opportunity going forward.

Okay, thank you.

Thanks, Ethan.

Your next question comes from the line of Mr. Robert Smith with a follow up. Please proceed.

Just as a closing statement, when we bring up the question of the dividend there's always this kind of chuckle and that there will be -- an increase will be considered, but you guys know how I feel and I really think it's really, really important to get those annual increases in And I would almost look at it as gospel that you should -- that would really be a priority. So, again, just a reminder.

I hear you, Bob, nd I'm not saying it won't happen. I'm just telling you --

No , I understand

But don't forget. we've gone heavy with the stock buy back and I think that's delivered value to the shareholders because since we've started it it's created some liquidity in the stock. Whether or not the stock prices has responded well and an increase in the dividend is immaterial compared to what we've been spending on the stock buyback. So we may do both or if we do one you may have to discontinue the other. So we're always having the shareholders in mind, we really do.

Dan, I'm telling you, the question of annual dividend increases since year X is extremely important in my opinion on total return from looking at an investment as I approach the market so that's all I can share with you. If there was a question between one or the other, I would opt for the dividend increase and I feel very strongly about that.

Okay. What are you hearing, if anything -- I'll ask you a question -- on the tax rate for dividends going forward? Are we hearing --

I'm not the guy to talk to about that.

Okay, I'm not either. I've heard rumblings, I've read the articles, that's sort of going to weigh in the decision when we meet in June. Probably not because it's too soon to know but everything I'm hearing is they're talking about significantly increasing that tax.

I honestly don't feel it should weigh. I think the most vital and critical element in that is that you have increased the dividend since year so and so, this has the weight.

Bob, I hear you, but to say it should not weigh, but hypothetically if they raise the tax to 100% then you would admit that it would be very inefficient for the shareholders for us to keep raising the dividend.

I'm going to Australia.

Right, you're welcome. And there they're talking about a super mining tax so you don't get into the mining business.

You can't win, right?

Right.

Okay.

But -- so I'm just saying it is a factor, we have to weigh it. Our job is to as efficiently as possible get returns into the shareholder's hands. And the question is, is it a combination or is it through buybacks, is it through dividends, how do we best deliver value back to the shareholders and for thanking -- or for rewarding them for investing in our business. So if the tax rate were to go to some crazy number to say it shouldn't factor in you and I both know it would have to factor in because --

Sure.

-- it's very inefficient to --

I don't foresee that, though.

Yes. Okay, good. Thank you, again.

Good luck.

Good conversation, thank you. Good are we -- Shantele, I think we're just closing statements now and I want to thank everybody and looking forward to closing out the fiscal year and frankly, it's a little tribute to one of my idols, which is John Wooden. John Wooden was always asked which of his teams did he think was most successful and it was not really any of the ones you would think it was. It was really in a year when he felt his team achieved the greatest potential of what they were able to do versus necessarily letting external people say, oh, it must have been one of the eight -- of the ten national championship teams and that wasn't the case with him. He felt he did his best coaching jobs with some of his less-talented teams. I will tell you that this fiscal year sales are going to be down, earnings at the moment we're pretty much flat with prior year, but I will tell you I think this was -- if we finish the three months the way the first nine months have gone, as Winston Churchill says, the people will look back and say this was our finest hour. Because, like I said at the outset, we could have done things that would have made this fiscal year look better to the detriment of the future, we didn't do that. And I believe when we're sitting here on these teleconferences 12, 24 and 36 months out, we're going to look back and say all of the good things we were able to deliver in 2011, 2012 and 2013 really were because of what we did or did not do in fiscal 2010.

So I'll get off my soap box but a little shout out to John Wooden, who passed away at 99 and just an incredible human being. If you guys don't know much about him, I encourage you to read about him. Thank you very much and we'll talk to you in 90 days.

Thank you for your participation in today's conference. This concludes the presentation, you may now disconnect. Have a wonderful day.