Oil-Dri Corporation of America (ODC) 2010 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the fourth quarter 2010 Oil-Dri Corporation of America earnings conference call. My name is Noelia, 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) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Dan Jaffee, President and CEO. Please proceed.

Thank you. Welcome everybody to our fiscal year end and fourth quarter investor teleconference. As usual, with me here in the Chicago conference room, Andy Peterson, our CFO; Charlie Brissman, VP and General Counsel; and Ronda Williams, who runs all of our investor relations activities. And Ronda, if you could cover the Safe Harbor.

Absolutely. Welcome everyone. 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 ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock.

Thank you for joining us.

Thank you. And Andy, will you cover the highlights?

Sure, Dan. We had sales of $54.7 million in the quarter, down 2% compared with last year's fourth quarter of $55.9 million. For the fiscal year we had sales of $219 million, down 7% from last year's $236 million. We had a gross profit margin in the quarter of 21.1%, about the same as last year's fourth quarter of 21.2%.

For the fiscal year we had a gross profit margin of 22.7%, up from last year's 20.9%. Operating expenses in the quarter were 15.8% of sales, up from 14.5% in last year's fourth quarter. For the fiscal year, operating expenses were 16.5% of sales, up from last year's 14.7%.

Our effective tax rate in the quarter was 14.4% of pretax income, down significantly from the 29.8% in last year's fourth quarter. The company utilized previously earned alternative minimum tax credits for the fiscal year. For the fiscal year the effective tax rate was 26.2%, down from last year's 28.0%.

Net income in the quarter was 4.4% of sales, down from 4.6% in last year's fourth quarter. For the fiscal year, net income as a percentage of sales was 4.3%, up from last year's 4.1%. EPS in the quarter was $0.33, down 6% compared with $0.35 in last year's fourth quarter.

For the fiscal year we had EPS of $1.30, down 2% from last year's $1.33. Looking at balance sheet cash flow, cash provided from operations in fiscal 2010 of $26.2 million was up $10.4 million from last year. This was primarily due to positive changes in working capital components.

Capital expenditures of $10.4 million were down $4.8 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 $6.0 million were up $5.3 million compared with last year.

Dividends paid of $4 million were up $300,000 or 8.4% compared with last year. Cash and investments at July 31, 2010, was $24.6 million, up $4.8 million compared to last year. At year end we had $6.3 million more in cash and investments than we had in debt.

Dan?

Thank you. Thank you Andy.

Reflecting a little bit before I open it up to Q&A, fiscal 2010 was the 15th year of me being President here at Oil-Dri, which is amazing, and in many ways it was our most gratifying year. You think about it against what could have been or what might have been when we were together a year ago and having to communicate the news of our largest customer going in a different strategic direction, and we were faced with all sort of strategic options.

The two that I'm most proud of have played out extremely well.

Number one, which again, I would say almost no companies would've done, was we didn't lay off anybody. Nobody lost -- no full-time employee lost their job due to that short-term -- from our perception -- short-term decision by a big account. We agreed to take no increases, and so it helped mitigate the pain, but we banded together and kept the team together.

You can imagine what that did for morale, and what -- how everybody redoubled their efforts to try and overcome the financial hit that was going to be taken by that shortsighted decision.

Secondly, on the consumer front, we dubbed the year "project comeback." Where we had to -- we could've done two things, we could have retrenched, cut back on spending, cut back on our advertising, cut back on new products and unique points of difference -- emphasis, or we could have done more. And we decided to do more.

So in the year we actually spent an extra $1.5 million on trade spending. We took dollars that ordinarily would have been spent in one channel and moved it to another channel. Again, very gratifying both in terms of what happened outside of Bentonville, and then what happened inside Bentonville during the year.

So outside Bentonville -- and these are all publicly accessible data we subscribe to IRI. For the 52-week period, the most recent 52-week period, the category -- outside of -- it's really called food, drug and mass, but not including Wal-Mart, because they don't report their numbers -- the category for what they call cat box filler, cat litter, was down 0.9% interestingly enough. Total Cat's Pride was up 16%. Cat's Pride Scoop, where we focused our effort, was up 30% for the year.

You can imagine then that we did very well. Fresh Step as a brand was down 3.7%. Scoop Away as a brand was down 15.1%. Arm & Hammer delivered a good year; they were up 8%. And then Tidy Cats as a brand was down 1.8%.

So obviously very gratifying that we were able to strengthen our relationships with all of food, drug and mass outside of Bentonville.

At the same time, we then were able to use this information, and a lot of other information, to try and get closer to Bentonville and convince them that they had made a mistake with Cat's Pride.

Fortunately for us, if we were the only category where we were trying to convince them that maybe their decision to reduce the assortment on their shelves was a mistake, we probably would have had a much harder sale. Instead, they were seeing this store-wide.

So they understood that they cut too far, too deep, that their consumers like assortment. In many ways we are not Europe, we're not places where 40% of the shelf can be dedicated to private label or the consumers are comfortable with one or two choices. Americans like choices. Americans like assortment. And Americans fortunately love Cat's Pride.

So we were able to, in a very short period of time, reverse a lot of -- a good chunk of their decision, because they recognized it wasn't in their best interest to restrict the distribution of Cat's Pride, and that trend is continuing.

So our relationship with them has never been better. We took the high road when they made the decision to deemphasize our brand, and certainly we are not gloating or smug when they are now making the decision to emphasize the brand. We have to continue to earn our stripes every day with excellent products, excellent service, excellent supply. We're doing that, and so, as I said, our relationship with them has never been better.

So for all of those reasons, I mean, if you had made me predict -- and we did, because we had to put together a budget for the year -- what this year would have played out like, I would not have expected quantitatively it would've looked nearly as good as it did, and I would never have expected that qualitatively we would have been able to achieve some of the strategic points that we were trying to achieve over the long haul, have achieved them so quickly.

So it was an unqualified success, from our vantage point, to be able to generate the cash we did, to actually deliver a year that was in many ways the best financial year we have ever had, and in some years, not so much. Sales obviously were soft. We were down. We knew we would be. And our EPS was off a little bit, off our record $1.33 a year ago. We ended up at $1.30. But like I'd said, given where we thought we were going to be, it was a great year.

At this point in time I would like to open up the call to Q&A, so I can make sure I cover what our investors still want to hear about.

(Operator Instructions) Ethan Starr, private investor.

Yes. Congratulations on the impressive cash flow.

How many points of distribution are you at with Wal-Mart currently, and how is sell-through in the reinstated stores compared to prior to the distribution changes?

Good question. I'm going to use a little bit different metric than I used last conference call, because what I'm zeroing in now is the Cat's Pride brand. We had points of distribution with Jonny Cat out West, and we still have that. That's all good.

But Cat's Pride's really was the brand that was impacted the most by their strategic decision, so I will give you some relative -- new relative points of comparison.

Prior to the August 2009 modular -- that is where they determine what's going to be on their shelves -- we had 6,900 points of distribution. That was spread across our brands of Cat's Pride Scoopable, Complete, Natural and of course, Cat's Pride Premium. That dropped to 987, or under 1,000, so a pretty big drop.

By March of 2010 it was back up to around 2300, and this August it went up again to roughly 2800, and like I said, the momentum is -- and we're getting the best stores back, so our sell -- our velocity in those stores is better than average, which is good.

We expect to continue to gain stores pretty much every six months. So in March our expectation is to gain more sales -- more stores.

Okay, great. What's to do with Calibrin and Verge, and how are sales of those products?

Well, I'm sure other people will ask those same questions. I will cover that. Let's go back in the queue, and if nobody asks them, then next time you get in, I will answer those.

(Operator Instructions) Robert Smith, Center for Performance Investing.

I also don't believe it's 15 years (inaudible) Dan. I hope Dick is well.

He is doing very well, thank you.

Fine. So yes, I guess I wanted to find out about newer products also, but more importantly, maybe you could just give me some brief color as to kind of the search for the Holy Grail in these industrial products with higher margins. We kind of develop the product, and when we have sort of ambitious targets, they seem to give some traction and then kind of [halt]. So can you just give me some idea as to what happens in that respect? I mean, why the promise really isn't fulfilled?

I guess it depends on which products you are talking about, but I'm not sure I would agree with you. We had a record year in bleaching earth, and that has been a culmination of a 20-year commitment. And yes, sure, early on, back in the early '90s that sputtered around, but that has been an unqualified success for the company.

The new products around scoopable cat litters that we again, outside of Bentonville, had a record year in 2010 for the Cat's Pride Scoopable brand, outside Bentonville. And again, those were all internally developed. Those are unique to the world. They're -- it utilizes our clay and a lot of the technology we worked down at [the IC].

So Bob, I would just challenge you, it depends on your perspective. If it's real short-term, you want to talk Verge or you want to talk Amlan, okay, but we don't invest on that timeline, and we don't really expect things to take off like that.

We're not really inventing the iPad, so it's never going to be really that hot that fast. These products are -- ultimately they were put in the ground millions of years ago, not that it is going to take millions of years to monetize, but as we pointed out, you wait five, 10 years -- the seeds we planted five, 10 years ago are paying huge dividends today, and the seeds we are planting today -- yes, you're right, maybe they didn't plant huge -- give you huge dividends in 2010, but we're confident they will in 2015 and beyond.

Okay. Well, I hope you continue the dividend increases. I think that has been a hallmark of the business for the last decade or so, or close to it, and I wish you well, and I do await you and what you have to say about the newer products like Verge and Amlan.

Good. Excellent. I would -- I mean, look, I'm sure everyone is seeing this stuff, but it is worth repeating. If you look at the cash that was generated during the year -- and not every year is going to be this way, but just to remind you, in fiscal 2008 net cash provided by operations, $11 million. In 2009, nearly $16 million. Now, we then knew we were going to have to swallow a bitter pill in the consumer area in fiscal 2010, and to still have generated $26 million in cash provided by operations is really an amazing performance.

Dan, don't get me wrong. The financial metrics are really fine. You have a lot to be proud of.

Good, excellent, thank you. I -- and it -- but it takes time, and I know you're patient. You're the ultimate patient investor, so I appreciate it, Bob.

And I hope that in discussing these products, you might give us a heads-up as to any -- anything else that's in the hopper (inaudible) so to speak.

Absolutely. As soon as it's in everyone's best interest to know about things, we do it. Are we working on a lot of things that we don't talk about? Absolutely -- because we just don't want to tip the competition off to the plays we're running before we run them. But we're continuing to find a lot of value in our clays.

I like the idea of a clay iPad.

Yes. Well, that would be really cool, but don't bet on it anytime soon.

Okay. So I'm waiting to hear the numbers.

What about the numbers?

You said to Ethan that you would begin to explore the numbers.

Okay, yes, so let's let -- let's go back in the queue and see if anyone other than you and Ethan -- and then if not, we will get to Ethan's second question.

Yes. Thanks.

(Operator Instructions) Ethan Starr.

Okay. Hopefully you can address my second question now.

All right. Amlan and Verge. We will take Amlan first, because it is farther along on the commercialization curve.

You know the fourth quarter was frankly disappointing. I sat down with Ron Cravens today. He is our General Manager and VP who runs that business for us. And when I challenged him on why -- and let me just give you the relative numbers. So we did $1.2 million in sales in the third quarter. We only did $730,000-ish in the fourth quarter on these items. So the ramp-up rate, obviously it's reversed.

And his belly button was telling him that inventories are high, demand was slow but that what is happening is we do have some exciting growth opportunities in geographic parts of the world that are just taking longer to play out. We're signing some agreements, we're gaining new distribution, new distributorships throughout the world, so -- and by no means are we --

Well, we're disappointed, but we're not at all retrenching on the core products, which is Calibrin-A and -Z, which go after aflatoxin and zearalenone.

However, the real cavalry coming across the hill is going to be in our new products that we've been working on, and we are working on them. We're going to be working on getting registration for these items in the back half of this fiscal year, to be launched in the beginning of next fiscal year.

These are all in that same animal health arena, but they do other things -- a broad spectrum binder that would go after more than just one particular mycotoxin. It could go after three or maybe even four at a time, as a general prophylactic additive to animal feed.

So still very confident, still very excited about the opportunities, but to Bob's point, short run, definitely is sputtering on the Amlan side.

And Verge?

Verge -- the good news is we are in commercialization, we are out shipping and producing and billing, albeit on a very slow basis, because the plant -- this is a new to the world process, and so the plant is still working on being able to make the product at the quantity that we need. They can hit the quality, but they have to really ratchet back on the production rate in order to do it.

So they're -- we have a great team down there. They're focused on it. I was just down there a week and a half ago. And there is no doubt they're going to figure it out. We keep hitting bottlenecks, and they keep solving them, and then you hit a new bottleneck. And that is the nature of sort of new to the world processes.

But again, still very confident, and our goal is to get the core process ironed out so then we can go and put in the capital to put in phase 2, which will double the capacity again, and then allow the sales guys to put on even more customers. So we sort of pulled back on the selling effort until the manufacturing guys catch up.

Okay. Has Calibrin been approved in China yet?

No, we're still -- it's still frustrating. Every time we clear one hurdle, they throw out a new regulatory hurdle in front of us, and then we clear that one, and they do another one.

Supposedly we're over one of the last ones, and we're keeping our fingers crossed for three months from now. But we've been saying that every three months, so it's frustrating and from our vantage point looks more like just anti-trade than it does reality. But that's -- it may not be. Maybe, give them the benefit of the doubt.

Robert Smith.

So can you just give me a heads-up on the Amlan competitive landscape? AMCOL has products in this area. Are you losing market share to them? Or is it (inaudible) what's going on there?

They are not one of the two big ones. They do have product in this area, but Alltech and BIOMIN are the big, big, big players in this arena.

Clearly with the market growing at -- I don't know -- it's not like the consumer area where you can get scanner data and get real good numbers. But our best guesstimate is it is maybe growing 10% to 15% a year. We were up way more than that in fiscal 2010 from fiscal 2009. So clearly we are gaining share, but I wouldn't bet that it is coming out of AMCOL. I would -- it's just the market is growing, but we're growing at more than the market rate. So so far our share is actually growing.

Okay. But in -- that wasn't true in the last fiscal quarter though, so to speak, when you had the shortfall?

Right. Not true in the last three months, that is correct.

So -- and within that brief period of time, what happened in the marketplace?

I have no idea, honestly, Bob. I mean, I keep (multiple speakers)

Okay. All right. That's fair. That's fair. So with the -- good luck with the financial resources (inaudible) it is quite apparent, are you looking to make an acquisition? Or what are you looking for?

Always looking at strategic acquisitions. Not really looking -- we have so many opportunities in our "creating value from sorbent minerals" mission that, yes, we are always looking for acquisitions in that, that fit with that mission statement.

Has that become any more active recently?

Nothing that I can talk about.

Well, that wasn't the question [though]. Really, I mean, has your search become more active?

There's nothing -- Bob, there's nothing that I can talk about. I will tell you a quote that I learned from my father. He was flying once with Alan Greenspan. They happened to be sitting next to each other. This was back when Alan was the Chairman of the Fed. And my dad said, Mr. Chairman, would it be prudent of me to ask you which way interest rates are going? And he said, yes, it would; it just wouldn't be prudent of me to answer.

Were they flying first class at least?

They were back in coach. No, I have no clue where they were sitting. But I will tell you, good question by you, but good, evasive non-answer by me.

Okay. Thanks again. Good luck.

Ethan Starr.

Yes. Last quarter you mentioned a new product in the works. Are you able to tell us anything more about it at this point?

No, but we're working hard on it, and we're excited about it, and we have conceptually shown it to customers, and they are very interested. They are only -- they have had two concerns, which is, can you get it to me faster? And the answer is no. And, you ought to price it higher.

So when your pushback from your customers is, "we want it sooner and we want to pay more for it," that is pretty good. And that is as much as I'm going to say on that one.

Wow. That's a -- price it higher. I think that's a new one. Never heard that one before.

Me either.

Thanks so much. I look forward to the next quarter.

And sir, you have no questions on the line at this moment.

Okay, good. Well, I think we have covered all of our range of topics. You can tell from the tenor that we are very enthusiastic again about the long term, but even the near-term prospects for Oil-Dri. So we appreciate your patience. We appreciate your loyal support, and we will talk to you again soon, actually at the end of the quarter, but it is only about six weeks, due to the delayed timing of the fourth quarter and the regular timing of the first quarter release.

So six weeks -- we will talk to you again. Thanks a lot. Bye-bye.

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