Oil-Dri Corporation of America (ODC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Oil-Dri Corporation of America earnings conference call. My name is Jennifer, and I will be your operator for today. At this time, all participants are in listen-only mode, and later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Dan Jaffee, President and CEO. Please proceed.

Thank you, Jennifer, and welcome everyone to our first quarter teleconference for fiscal 2011, our 71st fiscal year, which is pretty exciting. With me here in Chicago, Andy Peterson, our CFO, Angela Hatseras, our acting General Counsel, and Ronda Williams, head of all of our Investor Relations. And Ronda, if you would cover the Safe Harbor.

Thank you, 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 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.

Thank you, and as my prerogative as CEO, before I turn it over to Andy, I am going to steal all his thunder and crow about whether it has not just been a good quarter, but I was working on our -- my presentation for the annual meeting which is coming up next week, and I hope those of you who can make it will make it. But part of the presentation will be a retrospective, sort of looking back, because we are always encouraging our investors to take the same view of our business that we do, which is long term. So we don't give quarterly guidance, we don't even give annual guidance, and many of the decisions we make have a 5 to 10 year horizon on them, some even longer.

As you will recall, in fiscal 2010, we spent nearly $4 million acquiring a large body of reserves in and around our existing facilities when we already had 40 years of reserves in total. So clearly, that was a look way out beyond even my tenure with Oil-Dri. But it is that long-term focus that really drives our daily decision-making process. So we looked back 10 years and said okay, how has the decade been? And it has actually been pretty incredible. And I don't want to use up all of what I am going to cover in the annual meeting next week, but a couple of things that jumped out at me was if you had bought 2,000 shares of Oil-Dri stock on 7/31 of '01, so I am doing 10 fiscal years, it's nine years ago, you would have paid $10,280 for that. So, roughly $10,000.

And on 7/31 of '10, that would have been worth 43 -- almost $44,000 in stock value, but you would have also been paid $8,250 of dividends. So, your total value would have been just over $52,000. So your return compounded annually for that period of time was 19.7%, which is pretty powerful. And given the fact that in that period of time we have been in the teeth of the wind of a very negative global economy. Probably the worst economy since the Great Depression, and we lost a huge chunk of business with our single largest account. So if you'd factored all that into it, I wouldn't have thought we would have even done that well, but we did. But then I had some people who like to keep me humble, which is a failing job, but they try. And so they said, well you know what, you're looking back 10 years. That's a pretty rosy perspective for you, because you weren't doing so well 10 years ago and now you're doing well. But pick a different perspective.

So I went back five years. Because five years ago, the ship clearly was heading in the right direction. The Company was doing very well, and so if you just look back five years and you say okay, what is the total return for the past five years? And I grabbed some benchmarks. I said okay, let's see how Warren Buffett has done. So Bershire Hathaway, total return five years, up 34%. And I am using a website, so don't hold me to the exact numbers. If they spit out the wrong numbers, we will blame them, this is my Schwab stock screener. But I put it in there. And so Berkshire, Buffet up 34%, Bill Gates up only 5.5%, Microsoft up only 5.5% in the five-year period. Total return, not compounded. Oil-Dri up 78%. So I figure any time you're 2 times Buffett or 14 times Gates, you got to be doing pretty well. So that will be enough of me patting ourselves on the back. I think I pulled a shoulder muscle just now reaching around and giving myself an atta' boy.

But the reality of it is it's the team, and we really have assembled a great team. And when you get 800 people pulling in the same direction, as I have always said, you can really do a lot in a game of tug-of-war. If you get 400 pulling one way and 400 pulling the other way, that ribbon doesn't move very far. But we have proven that given a clear mission of creating value from sorbent minerals and then really trumpeting the values of the Company through our acronym of We Care, you get 800 people pulling in the same direction, and it really is powerful what can be achieved. But the real exciting part is not what have you done, it's what are you going to do?

So what will the next decade look like? And that's anybody's guess, but we feel we have a lot of momentum, individually and personally, our family have continued to increase our ownership in Oil-Dri, and we're off to a good start with the first quarter. So that is my segue over to Andy, he can cover the first quarter and let you know on our first little baby steps towards the next decade, how did we do?

We had sales of $56.3 million in the quarter, up 5% compared with last year's $53.4 million. We had a gross profit margin in the quarter of 23.5%, up from last year's 23.1%. Operating expenses were 16.7% of sales, which was down from 16.8% in last year's first quarter. Our effective tax rate in the quarter was 28%, the same as last year's first quarter. Net sales was 4.5% of sales, up from last year's 4.1%. EPS in the quarter of $0.35 was up 17% compared with $0.30 last year.

Looking at balance sheet cash flow, cash used in operations in the quarter of $500,000 compared with $7.6 million provided from operations last year. The $8.1 million negative swing in cash generated was primarily due to increases in accounts receivable and inventory driven by a 5% increase in sales. Last year, the opposite occurred when we had a 15% decline in sales compared with the first quarter of fiscal 2008. Capital expenditures of $1.6 million were down $300,000 compared with last year's first quarter. Debt payments in the quarter of $1.5 million were up $1.3 million compared with last year. We had purchases of treasury stock of $500,000 compared with no purchases in last year's first quarter. Dividends paid in the quarter were $1.043 million up $48,000, or 4.8% compared with last year.

Cash and investments at October 31, 2010, was $20 million, down from last year's $25 million. We had $3.2 million more in cash and investments in debt compared with last year's $3.7 million. On November 12, the Company sold 18.5 million of senior unsecured notes. The notes have a final maturity of 10 years and an interest rate of 3.96%. The proceeds may be used to fund future principal payments of the Company's debt, acquisitions, stock repurchases, capital expenditures and for working capital purposes. Dan?

Great, thank you. And some additional metrics that I like to focus on that I've talked to you guys about before, but we are selling a non-renewable resource, so we very much feel it is incumbent upon us to get the most for those resources, which is how we ultimately came to that creating value from sorbent minerals. So from a topline standpoint, we set a record in the quarter, $256 a ton. This is up 7% over the first quarter of a year ago, and I look back for the decade, a decade ago our average selling price was $156. So, we are up $100 a ton. And we have lost a little volume. We were doing a little over 1 million tons back then. We're on an annualized rate of right around 880,000, 900,000.

So -- but anytime you can increase your per unit price by 60%, 65% and only lose 8% to 10% of your volume, it is a positive trade-off. And that starts to show itself first in the gross profit line, where we made $60 a ton in the quarter. Again, this is after making $55 a year ago and only making $28 a ton a decade ago. So more than doubled our GP per ton, which is exciting.

And then you get into the net income line, and we made $11.47. We have set a goal internally of $11 in '11, meaning we finally broke the $10 barrier in fiscal 2010. We made $10.52 last year, and so got a nice ring to it, let's make $11 in '11, and we are out of the gates well, we're making $11.47 at the moment. If you look back a decade, we were only making $0.89 a ton, so I'm not even going to bother doing the math on that one.

So those are some of the key things that we look at as we make sure that we are heading along the path that we said we were. At any point in time, certain opportunities are going to be doing better than others, others are going to take longer to materialize, and others will even fail. We have failed, believe it or not. But net-net, I think we have done pretty well.

So I would like to, Jennifer, open up the call to questions and answers. As always, I'd like to encourage each person to ask their most important question first and then go back to the end of the line because we only dedicate 30 minutes to this. And so I want everyone who has a question to have a chance to at least ask their most important question.

(Operator Instructions) Your first question comes from the line of Ethan Starr. Please proceed.

Good morning, nice quarter.

Hi Ethan, thank you.

Will the new product you mentioned last quarter, will that require a lot of cash either in the form of CapEx or marketing spend?

It will be a significant investment on all fronts. Yes, that is a good question, and it will require that.

So, both fronts?

Yes.

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

Thanks.

(Operator Instructions) Your next question comes from the line of Robert Smith, please proceed.

Hi, good morning.

Hi, Bob.

I haven't seen you guys for a while.

Yes.

So could you give us the quarterly breakout of the Calibrin and those things that you have been sharing with us over the last year or two?

Yes, you don't even ask about the pension, though. You told me you were going to -- you were supposed to be my shill here.

Well, you were supposed to get back to me on that.

Well, I was going to do it here. I thought you were going to ask me about the pension, and then I would look like a well-informed, educated CEO, and it all would have played out well.

I was going to ask that. You said the most important questions first.

All right, I will cover both. Because I knew you did ask that question. We were up a little bit on the Calibrin products from the fourth quarter, but again, I think we are all disappointed with the trajectory of the increase. But I think as I mentioned in Boston, and I will reiterate here, the core products are doing well. But what has really been slow for us is the introduction of the next generation, what we call clay plus.

So taking our basic clay technology, adding something to it, to then have a beneficial impact both in the eyes of the nutritionist and then ultimately in performance with the animal. And the registration process, the testing process, all of the hurdles you have to leap through every time you make any little change to your core product, it requires a complete re-registration. So we are excited about our next generation products. They are in the hopper, they're -- I just met with Dr. Ron Cravens yesterday. We are continuing to be very confident about the long-term prospects of the business. Short-term, it is taking longer to get off the ground than we would have liked.

Do you have the number?

I do, but it is so immaterial, do you really even want it? We're talking -- I'm not going to even bother anymore. Until it's material, just for your purposes, it was relatively flat. It was up, but it was relatively flat. And when it's--.

Well, I wish we would continue the ability to have those numbers.

I know, but it just leads to spending a lot of time on something that is a small percentage of the business, and I have been encouraged by my advisors to stay away from immaterial numbers. So until it is material, I guess I have a gag order on me.

Okay, all right.

So, it is relatively flat, but it is immaterial. That is what you need to know. But then on the pension front, this is a hot topic, and it is a great question. Because a lot of companies are, and states in particular are in deep water when it comes to their pension. I got into this, so just to give you an idea, I guess the US average of 80% to 85% funded of what they project the future liability to be. The state of Illinois is at 38%, which is horrendous. The Pension Protection Act mandates that by 2014 you have to be a least at 100% funded, and the good news is Oil-Dri as of today is at 101%. So, if we can just stay where we are at, we are fully funded.

We use an annual growth rate assumption of 7.5%. That is unchanged from 2009, and our 15 year average return has been 8.12%. So we are actually picking a number that is more conservative, that it is lower than what our actual results have been, but there are obviously a lot of reasons in this environment for being conservative. The discount rate has been dropping, that is a federally, I think, mandated number. It's not anything we get to choose. But obviously, as that number drops, your liability goes up. And so, even with all that, we are at 101%. And we have $18 million in assets, which is good, and our annual payout for the fiscal 2011 is just under $750,000. So on that rate, we are 24 years of funding just sitting there.

So we are in good shape with our pension. It has been managed very well. This is one of the things that my father has continued to be very focused on. He is very conservative, he has got a lot vested in making sure that pension continues to get paid out. So it is all working.

I am glad to hear that. I'll get back in the queue.

Okay, thanks.

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

Yes, I'm wondering, what is Oil-Dri's potential liability should any litigation arise from the unfortunate accident in Ochlocknee in October.

Angela?

It is not expected to be material from a financial reporting or a CC standpoint.

Okay, thank you. Also, what are the prospects for continuing to restore -- Cats Pride to additional Walmart stores?

Very favorable in the sense that as a company, they have, I don't want to say reversed, but they recognize that they cut too deep with their project impact, and they have been across all categories, restoring discontinued SKUs and/or brands. It is the kind of thing they address every six months. So what we have in place right now is going to stay what we have in place. We would expect that come March, they would look at that again and that we would hope to gain more of the lost doors come March.

And the stores that you've restored in the last few months, have you seen increasing turns there? On retails on the shelves?

The calendar category has been a little weaker in general, so our movement is good relative to the whole category, but the whole category is soft. I think Walmart just reported five consecutive quarters now of same-store sales decline in the United States. And so I would say relative to the category, we are happy with the turns. Relative to what we saw maybe in the past, it is looking a little soft.

So, okay, compared to before, before you were discontinued out of Walmart briefly, it is slower than that?

Correct.

Okay, thanks.

Your next question is a follow-up question from Robert Smith. Please proceed.

So at our analysts gathering, we spoke of the R&D effort and the numbers. So my question centers on the extension of the R&D tax favored treatment. So how are you in -- how is the statement of the actual R&D figure reflected in the tax benefit? Do you have to look at this again, how you present the data?

Andy, let me just give you the background, and then you can answer. The point I was making at the investor conference was while we reported R&D number, that is a pure R&D that is easy to get your arms around. When you then say, wait a minute, we are running in beta mode down at the plants some of our various projects, and we don't really capture those dollars and then send them back up to Vernon Hills for the R&D budget. So I would say our true research and development expenditure is greater than what we would expend in Vernon Hills, so that was my point. So then, Bob's point, I think is on the tax side of how--?

Yes, I think -- I am not sure that's all been sorted out in terms of what the R&D tax credit extension and how that is going to look. It is not going to be a significant number in terms of what that is going to do to our taxes.

Well, but I mean, you want to save every buck you can, right?

No, I'm not -- I would agree.

You do, but we are already in the alternative minimum tax, we are already getting it because of inflation. So the odds of us being able to take advantage of a bunch of additional tax credits--?

Right. That was my point. Not that we wouldn't do it, not that we wouldn't look at doing it, but it's not going to be a material impact.

I understand that, okay. And could you just circle back and tell me about the brick product? Where is that now?

That was my failure. So when I said we've failed on stuff, there is one.

So, it just didn't work?

Yes, it didn't work. The product worked, but the consumer didn't want it at the price we needed to charge them, so.

Could that be revisited at some point in the future?

Yes, I would think -- look, it goes with the building industry.

That's what I was thinking about.

Right, so we picked a bad time to launch a product into the building industry, because they are in the tank. And so the last thing they need is to spend more money on incremental capacity. They got all the capacity they can handle. So yes, if it ever got to where things heated up again where they were looking for incremental capacity, our product works.

Okay, thank you very much.

And your next question comes from the line of Ethan Starr, please proceed.

Yes, I'm wondering how things are going with manufacturing verge. Are you getting closer to being higher quality on that and being able to offer different sizes and different types?

Yes, I think it is -- we are progressing. We are getting better throughput, we are going to be expanding in terms of the product line at some point. But I think it is being well received in the marketplace, and we are continuing to refine our processes. And it is a new process for us, so it's going to take some time.

Do you think another year or so? Or you're not really clear?

I hate to put a timeframe on it. But I think certainly, if you look at the next year, we are going to make a lot of progress.

Okay, that sounds good. Any progress in getting into China with Calibrin?

No.

We are still fighting the red tape, registration process.

Okay. Well thank you very much, I will see you Tuesday.

Great, thank you.

Your next question comes from the line of Robert Smith, please proceed.

Just want to wish you guys a happy holiday season. And also, thanks for the dividend increases.

Absolutely. And Bob, your point on doing it once a year is well taken. I've see the rankings and so forth, and as you keep doing it, you get yourself into a more and more select group, so.

That's true, yes.

Yes, so given the performance of the Company, I'm sure the Board will look favorably upon that again. I think at the June meeting we tend to take it up.

Thanks so much.

Great, thank you.

Good luck.

Good. Well, thanks everybody, it's a very positive quarter. We have got a lot going on. We are confident in both the short, mid and long-term. And obviously, always, things can happen, but as you can read from our vibe, we are very enthusiastic about what the future holds for Oil-Dri.

Jennifer, that concludes our call.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.