Oil-Dri Corporation of America (ODC) 2011 Q2 法說會逐字稿

Good day and welcome to the second quarter 2011 Oil-Dri Corporation of America earnings conference call. My name is Francine and I am your operator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Dan Jaffe, President and Chief Executive Officer. Please proceed.

Okay. Thank you. Welcome, everybody, to the second quarter and six month teleconference. With me in the conference room is Doug Graham, our Vice President and General Counsel; Dan Smith, our Vice President and Chief Accounting Officer; Jeff Libert, our Vice President and Chief Financial Officer; and Ronda Williams, who has the ball of our investor relations and will also walk us through the Safe Harbor.

Yes. 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, Ronda. And as always we will start with the detailed -- somewhat detailed brief recap of the second quarter and six months that Jeff will walk us through and then we will open it up to Q&A and we encourage you to prioritize -- ask your most important question first and then get back into the end of the queue. So, Jeff, will you walk us through the results.

Thanks, Dan. Sales for the quarter and year to date were up 5%. For the quarter, we sold about $57 million worth of products and $113 million for the year. EPS didn't fare quite as well. For the quarter, we earned $0.25 a share which was down 19% versus a year ago. For the year we earned $0.50, which is down 2% versus a year ago. The story here for the top line is that we continue to experience success in a number of our product lines; however, for the bottom line things didn't go as well and it's a story that we're hearing quite a bit in the business world these days. We've suffered due to increased costs and it's really primarily oil related. Oil is a major factor in our freight and it's a major factor in our packaging costs and we've also seen a spike in our healthcare related costs. That's something that is going on in the community in general. Also our foreign subsidiaries have struggled during the year. We've seen a very vigorous competition in our foreign subsidiaries. And our spending and market research and advertising have increased. Those of you familiar with Oil-Dri know that this is reflective of our long-term philosophy.

In our business to business area, some of the areas that have done well, we've seen a lot of increase in our fluid purification products; however, the sales of our ad-cam and co-pack packaging litters have declined during the quarter. In our retail and wholesale area, sales were strong from (inaudible) products; however, they were not strong enough to cover some of the increased costs that we faced.

Moving on to our balance sheet, we are in a very strong position. Our cash investments balance is now $40.7 million. During the quarter we closed on $18 million -- $18.5 million of borrowings. And as in the past, we remain committed to dividends. Our yield -- our quarter dividend was 16% and that represents a yield of 3.4% based on the quarter end closing price. And we can -- also have continued our share repurchase program during the quarter. We bought almost 79,000 shares, which cost us $1.7 million during the quarter and for the year we spent $2.2 million on share repurchases. That pretty much summarizes it.

Thanks, Jeff, and I'll add a couple of bullet points, things that we've talked about in the past which is our average selling price and then in the past this has gone up greater than our average costs. So we, for the last few years, have been able to show some margin expansion. The good news is, our average selling price in the first half was right around $256 a ton, up from just under $240 a year ago. So, a nice increase; however, margins were still down. So that sort of amplifies what Jeff was saying which is that our ability to get the cost up -- get our prices up greater than our cost has not happened and so we have seen margin erosion in the quarter. We are working diligently. A lot of our prices are set contractually and there's an annual mechanism so those will go up when it's time for them to go up. And a lot of our prices are committed through the end of our fiscal year. So those -- we will honor those commitments as well. Where we can, we are raising prices and oftentimes it's in the form of passing on incremental fuel through a fuel surcharge on freight. So I think everyone's seeing this probably in all areas of the economy, the commodity prices are going up and we're being impacted as well. I would like to, Francine, at this point in time open it up to Q&A to make sure we cover the issues that are most important for our investors.

Yes sir. (Operator Instructions) Our first question comes from the line of Ethan Starr.

Good morning.

Hi, Ethan.

I'm wondering, are the increased capital expenditures for new product initiatives, are -- is that for manufacturing equipment and, if so, when will the installation of such equipment be complete?

I'll take that one, Dan. Yes, we continue to invest in our manufacturing infrastructure, Ethan. We're a very capital intensive business and it does require a number of reinvestments during the year. We also are investing in continued automation and making our process more efficient. And we do have some projects underway right now and we'd expect them to be done in the next six months or so.

Okay. But that's relating to the new product initiatives? The new -- this new equipments?

Really, it's all kinds of things, Ethan.

Okay. Well, the new product -- when might you see revenue from this new product?

I don't think we're answering that question right now, Ethan.

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

Thank you.

(Operator Instructions) Our next question comes from the line of Robert Smith from The Center of Performance Investing.

Good morning, Ethan.

Do you have a question for us or for Ethan?

So, the Calibrin -- the new product registration and international market, we've spoken in the past about China. So that seems possible. And are you willing to state that? Or disavow it or what? Because--?

Yes. That's very perceptive on your part and that is the large market so our Calibrin-A, our aflatoxin binder has been approved in China. And we're in the final stages of trying to receive approval on Calibrin-Z.

Okay. And what do you feel is the opportunity there, as far as size goes?

We're not disclosing that. It's obviously a significant market and we have a lot of hopes for it.

What is your CapEx estimate?

For the year?

Yes.

We expect to be a significant year in terms of CapEx. I would expect it to be something in excess of $10 million.

And how much of that would be related to new product?

I'd say a fairly good chunk of that.

What do you mean by that?

Maybe half of that.

Okay. And I noticed the yield is up this morning. That's a touch of humor but -- okay, I'll get back in the queue.

Thanks, Bob.

And we have a follow-up question from the line of Ethan Starr.

Yes. How are Calibrin and Verge doing generally? And I'm wondering if the -- also, is the manufacturing of Verge continuing to progress as far as ability to produce different sizes and different things?

Yes. Let's start with Verge first. Consumer -- or customer demand continues to be very strong. The sort of breakthrough technology is being leveraged by a couple of key customers who are seeing real benefit out in the marketplace. So they're able to market that and they've exceeded their forecast with us in terms of demand. So that's a very good thing. We're hopeful that it'll -- we'll get the volume up to the point where we can justify phase two of the expansion. Phase one was a lot of infrastructure that can be leveraged in incremental capacity in phases two, three, and four, without putting in a lot more incremental capital. So the average cost of the product would actually drop. We did not want to go to phase two until we had stabilized the process. I can tell you the team led down in our Ripley facility is doing a great job. I was just there again within the last 30 days and it's fairly stable. I mean, they're getting it. They're getting it to where the costs have come down. They're stabilized and they still have some ideas on how to improve it even more. At the same time we're putting together the justification to go to phase two. So far things are good on the Verge front, sort of as you would expect. Any time you're creating a new-to-the-world really technology, there are going to be some start-up challenges. And we have hit those and we've overcome a lot of them. So still very optimistic on Verge.

Calibrin -- the core products are doing sort of what we thought they would do, and these are the clay-only toxin binders. We're -- Dr. Ron Cravens and his group would be the first to admit and discuss where they would be disappointed would be on the new product side, on getting into sort of a broad spectrum binder and then even into what they would call gut-health, which would be a little farther up the value chain from just pure toxin binding. So, we're continuing to invest out at R&D and then in outside labs, on in-vitro and in-vivo studies to find the right blend between our clay and other additives that are known in the industry to come up with the best products because, at the end of the day, the nutritionists are going to be driven by data and your products have to work. The good news is, from a toxin binding standpoint, our products work the best of anything we've seen and we've put our products into tests against a lot of the other guys and our products work very, very well on apple toxins zearalenone, which are the A and Z of Calibrin. And -- so we're continuing to leverage that, but we know we have to move up the value chain to make this a success.

Okay. So, I hope at some point you'll be able to outsell the other guys?

Yes. That would be great.

Okay. The broad spectrum binder you mentioned, is that Varium?

That would -- that's sort of the code name for it, yes. But I don't know that it will end up being marketed under that name or not. That's to be determined, but that is the idea.

Okay. I have other questions or I can get back in the queue.

Yes. Let's go back in the queue and just see if anyone else is -- has got one otherwise you'll come right back.

Okay. Thanks.

We have a follow up question from the line of Robert Smith.

Yes, hi. So I thought I heard you say that the per-ton figures were $256 and $240, is that right?

$240 a year ago and $256 this year. Yes.

Okay. And then you spoke about price increases and this question of contractual -- so what portion of sales is contractual through the end of the year? I mean, what freedom do you have to raise prices on -- across the -- your product lines?

Oh, I -- the majority of our business is not contractual.

It's not. Okay. So you have that wiggle room?

Yes.

Okay. I'll get back in the queue.

Okay. Thanks.

And we have another follow up question from the line of Ethan Starr.

Yes. Given the increase in price of plastic resin, at what point would it make sense to switch to cardboard boxes for cat litter packaging?

Well, I think your perceptive to category is blending the two consumers. There's still a set of consumers that love the jug but a lot of them have accepted the boxes. So, we do sort of a rudimentary box now and we're definitely looking at upgrading and doing sort of a state of the art box in the near future.

Okay. I just read an article this week, there's this company, Seventh Generation, is doing -- is going to do a cardboard container for their liquid laundry detergent. And they think they can do that -- I would certainly think you can get a better box for your cat litter, hopefully.

Yes. Absolutely.

I know you've had issues in the past with the boxes but hopefully you can make it work. And I don't know if -- would the cardboard generally be cheaper than the plastic or not?

I think I heard for an equivalent size, yes, I think it is.

Okay. Well, that's something to consider. What -- you decide what to do but anything that cuts cost is always nice.

Yes. The beauty of the cartons is even on the -- forgetting the per unit cost, is because they're rectangular in shape they stack so well on a pallet that you can get more on a pallet given the same -- less wasted space. Whereas jugs you got all the curves and the handles and all that kind of stuff. So, you're definitely paying to ship air to a greater extent than you are with cardboard boxes.

Interesting. Okay. Do you mind if I ask another one?

Sure, fire away.

Okay. Would it make any sense to -- I don't know all of the details of the Verge manufacturing process but would it make sense -- or the Verge technology to apply that to any of your other products?

Absolutely and we are looking at that. We think that has potential.

For when?

Well, nothing in the near future. Anything of that value added basis, we're going to have to go through tests and get the data and all that kind of stuff. But we're looking at it.

Okay. Would that be more for a consumer or industrial side?

Probably more on the B to B side, only because on the consumer side one of the benefits of Verge is that it's spherical and with very great uniformity. And imagine a litter box full of BBs. Not a good thing because if they get out, they're going to roll and that's not a benefit in the cat box. You don't want spherical. We want nonuniform granules so that they don't track and they don't roll.

Sure. Okay. Are the prices you're charging today, literally today, where they need to be to restore profitability to where you want it?

No.

Is that, no?

No. That's a no.

Okay. Then I'd like to urge you to continue to repurchase stock. The stock's down today and hopefully we can get some shares at a bargain price. And also, when it makes sense to do so, as well as to increase the dividends again this year.

Okay. Now you stole Bob's thunder. Now you're going to knock him out of the queue.

Well, hey, any vote -- any additional votes for that I'm sure will be appreciated by other shareholders.

Yes. That's true. All right. I always say my dad and my sisters will probably be right there with you too.

Okay. Well, thank you very much and I look forward to next quarter.

Thanks, Ethan.

And we have a follow-up question from the line of Robert Smith.

Ethan, thanks for the comment about the dividend. I noticed that in your press releases you do highlight this fact about the dividend being increased in seven years, and I think it reads very well, and I'm hopeful that you will continue this policy. So, are there any numbers that you can offer us about the comment about Walmart and that--?

I'm glad you brought up Walmart. I would just say that we're continuing -- I think our relationship is better than it's ever been. And I was just down at their vendor supply summit, which is something we have not been invited to the last couple of years. So, it was number one, nice that we got invited and got to spend time with both our buyer, our DMM, our GMM, interact really with all levels of the company, and that from the senior execs presented. And everything they're talking about is right in line with what we can deliver. So we feel like, strategically, we're moving in the same direction as our largest account, which is obviously a very nice thing to be able to say.

So are you continuing to increase the store count?

Like I've said in the past, they are huge. They have 2 million associates. And so we will hope and continue to increase stores as they work on their -- what they call their modulars and make changes. But I can just tell you that they talked about a couple of key things. Number one, they want brands. They want assortment. And they want brands to the extent they can be to be the OPP, the opening price point, in categories not just private label. And for instance, Cat's Pride Scoopable is exactly that. It gave them assortment, it was unique, it's flushable, and it was the opening price point for branded scoopable litter in the category. And so when you start hearing that, it makes us encouraged about the future for Cat's Pride Scoopable in Walmart.

But has the storefront numbers increased in the last three months?

Last three months -- no. Not in the last -- they look at them every six months. And so the next time they're likely to look at them would be sometime in the fourth quarter of our fiscal year.

Okay. And can you share any performance numbers from Calibrin in the quarter? Was it up?

No. Same -- it was relatively flat which is disappointing. So we are -- but in no way are we waving the white flag. We're still very encouraged and confident about our long-term prospects in the animal health area. We just hit some road bumps here in the short run.

Anything you might comment about the R&D function going forward? I mean, about the money being spent as productivity and anything on the finally -- you can't speak of it now, the time line to when you might be able to say something?

I would just say that as an investor, you should want to know -- as we're hitting a softening in margins, are we cutting the things that could potentially benefit us in the long run -- R&D, advertising, sales, effort, and the answer is no. So, we are doing what we can to control the expenses that are not in those areas. But I would say we're actually spending more in those three areas and we're going to continue to do so. We are still very encouraged about the long term prospects of our business and feel that short-term, yes, we've been hit with cost increases greater than our ability to forecast them and get out in front of them. But I think we're not over reacting either. We're going to get our prices up. We're in rational markets, which is good. I've been reading a lot about Warren Buffet and where he likes to invest and one of the things -- his latest hot button is pricing power. And I don't know that we have pricing power but I think we're in rational markets where when external costs go up, the market in general tends to have to react because these are not things we can control and nor are we expected to control. So, oil going up as much as it has is something that's completely outside our control. So we will be out there raising prices and trying to cover these cost increases.

And any comment that you can offer about the year as a whole?

We don't really give too much forward guidance, but you could read into my comments to say that I think 2011 will go down as being a very important strategic year, but maybe not -- when you look back on your investment say it was the greatest financial year. I mean, we're behind right now in earnings from a year ago by a couple of pennies or wherever we are -- one penny. I know I was rounding. And we'll finish the year on whatever trajectory we're on, but I really think we're planting seeds that for '12, '13, and '14, are going to be very valuable to you and the rest of the investors.

You think you can match last year?

We don't really give forward guidance so I'm not going to answer that question.

Okay. Sure. I hope your dad is well. Please give him my best.

Thank you. He is well and I will. And look, you should take a lot of pride. That comment at the end of the news release or wherever we mention the dividend, that's straight out of you. So thank you.

Well, I accept that and I think the world of the policy itself and I think it really has weight in the investment community and will have increasing weight.

Good. So, thank you. Thanks for your advice.

Thanks. Best of luck.

Thanks, Bob.

And we have a follow-up question from Ethan Starr.

I lied. I have more questions. The press release mentioned the coarse cat litter category and its decline. And to what extent long-term, if it declines significantly, is that a potential threat as far as leveraging your fixed costs with--?

It's a good question. I would say the good news is, yes. It's declining as a percentage of the overall category because the growth of the category has gone to Scoopable. However, I will tell you when Scoopable was launched 19, 20 years ago, right around 1991, we have pretty much completely gone through the life cycle of any cats that have been born, and raised, and perished during that period of time. And yet, coarse cat litter is still a huge part of the category. So, I think people were sort of predicting -- oh, yes, people stay with coarse because that's what they were traditionally in but when they -- the new buyers will all go to scoop. That is not true. I mean, so there -- new buyers are making the decision to go to coarse every day. Obviously, more new buyers are making the decision to go to scoop. But we would be out of coarse altogether if the predictions from 20 years ago had come true. So, that's sort of the good news to sort of directly answer your question. I mean, it would not be good for us if coarse cat litter went away. There's no trajectory that's sort of predicting that's going to happen any time in the near future. And so you end up owning a greater share of a smaller segment of the market which, again, getting back to any kind of pricing power, all the investment and any kind of new capacity that's coming into the cat litter category is coming in on the Scoopable side. So, you can read into that what you want. The competitive aspect of the category is on Scoopable, not coarse.

Sure. Okay. And just can you expand a little more about your comment before about phase two, three and four on Verge?

I'll let Jeff sort of--.

Sure. Basically the -- plant's been designed in a modular fashion with enough space for all four phases. And as demand can justify it, we can then make the next investment into phases two, three and four. We've only invested in the first phase so far, but there is plenty of space for future growth. And so as our profitability improves, as we improve the process and as customers adopt our granule, we're going to be moving into those other phases.

And I'm just going to back of the envelope, Ethan, and so don't hold me to this, but just an order of magnitude, the fixed costs per ton on phase one -- because we did have to build up the infrastructure to allow for incremental capacity in phases two, three, and four, the fixed cost is roughly -- I won't even get into the numbers -- but I -- my back of the envelope is about five times what the fixed cost would be on just the discreet expenditure in phase two. So that means we can pretty much double the capacity with one-fifth of the capital. So as you start to do that, then you drive down your overall average cost and the whole thing gets a lot more profitable.

Great. Now is -- so is phase two just additional capacity and not the -- not something that makes a different size or different quality or different -- not different quality, but different size or --

Yes, right. So you still got the same three variations. You got the nondisintegrating. You got the disintegrating and then you got the slowly disintegrating. And then under that you got three different sizes, our 100, our 140, and our 200. And then phase two makes those same exact nine SKUs but it just doubles our capacity.

Wow. Okay. Got it. So what's -- so you could getting close to -- once you refined the process enough that you can produce them consistently well, you'll add phase two?

I think we were getting pretty close to where I'm expecting Jeff and Tom Rutherford, who's the VP of the division, to be -- come to me with the request to think about phase two.

Okay. And so phase three and four are just additional capacity?

And the quality -- we can make all the products that we want to make right now. We've got those capabilities. The question is customer adoption. And so far we are very much on track with where we wanted to be in that, and costs, and that's been a little bit harder for us. But we are making progress.

Okay. Well, sounds very exciting. Thank you.

Yes. And I would encourage you to Google or Yahoo! and I bet it's out there somewhere, Verge and -- yes, I haven't tried to do this but I know that they've -- they're out there. FMC is out there with an advertising campaign really touting the Verge granule. If you don't find it, then it will be out there soon enough. It just means they haven't put it out there.

Actually, I have done that. And there's a press release out there and they -- they're talking about the strength of their product and the reason why it's so strong is because it's revolutionary Verge technology. So, if you do that, if you look on their website, Ethan, you'll be impressed.

Yes. So, I encourage you guys to do that because it's really a nice testimonial to -- if you build it they will come -- and we built it and they've come.

That concludes the Q&A portion of the presentation. Mr. Jaffe, any closing remarks?

Thanks, Francine, and, yes, thank you guys. Look, quantitatively not a great quarter. But again, qualitatively, under the covers a lot of investments are being made that are not going to -- that did not and would not help the quarter, are not even likely to help the next quarter or the quarter after that. But there's certainly things that we are hopeful and confident are going to help future quarters. And a lot of good strategic investments are being made to grow the business. So, thank you, and we will talk to you again in three months.

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