Oil-Dri Corporation of America (ODC) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter 2011 Oil-Dri Corporation of America earnings conference call. My name is Anne and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) I would now like to turn the presentation over to Mr. Dan Jaffe, President and CEO. Please proceed, sir.

Thank you, Anne, and welcome everybody to the fourth-quarter and fiscal year-end teleconference. I hope you all have had a chance to review the news release. I guess before I do my pre-comments, let me introduce who is here with me. Jeff Libert, our CFO; Doug Graham, our General Counsel; and Ronda Williams, our Director of Investor Relations, who will do the Safe Harbor.

Yes, I will. Thanks, Dan. 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.

Thank you. And before I turn it over to Jeff, for a detailed review of the quarter and the year, now let me just say from a 50,000 foot standpoint, quantitatively, not the kind of year we would have liked to deliver, although a lot of reasons why we were even, I'd say, somewhat happy with the financial results.

And we can get into that, as those of you who have been following us for awhile know, given what could have happened with our largest account a couple of years ago, the numbers really weren't so bad. But, qualitatively, very, very positive. We believe that fiscal 2011, a lot of strategic moves were made that are going to add value to your investment over the long term. And so, we will certainly be talking about those in the rest of the call. Jeff, why don't you cover --?

Thanks, Dan. Thanks, Dan. For the quarter and the year, sales were up 6% for the quarter and up 4% for the year. Sales were a little under $58 million for the quarter, and $227 million for the year. For the EPS, the bottom line, was a mixed bag. EPS was $0.40 a share, up 21% versus a year ago; however for the year, EPS was -- sorry, a $1.26 a share, which was down 3% versus a year ago.

And the story was that the top-line increased due to a higher value mix of products and I'll talk about that in a moment. For EPS, we had a strong fourth quarter, primarily due to lower healthcare costs in the quarter and as some of you may know, we are self-insured and we see some volatility in healthcare costs and we just saw a very good experience this quarter. And we had lower effective tax rate in the quarter as we assessed our tax position at year-end.

For the year, EPS was lower due to, as we've talked about in previous teleconferences, increased costs, primarily oil commodity-driven things; and energy-driven things; oil is a major factor in our freight costs and our packaging costs. And, as a result, our gross profit margins declined from 22.7% to 22.1%. On the SG&A side, we spent a significant amount of dollars preparing for our Fresh & Light launch, but in offsetting those costs, were lower discretionary bonuses which reflected our reduced earnings.

Getting into the business units, on Business to Business, sales increased 3% for the year but income was down 2% for the year. We saw really strong sales in animal health, bleaching earth and agricultural carriers during the quarter; however co-pack and international sales declined. We saw incremental sales that went into our Ag Carrier business of Verge-engineered granules. And co-pack and international declined due to industry trends of declining coarse cat litter sales of which we have a large share.

On the retail and wholesale side, sales were up 4% for the quarter but income was down 11%. Slow sales of coarse cat litter, as I mentioned earlier, and higher commodity costs adversely affected our consumer business. However higher sales of Scoopable, with the return of Cat's Pride Scoop to Wal-Mart helped -- drove sales higher, and as mentioned a minute ago, we spent significant dollars during the year to develop the Fresh & Light product that affected adversely our income for the quarter.

Our balance sheet remains strong, as it has in previous quarters. Our cash and investment balance is now $33.7 million. During the year, we borrowed $18.5 million at very attractive rates. However, our net debt, that is our borrowings less our cash and investments, is virtually zero at year-end. So our balance sheet has really never been stronger.

During the year, we spent $13.8 million on capital, a little over one-half of that amount related to the Fresh & Light launch. And we really spent that money to produce a product that has unsurpassed quality and to have configurations that are standard within our industry so we can sell on -- in any of the formats that our customers want.

As we have been in the past, we remain strongly committed to dividends. We recently increased our dividend; our quarter dividend was $0.17 per common share and that represents a yield of 3.3% at the quarter's closing price. And during the year, although we weren't active in the quarter, we repurchased $2.5 million of our own shares. Back to you Dan?

Great, thank you, Jeff. Great recap and I think highlighted the key parts from the quarter and the year. As always, I really want to spend the next 20 minutes covering everything you guys -- 20 minutes, 25 minutes, everything that is first and foremost on your radar screen. So, please, Anne, if you could open up the queue and I would just emphasize, again, prioritize your question, ask your most important ones first and then get back in the queue to let other people ask their question.

(Operator Instructions) Ethan Starr, a Private Investor.

Good morning. Congratulations on a nice quarter.

Hi, Ethan. Thank you.

I'm wondering, have you added new retail distribution that did not previously carry Oil-Dri products, with the new Cat's Pride Fresh & Light, have you added a new retail distribution and how is sell-through at retail?

I will tell you this. We've definitely -- we've been out presenting coast-to-coast and the reception has been overwhelmingly positive. So, it takes them time from the day they say go to actually get it on their shelves. A lot of the major retailers do things called plan-a-gram resets where they put in their new -- what they are going to be stocking on their shelves on a systematic basis so they may do it once a year, maybe twice a year but they don't do it the day after you make the sales call.

Sure.

So, we have got commitments -- really, we are batting nearly 1,000 which is great. And, so, over time, over the next 6 months, 8 months, you are going to start seeing it everywhere. You will see it some places quicker, who are just about to do a reset or have the flexibility to get it on their shelves sooner. You'll see it at other places farther out but the response has been overwhelmingly positive.

Okay, and sell-through?

Well, you can't see sell-through yet. You can see sell-through at the one retailer who did get it out there quickly, which was Wal-Mart. All I can tell you is the feedback from them is that it is adding to category sales so not cannibalistic, driving their category growth. These are quotes we are hearing from them so all very positive; they are very much behind this launch as they see it as a strategic move in terms of environmental sustainability. So, very positive on the 1 retailer who really has it at the moment.

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

(Operator Instructions) Robert Smith, Oil-Dri.

Hello, you just hired me.

Welcome aboard.

I'm at minimum wage. (laughter) So could you just go over the landscape of Calibrin and Verge?

Yes, I will take Calibrin and Jeff will take Verge. While we did finish the year strong, all in all, it was not a great year. I will tell you, it did cause us to re-look at our strategy.

And I would say, when we launched the Calibrin products 3 years ago, it was believed, this will be a global product, which it is, and we should indiscriminately blow it out there and hopefully, we get customers in every country of the world. It was not a great strategy on my part, I will take blame for that. We've learned, in the past, that focus is the key. So better to have a 10-share in 5 markets than have 0.5 shares in 50 markets.

So we have been refocusing on our major markets and we are seeing the benefits of that. We saw it at the end of the quarter and we are really seeing it at the beginning of this fiscal year. So, we're -- Calibrin is doing very well and that's focusing on the core markets where we have real good distribution, real good strategic partners and we'd rather increase our share with them and it helps us concentrate our travel, our marketing, everything. So, --

Core markets are which?

Well, I'm not sure I want to disclose that, just from a competitive standpoint. I think it's like telling the competition what play you are going to run before you run it. But, so I'm not really going to get into that but you could easily figure it out because you'd say, well, you are going to go where the dairy, poultry and swine production is. But, anyway it is the top 5 markets, 6 markets for us and at the moment, the strategy is working.

Okay. (multiple speakers)

You asked about Verge, wait -- Bob, had a second -- Jeff is going to cover Verge.

You asked about Verge and I would say that the process is still very much being developed. This is a new-to-the-world process. And, so, it is going to take some time but we have seen a lot of improvements during the year and even during the quarter. We are now making product at a much faster rate than we were before.

But a worry for us is we see a lot of enthusiastic response to this in the marketplace. There are people who want to try this product and we just don't have the volume to sell them right now and we're working on overcoming that. So I would say that, at the time, we are still not really at a point where we can say this is a real moneymaker for us but we are seeing good response in the marketplace and we are making manufacturing improvements that we expect to continue. So, we are bullish on its future.

David Zelman, Zelman Capital.

Hi, guys. I'm relatively new to your story. Obviously, you have a very high quality Company here. Cash flow has been pretty consistent for a long time and it appears to me that the growth here is on your new kitty litter product.

I read your transcript that talked about the benefits of shipping and the volume and so it's obvious, from a retailer standpoint, the cost savings. How about from a consumer standpoint? Other than weight, is there some cost benefit advantage to the consumers?

And then, from a profitability profile, on your last call, you said it's priced about the same. But what does the margin profile of that product look like and then the other part is what's going on with your new international distribution as well? So if you could drill down a little bit more into the economics of your new product, and your new markets, that would be very helpful.

Great. Well, David, welcome to the teleconference and yes, some good questions there. Consumer benefits, let's start with that. And you said, other than weight, and just to be -- just to clarify on weight, why a consumer would care. Yes, they might care a little bit about the environmental sustainability.

The weight aspect for the consumer is the number one negative when you survey buyers of cat litter, which the demographic is women, 25 to 54. Those are predominant buyers of cat litter is that it is so heavy and bulky and so making it lighter just means they carry home less pounds each week. It isn't so much about the environment, it's more about ease-of-use, ease-of-carrying and pouring.

But having said that, when we first challenged our research team and manufacturing team to make this product, I was hoping for product parity. I was hoping the product would work as well on the key features and benefits -- clump strength, odor control, dust, and that the added benefit would be that it is lighter so it is easier to carry and pour. The synergistic benefit of taking the, what we call the best of both worlds, and I will give you a little bit of a history course on cat litter.

In about 1948, Ed Lowe came to my grandfather and had the idea of buying coarse, absorbent material; we were their distributor on floor absorbents. He said, I am going to break it up and sell it in 5-pound bags, write kitty litter on it and try and get people to use it instead of sand, which was not absorbent and didn't control odor. He invented the industry. So that started cat litter back in about 1948 and that was based on calcium bentonite, which is a non-swelling mineral, highly absorbent, light in density, controls odors very well and it's our raw material.

So, until about 1991, that was the mineral of choice in cat litter. Then about 1991, John Hughes of the American Colloid Company, which are -- they're in the sodium bentonite business, came up with the idea with, our product doesn't work as well as calcium bentonite in many of the traditional aspects but it does one thing that calcium bentonite won't do and that is, when it gets wet, it forms a clump. And maybe we can change consumer behavior and get people to actually scoop it out and that was the advent of Scoopable Cat Litter back in 1991.

Now 20 years later, what we have done is pretty eye-popping. Our scientists figured out that, with the right percentage blend and the right granulometry, the size of the ratio of the 2, you can put calcium bentonite together with sodium bentonite and come up with a better cat litter. It clumps better, controls odor better and has less dust and weighs 25% less on a pounds per cubic foot basis.

So, all of a sudden what you got was, like the Post-It Note --we went out to invent one thing and actually came back with something else. Now, the exciting thing is, we have patents, we have patents pending, we have the raw materials, and you've got the environmental movement.

So when we took this to Wal-Mart, and the other retailers, yes, they were very excited. As you said, they saw the benefits of -- you can put pretty much 22% more on a truckload. The pallets are the differential. We didn't change the weight of the pallet.

So, you can put 22% more on a truckload which means I am going to bring in thousands of trucks less, if I am Wal-Mart, tens of thousands of trucks less, if the whole country changes to this thing. It will free up dock time; it will take trucks off the road; it will use up less diesel fuel; it will emit less carbon dioxide, carbon monoxide, into the environment; it is all good.

And then, when you compound that with okay, and now it works better and the consumer, when they try it, it is eye-popping. It is really a great cat litter so it really hits on all fronts except you, I think you said from a cost-of-use standpoint; over the year, if someone converts from any of the competitive products to ours, their total cat litter bill will be about the same. It isn't a cost savings for them. It's certainly not a cost increase for them.

But over and over and over again in the pet category, people have shown they are willing actually to pay more to achieve whatever it is they think they need to achieve, whether it is food so that their pets are healthier or whether it is litter so they can control odors better so people, when friends and family come to their home, they don't think that they've got a feline cage going on at the zoo. They want that odor controlled and they are willing to pay for it.

So Scoopable Cat Litter was more expensive than coarse and this is actually a price parity. So we feel in our usage and attitude studies in our in home use test. The feedback was we would pay equal to or more for this product than we would pay for what we are currently using because of the performance and because of the added benefit of its lighter weight. It is like wheels on luggage. It just really --

Well, that's very helpful. And the margin profile at the same price of your -- versus your older product? And do you think you are going to continue to supply your older product or is this so revolutionary that all your customers are going to immediately displace your older product with your newer product?

Okay, good questions. Margin profile, and I am assuming you mean for us and for the retailers, it is also giving them a healthy margin but much better margin profile because we're using our clay, our technology and priced at parity. In the past, a lot of our Scoopable entries have either been priced at a discount or we have been a value brand or have utilized a lot of clay and technology that wasn't our own. So the margins are better; we're not really disclosing exactly what the margins are but they're better and they'll allow us to support the product through media to actually drive consumers to the store. And then, what was your second question, I'm sorry?

Is it going to displace so the new products are going to take all the shelf space from you older existing product?

Yes, here's -- look, we have factored cannibalization into our model, and the good news is our historic Cat's Pride brand didn't have a large share so it is not going to cannibalize that much. Our products do have unique points of difference.

Our Cat's Pride Scoopable is the only certified safe-to-flush product out there. It doesn't really compete with this item at all. This item is not flushable; sodium bentonite is not flushable so that's what knocks it out.

That Cat's Pride Scoopable utilizes 100% of our calcium bentonite and then we put an additive in there to make it clump. So, it is still very, very relevant with the retailers and the consumers. They love that item because it is unique; it is the only one they carry that's certified safe-to-flush.

Our Kat Kit is a disposable tray with cat litter inside; that is unique. So, no, we don't -- we are not at all walking away from our historic line. They all have unique points of difference and reasons to be there.

We do believe, over time, if the light concept catches on like we believe it will, then all of our products will have to have a light spin to them and frankly, the competitors will, too. I mean, it's what happened in liquid detergent. It all went to 2X and then 3X because that's the way that retailers wanted this thing to shake out.

Thank you very much.

Ethan Starr.

Yes, on the Fresh & Light, do you have -- if 50% of the country starts using that, do you have the capacity to produce that much?

We -- it will be a great problem to have when we are out of capacity. Yes, we are the calcium bentonite guys and we have a lot of capacity. I would never say never, as Blackberry showed yesterday, do they have the capacity to deliver e-mail so I don't want ever be quoted and say, we will never have a shipping problem. But we have plenty of plenty capacity and it will be a great day for all of our investors when we are out of capacity on Fresh & Light.

Okay, great. On Verge, quickly, have they added another production line on that?

No, no, we are optimizing -- before we really feel we can add another production line, we need to optimize what we have. So, that's what we are focusing on.

Okay. And then has Oil-Dri generally been able to sufficiently increase prices to offset your rising input prices?

I think you saw the margin compression during the year so that answers the question a little bit, that while we have gotten the average price up, and I think I've announced these in teleconferences. So in the past, I can tell you in fiscal 2010, we closed in $244 a ton. You will recall just 8 years, 9 years ago, we were at $150 a ton. We finished this year at $260 a ton, so we were able to get our prices up but, you saw the percentage margins decline a little bit so it answers your question that we got the prices up, but maybe not enough to cover all the cost increases.

Okay, sounds good. Thanks.

(technical difficulty) We have no further questions at this time so I would like to turn the call back to Dan Jaffe for closing remarks. Wait a minute -- we do have Ethan Starr again.

Under the wire. All right, Ethan.

Let's try this.

You spoke about the Calibrin and your new strategy there but I'm wondering, will that really significantly boost Calibrin sales, do you think? Or will that really make a difference?

Yes, I think it will make a huge difference. I really do. I think concentrating our marketing and our travel into specific target-rich countries is the way to go. And it is already showing huge benefit. I'm not going to disclose any numbers yet but the snowballs are already starting to turn in those markets and so yes, I think it will make a big, big difference.

Okay, so, we should see increased sales in fiscal '12?

Yes.

Okay, good. And anything new in either R&D or M&A?

Not that I'm going to answer. So, just the typical. We're very focused. We continue to invest heavily in our research and development because we are the guys who are creating value from sorbent minerals, and so we have a great team out there and we've got the pedal to the metal to find new uses. And I think the fact that we've been able to get our average price up so much, so fast, is a validation of all that research spending.

Okay. Does anyone else own calcium bentonite reserves or are you the only guys with calcium bentonite?

There is some in the US; there are some other calcium bentonite, I would say, all calcium bentonite is not created equal. And so, we are using specific reserves for this opportunity because we found that they clump better and their profile was better. Additionally, we have the lion's share of the calcium bentonite so to the extent we create all this demand, a lot of that will come to Oil-Dri and then finally, we have this specific opportunity, and we have a patent done. So and it is on calcium bentonite. So, this -- we will be involved in this conversation.

Okay. Thank you very much.

Robert Smith, Center for Performance.

Hi, sorry, I lost you. Actually, I was disconnected and had to get back on. So I don't know whose problem that was. Anyway, who is doing your creative work for Fresh & Light?

Can I answer that question? (multiple speakers) Okay, good, because they had put out a release. We are using the ad agency, Doner, out of Detroit and they've really done a great job.

And it's spelled D -- how do you spell it?

D-O-N-E-R.

Okay, thanks. So are they going to be emphasizing the question of weight?

If you go out -- have you seen our TV commercials?

I have seen a couple of them, yes.

Yes, so the TV commercials, one of them is more weight-centric, the other one is more performance-centric and then they both finish with the concept that the same volume can weigh different. That's the teeter totter and the cat and then the balloon, the cat reaching up for the balloon and minimizing onto the packaging.

So and then we have a bunch of print ads that are getting across the weight as well. But, I will tell you that we've had a lot of discussions on this and when I am making the sales calls, I ask all the buyers and I'd be happy to ask everyone on this conference call, how many of you drive a purely electric car? And I have yet to find anybody that's driving a purely electric car.

But I'd say, okay, but if it performed exactly like a gas car, it went as far on a charge, it went as fast, it was as easy to charge and it cost equal to or less than a gas car, now how many of you would be driving an electric car and they all say, of course, I would. But the trade-offs are too negative. So, nobody is willing to just buy your product. I think David hit the nail on the head.

No one is going to buy the product because it is lighter weight or they may buy it once. They're not going to buy it a second time if it doesn't perform as a cat litter so you're not going to buy an electric car if it goes putt-putt-putt and you have to charge it every 5 minutes. It's got to perform.

And that's the beauty of Fresh & Light. It controls odors; its absorbency is fantastic; no dust; tremendous clump strength and by the way, it's 25% lighter. So, it's really exciting.

How much money are you going to put behind this? Is it your plan in this fiscal year to spend it out to pump up the selling? If it starts selling really well, you'll just put more, more and more behind it?

I'm glad you raised this point. Because I think in an earlier release, maybe last teleconference, I made a comment. I said, regarding this, while we don't give guidance, we are spending all this money on Fresh & Light, I said, we expect consolidated earnings for fiscal 2012 to be approximately equal to 2011. And you raise a good point.

We're getting such great response from our retail partners and in the year 1, there's a lot of 1-time spending. I don't know how familiar you are with the grocery trade but there is something called slotting allowances, where you've got to put money so they can put it on their shelves and a lot of the accounts put the money to work. They will give you ads, they will give you displays, they will give you features, but it's to get the product up and off the ground. Those are 1-time things that won't recur in year 2 and beyond.

So, the more acceptance we are getting, the more 1-time spending we are getting. So, look, it is too early in the year to say whether that statement I made is true or not. But, I will tell you that as we get 6 months or 9 months into the year, if we are confronted with the decision of do we pull back on the spending and choke the horse, or do we let the reins go and keep feeding it? As long as we are seeing positive repeat and positive velocities and getting great acceptance from the trade, which is what we are seeing so far, we're going to keep feeding the horse. We're going to keep letting them run.

Okay. Well, again, the present fiscal year seems to have some really exciting possibilities. I hope that you might consider expanding the conference call time to 45 minutes.

Maybe next time if there is enough results. It will probably be the third quarter one or maybe the fourth quarter one. It's a good point.

Okay, thanks. Good luck.

David Zelman.

So, I'm debating with my colleague over here as we listen to the call. And I am thinking it's obviously a very -- I am as excited as you are over there and my pragmatic colleague goes like, it's a huge, fragmented market. There's giant consumer brand product players.

Can you talk about what the market share opportunity is for this new product? So we are all trying to gauge a size opportunity for this new product. And although we know it is good and it's got the benefits and the environmental and all those good things, it is very hard to try and quantify what the real opportunity is for this. And based on what you are seeing on retailer acceptance, what is short run, 1 year or 2 years opportunity for it, do you think?

Well, look, that's the million dollar question. And there are multi-million dollar questions. We have our own internal share expectations. I will tell you the thing that gave us the confidence, and look, we own more of this Company than anybody else and this is a huge launch and we're -- we couldn't be more excited about it.

And what makes us excited about it is in our history, share has gone hand in hand with distribution. Because there is such little holding power on the shelves, this isn't like One-a-Day vitamins where they can put a month's worth of stock probably in a 6-inch spacing. You can only fit 3 jugs or 4 jugs in a [spacing].

So, the key -- these guys go out of stock so much that basically everyone's share pretty much falls in line with the distribution they're getting on the retailer shelves. Some guys will outperform it by a little bit but it usually just means they go out of stock on Saturday versus Sunday. And then they all restock the shelves on Monday.

So we are getting the commitments on distribution. So, we're very bullish. That's all I can tell you. So, you can do the math.

You can go out and do some retail checks as this starts to happen, and if we have 10% of the distribution, you should be able to say, okay, then given the average velocity, they are going to get 10% of the share. If they are getting 2% of the distribution like they got now, or 4%, then they're going to have a 4% share. And if they get 20% of the distribution, holy cow.

So, it's too early to tell you what percent of the distribution we are getting, but that's all public, trackable stuff. The IRI does it through what's called ACV, All Commodity Volume, and we will start reporting on that as it starts rolling out.

Ladies and gentlemen, due to the time allowed, this concludes our question-and-answer session today. I would now like to turn the call back to Mr. Dan Jaffe for closing remarks.

Real quick, as we are over the time and I would just -- I'm excited that the questions today were about what we see as a very exciting opportunity. So we will be able to come at you with more public data as the data starts to be gathered. We subscribe to IRI and we'll use that to help communicate how our distribution is going and how our sales are going. And we look forward -- there will be some of that on the next call but it's really the call after that, that we will really start getting some data. So thank you, and we'll talk to you again in 3 months.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.