Oil-Dri Corporation of America (ODC) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2012 Oil-Dri Corp of America earnings conference call. My name is Derek, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session at the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn it over to Mr. Dan Jaffe, President and Chief Executive Officer. Please proceed.

Thank you, Derek, and welcome everyone to our second-quarter and six-month teleconference. As usual, Jeff Libert, CFO, is here, Doug Graham, our VP and General Counsel, and Ronda Williams, who heads up all of our Investor Relations is here. And Ronda, you are going to go through the Safe Harbor?

Sure am. Thank you. 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.

Thanks, Ronda. And when the news is bad, I always throw Jeff a bone and let him go first and take the beating, but when the news is good, I will take one for the team and make a few gratuitous comments, and then turn it over to Jeff for the play-by-play.

But I keep a spreadsheet of all but quarters going back to when I first became President, which is back in 1995, so now I have 17 columns on this crazy spreadsheet. So I can't go back any further than that, but in terms of our net income of $3.2 million, this was an all-time record quarter for any quarter, and we had never broken $3 million before, frankly never even close to $3 million before. And I looked, and actually it was better than four consecutive entire fiscal years of earnings back around the new millennium. So, that was very exciting.

And then from a sales perspective, it was an all-time record for a second quarter and it was the second-highest we have ever had. Back in 2009, we had a huge first-quarter that eclipsed it, so it was our second-highest sales quarter ever, and our highest net income quarter ever.

The other metric that I like to communicate you to guys that helps depict how we are doing on our mission of creating value from sorbent minerals is the whole idea of net sales or gross profit per ton, and again, an all-time record. We finished last year at $260 a ton. We finished this quarter at $285, which was due primarily to mix, just selling more of the high-priced goods. And then from a gross profit standpoint, again last year, we made $57 on every ton we sold from a GP standpoint and we made almost $69 in this quarter. So some very positive metrics and with that, after I stole all of Jeff's thunder, I will turn it over to Jeff for some more of the details.

Well I can tell more about the good news for the quarter. Sales were up 5% for the quarter and 6% for the year. Sales were $60.2 million for the quarter and $119.8 million for the year. For the quarter, EPS was $0.45 per share, which was up 80% versus a year ago. For the year, EPS was $0.60 a share, which is even with a year ago.

The story for the quarter was the marketing spend. It was the story for the first quarter and it's the story for the second quarter as well. In the first quarter we were spending behind our Cat's Pride Fresh and Light launch and in this quarter, we spent very little on the marketing for the launch. Not because we are not committed to the launch, but we took a hiatus as we continued to get distribution. We are going to see more spending in the back half of the year.

We saw strong performance in our core business, and that's why the EPS was so strong, our earnings were so strong, because the earning power of our business is still very good. We saw especially good earning power in our business-to-business area. We also saw lower natural gas prices, which is a pretty heavy component of our manufacturing costs.

In combination with the more profitable product mix, our gross product margin increased from 21.8% for the quarter a year ago, to 24.2% for this quarter.

Going through our business areas, first our business-to-business area, we had a very strong quarter. Sales increased 18% and contribution increased 42% for the quarter. Animal health, bleaching earth, and agriculture carriers all saw increases in sales. Both volumes and average selling price increased. Co-package litters were down. In our retail and wholesale area, sales were down 1% for the quarter. Sales increased due to Fresh and Light and other scooping litter products, but traditional coarse litters were down, especially private-label.

Group income was up 18% for the quarter, advertising was slightly lower than a year ago. During the quarter, marketing spend was lower, as we said a second ago, as we paused for Fresh and Light advertising, as we gained more distribution. Nevertheless, increased advertising and promotional will resume in the second half and that will cause a decrease in our earnings versus a year ago in the short-term while we invest in this very important product launch.

On the balance sheet, our balance sheet remains extremely strong. Our cash and investments balance is now $36.3 million. Our net debt is now negative, and that's for those of you new to the call. Net debt is what we call our cash balance versus our short- and long-term debt. Our net debt is now $5.1 million negative, meaning we have more cash on our balance sheet than we do debt.

We spent $3.5 million on capital for the year so far. With the completion of our capital related to Fresh and Light, our capital spending should be somewhat reduced this year versus a year ago. And as always, we remain committed to dividends. Our quarter dividend of $0.17 per common share represents a yield of 3.2%, at the quarter's closing price. That should cover the financials.

Great. And, Derek, we are going to open up to Q&A and as always, we encourage everyone, prioritize your questions, ask your most important question first and then get back into the queue to allow other people to ask questions, because we are sticking to our 30-minute time frame. Thanks.

(Operator Instructions)

And our first question will be coming from the line of Robert Smith, from the Center of Performance. Please proceed.

Good morning, this is Ethan. I'm kidding. (laughter)

You beat him, finally. Give them a buzzer.

Just a question -- so just to clarify a point -- so as you go into this advertising and promotion for Fresh and Light, you have a certain amount of expenses that are in there right now due to the buys in media. So as the sales progress, and dependent upon what you see in the marketplace -- let me ask you, are you going to, somehow, if you see sales really clicking, are you going to essentially spend -- look to spend additional incremental dollars in this quarter to promote, or not?

A lot of the promotions are variably driven, where you give a cents-off on a per-case, and the more cases you sell, the more it's going to go. So there is no doubt about that. On the media side -- you're right, we've already had to commit now. We've been holding back, but as you get closer and closer to the launch, which is what is happening now, we started hitting TV heavy in February. Hopefully, some of you have seen the Good Morning America. It's running this week, last week, and we have a couple more weeks coming up. We are pretty committed on the media buy.

So yes, look, as Jeff has pointed out to you, our balance sheet is in incredible shape, and to the extent we see an opportunity and continue to see it, we are in position to take advantage of it.

Say B2B continues its strength, are you going to spend those increased incremental dollars in promoting Fresh and Light?

I don't know if you could say one-for-one, but certainly, they are helping to underwrite the launch, no doubt about it.

For sure?

Yes.

Okay, I'll get back in the queue.

Your next question is coming from the line of Ethan Starr, private investor. Please proceed.

Good morning, great quarter.

Thank you.

And I don't know how Robert beat me.

I don't either, you must have carpal tunnel syndrome or something; he beat you on the buzzer.

Yes. Well, my question is -- how is Cat's Pride Fresh and Light selling thus far in the grocery segment? Are you seeing repeat buyers, and to what extent is Fresh and Light cannibalizing sales of other Cat's Pride products?

Okay, so it is two questions, but I'll answer them both because they are related and they are good questions. I am going to take your second one first.

We are not seeing a lot of cannibalization, certainly to our brand; but really even to the category, which is interesting. I mean, you can't imagine that you are bringing new users into the category, but what we are getting fed back from retailers is they are seeing -- you can see nationally, cat litter is growing at 2%. They are seeing strong double-digit growth in their categories, and they are attributing it to Fresh and Light. So, they are seeing incremental growth. So those retailers that jumped on early are very happy with the movement.

Having said that, as I was telling these guys internally -- long term, when the whole thing settles out, you've got a new product launch, you are going to get all sorts of opportunities to incentivize trial and find repeat. Long term, when the category starts to settle out, you can imagine Retailer A; and if Retailer A is carrying 36 SKUs, you're the safest if you're in the top one-third, which would be the top 12. That's rarified air, and hard to get into. The middle one-third is where we like to make sure our SKUs are all living, so that they are safely north of the bottom one-third, which is what tends to get churned as new items come out, because the retailer obviously is going to make the best decision they can and try and take out those items that are moving the slowest to put in some new items and free up that shelf space.

So the goal, really, in this first 12 months, is to get out of the bottom one-third and into the middle-third with Fresh and Light, and that's everything we are doing.

Having said that, it is very expensive to try and do two things at once, which is, incentivize trial -- that tends to be a price thing -- but also communicate a brand and develop a brand and brand awareness, and that's a lot of the media. And so we are having to do both at once, because Fresh and Light was a brand that didn't exist; it's not like this is a line extension. So consumers are having to be educated first, what is Fresh and Light; and then you got to try to incentivize them to go to the shelf and buy it. So, it's expensive.

As euphoric as we are with the second quarter, and we don't give guidance, really, in terms of actual numbers. We have told you all along, we are expecting this year to be down in terms of earnings, and it's because we are going to be serving both masters, both the media side and the incentive side.

So, I think you asked of repeat. So far, we are seeing great signals on repeat. If we get consumers to try it, we are seeing that they are coming back to buy it.

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

Thanks, Ethan.

Your next question is coming from the line of Robert Smith. Please proceed.

So parenthetically, I didn't understand that, Dan, that you said earnings were going to be down. What I understood you saying was that you are going to spend in Fresh and Light essentially what you had to spend, but I didn't understand that before, because the strength in B2B would seem to mitigate that possibility.

All right, well now you do. So now we are clear.

So, essentially, you are saying that whatever you see in B2B, you are going to be spending that incremental dollar into Fresh and Light.

Well, I mean you are correlating the two, and that's fine, you can do that. I would just step up maybe 10,000 feet and just say earnings will be down.

Okay. So, let me ask you this -- fiscal 2013, that is setting up for the possibility of a perfect storm for you, with business-to-business and new product and natural gas.

Well, the perfect positive storm, I know, is what you're referring to. Absolutely, but as you and I both know, it always seems, whenever something great happens that's good, but then something we are not foreseeing -- the business is doing great. That's the good news. Again, we are generating cash. I can't agree or disagree with you, because we are not going to give guidance, other than to say maybe some of the incremental spending will go away, and that type of stuff.

Sure. So B2B -- could you give me some color on what is happening, break it out more for me? You said something about units and price, how did that differentiate?

Look, the mission statement of the Company is creating value from sorbent minerals. We have been very committed to doing a lot of research and development and tech service to help our customers either better understand what their needs are, so we can find out how our minerals might be able to serve those needs. Or there were, in many cases, our minerals were already serving needs, we just weren't doing a good job of communicating to them the value we were delivering. It's that old adage -- you don't know what you have until you lose it. And so then they started to realize, oh my god, Oil-Dri was actually doing a lot more for us than we even knew. So it took us to communicate that value before they were going to appreciate it in the form of buying these higher-performance materials. So, you nailed it on the B2B side -- the Verge granules, and even some of our traditional carriers on the ag side, are highly valued by our key partners.

On the Amlan animal health, we have said all along those are products that are pharmaceutical in nature. They are not, but they are doing something to promote the health and well-being of production animals -- poultry, dairy, swine. And so that's a highly specialized thing that you can't just throw floor absorbent at them and hope something good is going to happen to the animals. And, there is a lot of research, a lot of science, a lot of selective mining processing, and everything that goes on with that.

And then, on the bleaching earth side, both the edible and non-edible oils -- same deal. I mean, we're still scratching the surface on understanding exactly what our minerals do, and how best they interact with our customers' oils; and as we better understand that, we are able to find those applications where they see great value in buying from us.

And so, the B2B side is clicking, no doubt about it.

So could you break out the units and price increases for me?

No, there is no benefit. So sorry, Bob, I'm not going to do it because --.

Okay, stop. Any China business?

Good news on the China front. We were, if you recall, maybe a year and a half ago we got our Calibrin A, which is our aflatoxin binder, registered, but what we got caught in the red tape morass on Z. Z was registered during the quarter. So Calibrin Z is now registered in China; that's our zearalenone binder, and obviously that's a huge market for us in terms of potential.

Okay, I will get back in the queue.

Okay, thanks.

At this time, I'm showing no further questions in queue. I would like to turn the call back over to Mr. Dan Jaffe for any closing remarks.

Well, let's wait and see.

Okay, sure. We do have Mr. Ethan Starr on the line. You may proceed.

Thank you. Dan, I'm wondering -- following up on the Calibrin Z approved in China, how are Calibrin and Verge doing?

Doing very well. I think we have talked about this in the past on Verge. We built that plant in a modular fashion, and thankfully we did; meaning we can expand the capacity very quickly, but because this was a new-to-the-world process, better to learn -- sort of take it from the pilot plant to sort of a -- it's full-scale production, but it was a one-quarter of what we thought we would ultimately end up with, just so we could prove out the process. And the team has done a phenomenal job. We are now processing inspect, and really close to our initial projections from a throughput and cost standpoint, which is very exciting.

At the same time, we've been able to better understand the market and find those value-added applications where the consumers are willing to pay for a highly granular, highly spherical, highly uniform no-dust material. And so, we are in a nice position right now of where demand exceeds supply, really. So, we are as a team hunkering down, looking at phase two of our capacity. And that will be a very positive signal when I come back to you guys and say we are spending capital on phase two of Verge, because it means that we have sold out phase one and now we are growing.

So phase two will be a second line for the production line?

Yes.

Okay. Can you give us more color on Calibrin?

In terms of what? What are you (multiple speakers)?

I guess you aren't going to give us any numbers, are you?

No.

How is it doing in Brazil?

I will put you on mute for a second. Hang on. Okay.

I just wanted to make sure we had put out a news release about this, but we got a strategic alliance with Elanco in several major markets, Brazil being one of them. And Elanco is -- my understanding is, a wholly-owned subsidiary of Eli Lilly; it's their animal health; they do a couple of billion dollars a year in sales. And they identified our technology in granule as the way they wanted to approach the animal health toxin binding market. It has been very successful.

That's one of the key markets, and it is going very well.

Okay. Is there anything new coming out of R&D at the Innovation Center?

There is plenty, but nothing we should be talking about from a competitive standpoint at the moment.

Okay. I will hand the questions back to Robert.

Thanks, Ethan.

And your next question is coming from the line of Robert Smith.

So, did you do much, if any, promotion of Fresh and Light in the comparable quarter a year ago?

Comparable quarter a year ago, we did none; there was no Fresh and Light.

So, right. Your comment about promotion and advertising was down (multiple speakers)?

That was brand to brand. We had our Cat's Pride brand a year ago.

Yes, well, sure. So that was the reference?

That was the reference.

Okay. Did you buy back any stock at all?

Not during the quarter, no.

Okay, but as you would be looking to buy stock on stock weakness due to lower earnings, if that happened?

I would just call it, again, not trying to correlate why it would happen -- just being opportunistic, yes, we would always be opportunistic with our cash.

Okay. All right. I will get back in the queue.

And our next question is coming from Mr. Smith.

Ethan, you are not giving me any help here. I hate these guys who go away in 20 minutes. That's bad. I am trying to get them to spend more time than a half an hour.

It's not happening, Bob.

Okay -- so let me ask you this about 2013. Basically, are you going to let this run if it happens in 2013? I mean, what is your philosophy, essentially?

Bob, you say let this run. Can you be more specific (multiple speakers)?

Well, with the bucks that are going to Fresh and Light?

You say, what is our philosophy?

Well, I mean, are you going to let the -- would you let the bottom line run, basically, rather than spending -- continuing to spend big incremental dollars in feeding the Fresh and Light?

I think a broader question would be -- and as a long-time investor you already know this answer, but if there are new people listening -- would we sacrifice short-term earnings for a long-term win? And the answer is yes. So that's one of the beauties of Oil-Dri (multiple speakers).

But you have to remember, Dan, I've been around for a long time, like 15 years. So essentially I would really like to get this idea of the positive perfect storm happening in a way, and much depends not on the top line but the bottom line.

And Bob, look, it is all --- yes, you are right -- it is all, I don't know what your total return has or hasn't been. If you've dollar averaged in, you've done extremely well.

I am very satisfied.

Okay. Yes, if all you did was buy stock 15 years ago, you might not be so happy. But I was just looking back -- we do this all the time -- but, yes, our total return for the last decade, with dividends, has been almost 19% a year compounded. So, hard to beat.

So, anyway, I stand by what I said. At any moment -- it is sort of the beauty, I think, of the Oil-Dri deal, is we are not a slave to quarterly earnings. And I feel fortunate; I would have trouble saying I'm going to sacrifice the future just to make some short-term goals, so we are not going to do that.

When might you be able to say something about new R&D initiatives -- next quarter, the quarter after that?

You know us. We are going to be very slow to ever try and tip anybody off on where we are going, because it's not good for your investment, and it's not good for ours, and we still own a lot of shares.

You say things are perking in the lab. Okay, whatever -- but can you give me some sort of feel as to when you will be able to say something?

No. I am honest, at least.

Yes, well, I wouldn't ask anything else of you. All right, all the best.

Thank you, Bob. Okay. And Derek, I think we will close the Q&A.

And just say -- look, the next two quarters are going to be very dynamic, to say the least. And continuing to get a lot of distribution, and putting on new distribution, and are very excited about the reception from the trade. At the end of the day, you have to say, is the concept a winning concept? And the concept is, you have a cat litter that, frankly, is better than anything out there, but let's just say it is hard to prove better, so you say it is good as anything out there, and it weighs less.

When your target audience is women 25 to 54, the thing we keep hearing over and over again, it's like wheels on luggage. And you guys will have to assess for yourself whether or not your current luggage has wheels on it, or if you are still stuck with the old non-wheeled luggage. But as I get into the airport all I see are wheels, yet, it took years and years for that thing to catch on.

So, this may not be made in a quarter, but the concept is absolutely winning. And just to show you that there's a two-pronged win in this -- it's not just for the consumer, it's also for the retailer. As we have said, this product weighs out a truck. You can only put 44,000 pounds-ish on a truck in the US. And so cat litter being heavy density, by making it 25% lighter, with the pallets taken into configuration, we are able to put 22% more units on every truckload. If you buy one truckload, not a big deal; you buy thousands of truckloads, it's a huge deal.

And so, just this past week at Walmart's year-beginning meetings, they had, I think, close to 10,000 people there, vendors from their supplier community. And amongst maybe 10 to 20 award winners, but in a particular category around sustainability, they singled out Oil-Dri and gave us an award. It was the first time we had ever won an award from Walmart; we'll be putting out a news release on that, specifically.

But, it was all about sustainability. It was all about how Oil-Dri developed this concept, saw what went on in liquid detergent, partnered up with Walmart, took trucks off the road, saved diesel, carbon monoxide emissions and so forth; and they loved it and rewarded us for it, which was very exciting.

So, we'll be at you again in three months, and look for this news release, but we were very excited to win that award. Thanks very much.

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