Oil-Dri Corporation of America (ODC) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third- quarter 2012 Oil-Dri Corporation of America earnings conference call. My name is Carissa, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct the 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's call, Mr. Daniel Jaffe, President and CEO. Please proceed.

Thank you, Carissa, and welcome everyone, to our third-quarter teleconference. Joining me here in Chicago, Dan Smith, our CFO; Doug Graham, our General Counsel and Vice President and Legal, and Ronda Williams, who heads up our Investor Relations efforts. And Ronda, you are going to start us with the Safe Harbor?

Yes, 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 for joining.

Thanks, Ronda. Dan, I would like to turn it over to you for a quarterly play-by-play.

Thanks, Dan, and good morning to all. I am going to start from a total Company perspective. Sales were up about 8% for the quarter and 6% for the year, roughly totaling $60 million for the quarter, and $180 million for the year. Our earnings per share were $0.26 in the quarter, and $0.86 year-to-date. Those numbers are equal to the numbers we reported in similar periods last year.

The story, the past quarter has seen continued heavy spending on marketing and promotional expense for our Cat's Pride Fresh & Light launch. However, we have also seen strong performance in our B2B group, lower natural gas prices, a very profitable product mix which has helped drive our gross profit up to 24.6% from 21.4%.

B2B, as I mentioned, had a very strong quarter. Sales were up 19%, and contribution was up 46%. Animal health, specialty, agricultural carriers, all reported sales increases. Our co-pack litters were down a bit.

In our retail and wholesale group, sales were up 2% for the quarter, due to the increase in branded cat litter sales, especially our Cat's Pride Fresh & Light scooping litter. Traditional coarse cat litter products were down. Group contribution was down 81% during the quarter, due mostly to spending on advertising and promotion for our Fresh & Light product launch. And we plan on spending heavily on advertising and promotional expenses in the fourth quarter for that same product launch.

From a balance sheet perspective, our balance sheet remains very strong. Cash investments were almost $35 million, which exceed our net debt. So we have more cash and investments than debt. We spent about $5.5 million in capital, which is $1.5 million less than our year-to-date depreciation. And with the completion of our capital project related to our Fresh & Light business, we expect our capital spending to be less than last year.

We remain committed to our dividends. Our quarterly dividend was $0.17 per common share, which represents a yield of a little bit more than 3%, compared to our closing share price. Additionally, during the quarter we spent $2.5 million on stock repurchases, and then shortly after the end of the quarter we spent an additional $3.4 million.

From a forward-looking perspective, as I already indicated we are planning on spending heavily promotion and advertising expenses for Fresh & Light in the fourth quarter. And then on May 30, we announced the relocation of our cat litter and floor absorbent business from our Mounds, Illinois plant to our Mississippi plant. We expect this to impact about 40 jobs in Mounds, and we expect a pre-tax charge of about $1.7 million, most of which will impact the fourth quarter. Dan, I am going to turn it back over to you.

Great. I am not going to say a lot, because I always like to respond to specific questions from our investors participating in the call, but suffice it to say, it was a great quarter on -- from many, many standpoints. Quantitatively, when you take into account all the incremental advertising that we did in the quarter. Qualitatively, a lot of good things were set in place to help us strategically grow going forward.

And clearly, our commitment to creating value from sorbent minerals is paying off because even though tonnage continues to slide, our sales, both on a per ton basis and in total, continue to grow, as does our gross margin. And ultimately, when we lap this one-time spending associated with the launch of Fresh & Light, we're hopeful we will start to see the bottom line do the exact same thing.

So Carissa, I would like to open it up to questions. And as always, I would like to encourage our participants to prioritize, ask your most important question first, and then go back to the end of the queue. Just to allow everyone a chance to get a question or two in because we do stick to our 30 minute time frame.

(Operator Instructions)

And your first question comes from the line of [Ethan Starr]. Please proceed.

Good morning, Dan.

Hi, Ethan.

Nice quarter.

Thank you.

I am wondering, how are retail sales with the new Fresh & Light litter products doing, and are you still adding new distribution?

Doing very well, and yes, we are still adding distribution. So, I printed out some IRI information. And just to put it in context, this is food, drug and mass, but ex-Walmart. Walmart is though now going to start providing top line information. And so, in September, we will actually get to roll that in. Which, as you know, we have always been -- that has always been our biggest customer. So, it will help our numbers, when that starts to get rolled in.

But to give you a macro-macro look, let's start on a 52-week basis, so this gives you an annual snapshot. And some of this will help you understand what is going on in Mounds as well. So, on a 52-week basis, food, drug and mass, ex-Walmart, the category is showing sales of $827 million at retail. These are retail sales. Of that, scoopable is $600 million, coarse grind is $155 million, and then alternatives is about $74 million. So, if you look at coarse grind, which 21 years ago represented 100% of the category, it now represents 19% of the dollars, and 35% of the units. So, obviously, it's a lower-ring item -- the value and growth has come on the scoopable side. So, that just gives you a macro look.

Category is about flat over a year ago, but scoopable is up 2%, coarse grind down 7% from a year ago. And alternatives relatively flat, which is interesting in and of itself. So, now, our total Cat's Pride scoopable -- remember, the scoopable category is up 2%, Cat's Pride is up 7.2%. And just to give you some other things, so total, Tidy Cats scoop, which is Nestle Purina, they are up 7%, 7.8%. Fresh Step scoopable is up 5%, and Arm & Hammer scoopable is down 3.7%. So, you can see, we are performing right towards the top end of the branded players.

Fresh & Light is continuing to build volume and build share. In the quarter, we got distribution at Safeway, SUPERVALU, Schnucks in St. Louis, Giant Eagle. And you will recall, SUPERVALU is like Jewel, Safeway and Shaws, and Cub, and accounts like that, Acme in Philadelphia, Safeway, Dominick's here in Chicago. And so it's -- we are continuing to put on distribution. We are continuing to see what's called our ACV, our all commodity volume, grow on Fresh & Light, and we are continuing to see the velocity grow. So that's -- on a 52-week basis, I gave you the snapshot.

Let's just look at -- I like to then zero in on 24, and even 12. And you can kind of see -- is your momentum building or is it slowing? So recall, we were up 7% on total Cat's Pride scoopable for the 52-week period. For the 24-week period, total Cat's Pride is showing up 14.7%. So clearly, faster in the most recent 24 weeks, than in the most recent 52 weeks. The other guys, Tidy Cats scoop up 3%, Fresh Step scoop up 1%, Arm & Hammer scoop down 7.7%. So, on a 24-week basis, the Cat's Pride scoopable is of the fastest growing in the United States.

And that's very important, because I'm counting Fresh & Light, obviously, which is coming off a zero base. But there was always the concern -- how much cannibalization will we experience? And so this is rolling in, Cat's Pride scoopable, and Cat's Pride Complete, and Cat's Pride Natural, our other scoopable entrees that were on the market prior to the Fresh & Light launch. So, that's a 24-week look.

And then a 12-week -- let me just give you 12-week. And so our scoopables, total Cat's Pride Scoop is up 23% for the 12 weeks. And the other guys, Tidy's scoop for the 12 weeks down 3.9%, Fresh Step scoop up 4.9%, and Arm & Hammer scoop down 9.3%. So, you kind of see -- you get that feel, the momentum is building. So, we were up 7%, at the 52-week. We were up 14%, when you go back 24 weeks. We're up 23%-ish, when you go back 12 weeks.

So clearly, you can see the momentum is continuing to build. And if you want a 4-week snapshot, I got that -- we're up 31% on the 4-week. So, Ethan, you can see that, clearly, the snowball is continuing to roll, and continuing to gain momentum. Does that help?

Absolutely. But, given such a long answer, I hope you will consider extending the conference call. (laughter) I'll get back in the queue.

Well, I was assuming this was going to be top of mind of almost all the investors, so I was willing to spend a little more time. And I have more data if we need it.

Your next question comes from the line of Robert Smith of Center for Performance Investing. Please proceed.

Good morning.

Hi, Robert.

So, I can't help but seeing your supermarket promotions and couponing for Fresh & Light. So, you are really out there. I am finding your packaging rather uninspiring. I think you -- can you guys do a little pizzazz into the packaging? At least, that's my suggestion.

Also, I guess, you guys didn't buy into my advertising suggestions. Perhaps because it wasn't invented in-house, but anyway I hope you take that under consideration again. Further, can we go into Amlan and Verge, and what you are seeing there?

Sure. And on the packaging, we agree with you. There is a lot of basic elements that we like, we already have some things in works. We have to work through some existing packaging, but I think you will be impressed with the second-generation of the Fresh & Light packaging.

Okay.

And so, we agree with you, and we are excited about the future. And it's going to be eight weeks probably, before that starts to work its way through, maybe even longer.

Amlan and Verge, I mean, look, you can see in the B2B, we don't break out too much specifically. But you can see how well the B2B group is going. Amlan is continuing to do very, very well, continuing to validate our investment in both research and -- so, we can validate our product's efficacy from a scientific standpoint, and in the people.

We have a great team, a bunch of DVMs, very sophisticated salespeople, who are able to communicate to their customers who are making these decisions to buy a -- pretty much an animal pharmaceutical product. And it is going very well. So Amlan, you can never declare success, but the progress that has been made since the launch of that product line has been fantastic.

Verge -- it is still a work in process, but it is moving absolutely in the right direction. We have the process under control, and we are very thankful that we made the decision to do this in a stepped process, where we knew step one was not going to be very profitable from a fully loaded standpoint.

But it was almost like a glorified pilot plant, where we were able to learn a lot of things, because this was not an off-the-shelf process. You could not just say -- hey, we want to make an engineered granule, and just plug something in, and start producing. This is really new to the world. And so, we've learned a lot. The process is stable now; we're able to make the quantity and quality and material we want. And so now, it's on to phase two, and hopefully doubling our volume, and starting to show a fully loaded gross margin. But on a year-to-year basis, it's been a major improvement from a year ago.

Are you seeing anything from the Chinese registration?

Seeing anything from what?

The Chinese registration, I mean, is any --?

Well, right. So, we were registered in Calibrin-Z, from China during the past quarter, I think is when that came in. And we are obviously now dedicating more resources, both human and financial towards leveraging our products in China. And that's the biggest market, so that's where you want to be, and now we can start going after it. So, all the benefit we've seen thus far really has been without that market kicking in. So, we are still pretty bullish on the future.

And you were talking about transportation costs. I find it difficult to follow the decline in oil prices, and tell me about that?

All right. But now you are out of questions. You are going to have to go back in the queue, but I will answer the question, because it's a good question. Yes, I mean, first of all, diesel has not been our friend. And additionally, there is -- I am not a logistics expert, I just get the reports from our guys who are. But the general trend in the United States, they are having trouble finding drivers. And it's a supply and demand scenario, and everybody is experiencing the same thing.

And so, the cost of hauling our products from point A to point B this year is much higher than it was a year ago. And we have heard rumors that there is going to be some switch to natural gas for over-the-road trucking. And all that will be great, if it happens. But until it happens, the dynamics are what they are. And now it's up to us to go out there and try and recapture that through price increases. And as you will see, we put out a news release just yesterday for, covering the consumer division. But all our divisions are participating because they have to. They are all experiencing an increase in costs on that and a number of other fronts. And so, we're raising prices.

Okay, I will get back in the queue. Thanks.

Thanks, Bob.

(Operator Instructions)

And you have a follow-up question from the line of Ethan Starr. Please proceed.

Yes. Now that Calibrin-A, Calibrin-Z and ConditionAde 2.5 have been approved in Texas, do you expect to sell them there or market them there?

It's a good question. I think the benefit of the registration goes far beyond Texas, although before that, there were no toxin binders really registered or recognized in the United States. Now, at least, Texas has done so. So, I think the hope is that other states will follow suit, and/or other states will say -- okay, we see this product as registered in Texas, and even though it isn't in our particular state, they would understand the benefits of aflatoxin binding. So, we do see, in general -- our hope is that it will help us throughout the United States, growing our business in that area.

Okay. But are you making any active efforts to sell it there in Texas?

No more than historically.

Okay.

We have always been trying.

Have you added any additional production lines for Verge yet?

No.

Okay. Could you please discuss the trend away from private-label cat litter products, briefly?

That's an interesting one, because you would think with the economy and everything, you would be seeing private labels going up. And I've got this data in front of me, let's just look at like 52-week. And private label in total represents $105 million of sales. And so, you're talking a [13% dollar-share] of the US market. And while the total category is flat, private label is down 7%. And if you had told me a year ago -- here is where the economy is going to be, I think I would have guessed that private label would be up, not down. It hasn't been the case.

And interestingly enough, on a 24-week basis, it's down 5.4%. So, you kind of get a feel -- okay, maybe -- it's still down though, I mean, and so sort of confounding. What it does validate is that the consumer is willing to pay for performance. And the innovation, starting with Fresh & Light, is coming in the branded side. And we have done more consumer testing, and the light-weight concept has real validity, and it just makes sense.

I always ask people -- how many people do you see in the airport now with luggage that don't have wheels on them? And everyone laughs at you, like, what are you talking about? None. I mean, who would buy a bag any more without wheels? Well, 10, 15 years ago, there wasn't a wheel to be found. And so, it just -- that was a latent consumer need that went unmet for thousands of years, until somebody finally married up the wheel with the bag.

Well, it's the same thing with cat litter. If you can provide them the performance, and frankly, we are providing them better performance. You have equal to, or better, odor control, but better dust control and superior clumping, and have it weigh less, so that they can get the same fills, the same number of loads, if you want to use laundry detergent, at a lighter weight, I mean, it's just a matter of time. So, we have done trial and repeat analytics, and the trial and repeat numbers are fabulous.

The problem -- the repeat -- the problem with us is trial. We got to get this in front of more customers. Now, maybe part of it is what Bob alluded to, that the packaging hasn't been as dynamic as the product is. And so, we are certainly working on that. But it's also finding the right vehicles to incentivize trial, because we have the analytics and the confidence internally to know that when a consumer tries it, we get them. We get loyalty now, because this is really the best product out there.

Okay. I would like to urge the Board to both increase the buyback authorization and increase the dividend again.

Okay. And you stole Bob's thunder. I bet he was going to say the same things.

Well, hopefully he will, too. I can't imagine he would disagree with me on that.

I would be stunned.

Okay, one last question here. How much will the shift from Mounds to Mississippi save annually? And also, will there still be manufacturing at Mounds, or only mining?

There still will be the manufacturing at Mounds, and mining. There will still be a group of people still working there. We are not in a position to disclose the annual savings for the shift.

Okay. Thank you.

And you have a follow-up question from the line of Robert Smith of Center for Performance Investing. Please proceed.

Hi. Well, of course, I favor the dividend increase. I mean, hopefully, we will see, what, 9 or 10 years running now, I guess? We are almost there. Can you tell me where the block of stock came from?

I don't think -- no.

You cannot? Was it an institution or --?

I don't even know that we know. I mean, we just had an authorization out there, through our 10b5-1 -- corporate 10b5-1 plan, and it triggered. So, I don't even know that we would know. I mean, we could probably figure it out, when we look at the next filings of who owns what. But we wouldn't know, I mean, we are not married up. It's not like us transacting with an individual.

Okay. And I guess you're setting up for really gangbusters '13. I mean, here it is a possibility anyway.

Yes. You made that comment last time, and I made the same comment I made, (laughter) which was, yes, if our goal were to close business 7/31/13, we could certainly deliver any kind of earnings you would actually imagine. That isn't our goal, so we are going to certainly take the advantage of investing heavily in other opportunities to guarantee that '14, '15, '16 and '17 look equally good. So, if your expectation is that '13 will be better than '12, you and I are on the same page. But we will not be looking to squeeze every drop out of what's out there.

Okay. And by the way, you haven't heard this in a long time, but is Camp Turner still alive?

(laughter) Very much so. Camp Turner is still cranking along.

Anything new?

Nothing. I mean, Dan, do you --?

Yes, I was going to say, we received another small distribution -- $20,000, $30,000 or something of that nature -- totally immaterial.

Okay.

Yes.

Good luck. Thanks so much.

Thanks, Bob.

And you have no further questions at the moment.

Perfect. Okay, well, thanks, Carissa, and perfect timing. You can sense our enthusiasm. And we have a great team in place on the consumer side, and without overusing this term, they are really playing money ball. They are really trying to get into the details, and make sure that in fiscal '13 we maximize the bang we get for our promotional buck. We have ideas about what works the best, and how we can best incentivize trial, and now we need to execute those ideas. And so, we will look forward to talking to you again in three months.

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