Oil-Dri Corporation of America (ODC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter Four 2012 Oil-Dri Corporation of America earnings conference call. My name is Dave and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions). As a reminder, the conference is being recorded for replay purposes and now I would like to turn the call over to Mr. Dan Jaffe, President and CEO. Please proceed, sir.

Thanks, Dave, and welcome everybody to our fiscal '12 year end teleconference. With me is Dan Smith, our CFO, and Doug Graham, our VP and General Counsel, and Ronda Williams who heads up all of our Investor Relations. And Ronda, you have got some Safe Harbor.

Yes. 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.

Great. And as always I'd like -- we are going to turn it over to Dan Smith to give a little play-by-play and then I will have some qualitative comments. And then we will open it up to Q & A because we really want to spend our time on those issues that are most important to you guys. So, Dan?

Thanks and good morning to everyone. Oil-Dri ended the year with sales up about 6% for both the quarter and the full year. Our full-year sales of $240 million established a new record for the Company. Our EPS of $0.85 per share for the full year was down from last year's $1.26. We reported a small EPS loss for the fourth quarter.

Generally, the story for the quarter and the year was continued heavy marketing and promotional spending for our Cat's Pride Fresh & Light launch, partially offset by very strong performance of our B2B group. We also recorded a pretax capacity rationalization charge of $1.6 million in the fourth quarter. The charge was the result of a plan we announced in the third quarter to relocate certain products from our Illinois plant to our facilities in Mississippi.

We continue to see lower natural gas prices in our manufacturing processes. These factors and a more profitable product mix accounted for gross profit margin increases from 21.5% to 25.4% for the quarter and from 22.1% to 24.5% for the full year.

B2B had another strong quarter. Sales increased 12% and contribution increased 58%. For the year, sales increased 15% and contribution increased 47%. Animal health, fluids purification and agricultural carriers all reported sales increases for the quarter and the year. Our sales of co-packed litters continued to decrease along with the general decline of coarse cat litter.

The Retail and Wholesale Group saw sales up 3% for the quarter and 2% for the year. We continue to see increased sales of our branded cat litter, especially Cat's Pride Fresh & Light scooping litters. Traditional coarse litters were down again this quarter, especially private label products. Group income was negative for the quarter and down 80% for the year, driven by the increase in advertising and promotional spending to support our Fresh & Light product launch.

Our balance sheet remains very strong. Our cash and investment balance at year-end was $36.3 million which was an increase of $2.5 million from fiscal '11 year end. This increase was achieved while spending approximately $7 million in capital, $6 million in stock repurchases, $4.5 million in dividends, $3.6 million in debt repayments. We also incurred an additional $9.3 million of consumer, promotional, media and trade spending during fiscal '12. Our cash and investment balance actually exceeded our debt by more than $6 million.

Finally, we remain committed to dividends. During the fiscal year, we raise our dividends for the ninth consecutive year. Our quarterly dividend rate of $0.18 per common share represents a yield of greater than 3% compared to the closing stock price at year-end.

Thanks. I will turn the meeting back over to Dan Jaffe.

Dan, great job and didn't leave me much to embellish upon. Really, it spoke for itself. You did a great job there. And I would just say exclamation point on the cash generation. We always have that saying around here -- earnings are an opinion, cash is a fact. And to be able to start the year with $33.7 million spend $30 million-ish on all the various things you talked about and finish the year with $36.2 million to us was very rewarding. So that was our year in a nutshell.

I would like to turn it open to Q & A so I can respond to the questions you have. As always, please prioritize, ask your most important questions first and then go back into the end of the queue so everyone who wants to ask a question has time to do so.

Dave, can you open up the queue?

Certainly, sir. (Operator Instructions). Ethan Starr, private investor.

Good morning. Just wondering how is the Fresh & Light doing? Can you give us more color on that? And to what extent is it cannibalizing sales of your other scoopable litters? And can you give us any idea of what you might spend in marketing for it in the next -- in fiscal '13?

All right. Let me take your questions in some order. Dan, I am probably going to let you answer the third question. But I will take the first two.

Interestingly enough, this is the first period where the IRI now captures Wal-Mart sales. So that is good. It increases the percent of the category that is now covered. So in the past, I think maybe 55% of the category was covered. Now I would say about 85%, because the 52-week data I am seeing shows that cat box filler category at $1.5 billion and we think it is probably about $1.8 billion to $1.9 billion. So you still have got the clubs who aren't reporting pet specialty, like PetSmart is not reporting.

But now with Wal-Mart being in there you have got a biggie. So we are now seeing a greater percentage of the pie. So that is good news.

So you asked how is Fresh & Light doing and did it or did it not cannibalize. I think one of the best ways to look at it is to look at what was our biggest item other than Fresh & Light and that was our Cat's Pride scoopable. And we finished the year of the 52-week period, the category grew by 2%. Cat's Pride scoopable grew by 19%. So I would say that the numbers speak for themselves. That, no, it did not cannibalize. And in fact it enhanced it. It gave us a greater shelf position. Gave us more importance to the retailers and we were actually able to expand some distribution there.

So Cat's Pride scoopable grew to 20 -- nearly $25 million at retail for the 52-week period and grew by 18%, far outpacing the category.

Fresh & Light finished the year, the 52-week period, with $22 million at retail. So not quite Cat's Pride scoopable, but almost equaled it. You know, up [thousands] of percent because it was just a little bit of prior-year data. So when you put all of our scoopables together we have Cat's Pride Complete, which was a smaller number, $9 million in sales, but that was up 4%. So that even outpace the category. So all of our scoops together totaled $61 million at retail which was up 56% from a year ago, which is pretty exciting. Still a very small share, still a long way to go, but certainly a lot of progress was made during the year.

One of the things that we are most encouraged about with the Fresh & Light is the repeat sales. Where there's -- we have a way through our metrics of IRI to measure repeat purchase in the first 12 months of launch and then compare it against some of the most recent competitive launches. So we can look how it would do against Fresh Step Extreme or Arm & Hammer's Double Duty. And interestingly enough, our repeat significantly exceeded theirs after -- 12 months after launch.

So for instance, Fresh Step Extreme was showing 21.4% repeat purchase at 12 months after launch, Double Duty's 30% and Fresh & Light 37.5%. So a full 22% more repeat than Double Duty and 75% more repeat than Fresh Step Extreme.

Additionally there is another metric where you try and see what percentage of your volume is coming from repeat purchase. And a consumer packaged goods standard is you want to have at least 50% of your sales coming from repeat buyers. And we are already above that. We are at 56%. So that is all the good news.

So the bad news is all right, well, if you are doing so great how come the business isn't bigger and that then gets to trial. Because when we get people to try it they are clearly repeating at a much faster rate than others in our category have experienced historically. The problem for us is being a small challenger player is getting that trial. So clearly, our team is focused in fiscal '13 on incremental trial programs to get our product in the hands of consumers. Because we know when we do that they, with confidence, they will come back and buy it, because it truly is the best cat litter on the shelf. And the key is getting them to notice it and getting them to take it home.

Dan, to the extent of media, I mean, we had a lot of onetime media spend in fiscal '12. Things like slotting and creating the commercials and things like that that will not repeat. So even though we will spend less in fiscal '13, it doesn't mean we are going to spend less trying to go after trials, it means a lot of onetime expenditures will not repeat, and now all of our dollars will actually be going towards performance and trying to incentivize trial.

Yes, Ethan, we are going to spend less in '13 than '12. We disclosed that in our press release, but we are going to spend more than we had historically spent, the team and consumers looking at the most efficient utilization of the cash and how they can target the cash. So, I don't want to give you a hard and fast number because I think we want to plan flexibility into our processes. But it is our current expectation we will be spending less in 2013 than 2012.

Okay, sounds good. I will go back in the queue.

Robert Smith, Center for Performance Investing.

Good morning. So, guys, how are you as far as your budget for the year?

Are you talking looking back at fiscal '12 or looking ahead to '13?

No, looking back.

And specifically? I mean --

I mean for the year. How did that play out as far as compared to your budgets?

It varied by group. The groups that were not in the dynamic mode, the Division III was in -- I'm sorry that is our consumer division -- did very well against budget. Our historical businesses, the animal health and the bleaching earth and the ag carriers and the industrial did very well.

The consumer division, some things were real good, some things were not so good. It was so dynamic that I would say, how well did we budget? Not very. I will give us a C on budgeting in the consumer division, but probably an A in the other division.

And, Robert, we did not plan obviously, for the capacity rationalization charge. So that --

No, no. Yes I X'ed that out, sure.

Yes. So I don't know if that answers your question, but the good news is we should be able to do better in '13 because it is not as dynamic. Now we know what our distribution is, we know what our velocity is, we have our arms around a lot of the spending we are going to do. So fiscal '13, we ought to do better.

Okay, is the spend for advertising going to be backloaded as it was this year?

It's pretty --

I would say it is probably more in the second and third quarters, but that -- we are going to be flexible with what the market needs are and we will adjust accordingly.

The good news is we have got a winner and the key is we have got to keep feeding the beast.

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

John Bair, SKA Financial Services.

Good morning. A quick anecdotal observation that Ethan might like here. There is a Wal-Mart right down the road from our office and I have been going by there the last couple of months and the Fresh & Light is right about at eye level. And usually there's not very many boxes of it there. So I hope that is a good sign. They are selling out pretty quick. So, anyways.

The other question I have, couple of questions actually, is what you anticipate your savings may be for the relocation of the Mounds plant?

And did you have a second question, or --? I mean, I will answer that question. I don't know how much we are disclosing on that, but --

We haven't. It is obviously going to generate a savings, but we haven't disclosed any specific information.

Okay. I was just trying to play that back in as far as what you're -- under the capacity rationalization charges and so forth and, obviously, it is probably a one-time deal. But it may play into assuming the overall operating expenses then would improve by closing that.

That's a good assumption.

Well, that is what I was trying to get my hands --. And as far as your advertising, does that go in -- that goes in under your cost of sales, correct?

Advertising is part of SG&A. Trade spending goes into cost of goods sold. Actually reduction of sales, sorry. Part of gross profit.

Okay. And one last question, and I will get back in the queue, is you mentioned in your press release about purchasing stock and looks to me like it was about $192,000 maybe in the fourth quarter, look at the year over year, looks like it's not that much different. Am I right on that?

For the year, we purchased about $6 million, about 300,000 shares, a little less than 300,000 shares for the full year.

And do you have the --?

I don't have the quarter right in front of me.

An average cost on that? I guess (multiple speakers) I can figure it out. Okay. All right, I will get back in the queue. Thanks.

Ethan Starr.

All the stock buyback information is in the K, so please read that. And the question is how are Calibrin and Verge doing? It sounds like Calibrin had a really great year.

Yes, our animal health business did very well in the year. And we continue to be bullish about it going forward. We have known all along and we have said all along, our products really are the best. They -- we selectively mine and process, the products work very well. And we have got the science behind it, we have done the in vitro and the in vivo science to prove how well they work.

And then our team, our animal health team, really, it has all been about getting registrations which continue to come last year. We still have even more that are going to come this year. And then putting on the distribution network to take advantage of those registrations. So it is really a snowball that is rolling and it was materially significant in fiscal '12 and we expect it to continue to grow in fiscal '13.

So if it was materially significant can you tell us a number?

I don't know. I am seeing heads shaking. Look, at the end of the day you don't want to hurt your own investments, so it is in the B2B group and you can probably do your own extrapolations and get pretty close.

Anything on the horizon as far as new products go?

Always things on the horizon. I'm not sure what I can tell you about. I'll just say in general, one of the things that was a big success with Fresh & Light was really establishing ourselves as the category innovator. And we were challenged by several of our large accounts, look, you guys are the horse. Don't become the cart. And stay out in front.

And so we have some exciting new innovations there that were -- we will be rolling out over time as the -- as our network can absorb and handle the growth. So we are not going to just dump them all in the market at the same time, but we have got plenty of innovation going on there. I would say really in every single business unit we have got something fairly interesting going on that is a next logical step, but it fills a currently unmet customer need, unmet by Oil-Dri. And so, we have got exciting new product opportunities in almost every area of the business.

Well I hope the new cat litter stuff, products, ideas will be as revolutionary as Fresh & Light.

Yes, they may not be as revolutionary, but they won't be as costly either. So I can tell you that. They will be incremental -- I won't call them productline extensions because they really are innovations, they are different. But we are not expecting to have to spend tens of millions of dollars launching them either.

Well now that we have three people asking questions on the call, you have really got to extend them. That is all I have for now and I wish you good luck in the next quarter and year.

We still have seven minutes, Ethan.

Robert Smith, Center For Performance Investing.

So could you give us a lot more color on Calibrin and Verge? What can you say about them for '13?

I'll focus on Verge. Let's focus on Verge because I already talked about Calibrin. We had a great year in Verge in fiscal '12. Both saleswise, the team met their goal and hit their tonnage goal for the year which was, again, a good stretch for them and they hit it. But then on the production side, we really stabilized the process. Really having another year under our belt of figuring out where our losses were coming from and what variability was being added to our process, they were able to hammer all of that out. And so we were able to actually contribute variable gross profit to the Company in fiscal '12 whereas it was a loss in fiscal '11. It was purely an investment mode. So from a delta standpoint it was a strong contributor. Verge was very successful in '12. We are looking forward to continuing to grow it. We have again growth plans for '13 and that would then ultimately justify and necessitate going to the second phase, which would be to expanding our capacity.

So, knock on wood, so far Verge has been very successful and we are looking for continued growth on into the future.

The growth rates were very robust percentagewise, so are you looking for comparable numbers or, as the products get larger, I mean, is that percentage increase going to shrink in '13?

Yes, I would say focus on maybe the dollar increase so the percentages start to water down so you won't see the huge percentage jumps all the time. But from a dollar standpoint, we are looking at that.

So, can you say that you are targeting similar dollar increases for those products?

I wouldn't yet. What I will be willing to hold myself to because we have got so many diverse businesses is that we don't give guidance for the fiscal year and it is really not helpful to anybody because most of the time we are wrong anyway. But what little guidance I will give you for fiscal '13 from an expectation standpoint is I'm not expecting huge topline growth in fiscal '13. We will see. But we are still absorbing the market dynamics that led us to reduce the Mounds plant. You know, coarse cat litter is continuing to shrink. Floor absorbent is continuing to shrink.

So, we have got some of the historical productlines that are continuing to decline as some of the new ones are starting to grow. So, I would say as an investor, your expectations should be relatively flat on the top side, but strong earnings bounceback because a lot of these one-time expenses are going to be gone and we are certainly not going to pull back all the spending because we do want to incentivize trial, but there is going to be enough there where you are going to -- you should be pretty happy with the bottom line bar in some currently unforeseeable raincloud.

Will the bottom line exceed '11?

I'm getting too much into guidance. So I'll just stick with what I told you.

So what kind of a buyback authorization is still left?

I don't know and it looks like no one in this room knows. I think it is like --

It's in the K.

It's in the K somewhere.

All right.

I will take a guess.

Okay. Drop it. What is -- on the non-current liabilities, what are the main categories of that, the $40 million?

Where are you looking at specifically, Robert?

The balance sheet.

On the balance sheet. We have a large pension change that was driven by, basically, a discount rate change.

Yes, what did you change it to?

The discount rate went from I believe 5.25% to 3.75% and that increased our pension liability somewhere in the neighborhood of $10 million.

Then, I am glad you did it. So that is the bulk of that?

I would think that would be the bulk of it.

Thanks. I'll get back in the queue.

The number of that -- page 22 of the Q, 320,000.

I was going to go 300,000. So, 324,000 shares is still left in our buyback authorization.

Thank you. And I --

[Jim Schwartz].

Because you brought up the earnings power for next year and even though it is an opinion, the gross margin this quarter was very strong. You haven't really addressed it yet. Obviously it is a function of natural gas prices and the way you guys are managing your business, but on minimal revenue growth, if very little revenue growth, with a gross margin that I don't know if it is a new sustainable number, 25%, but if we could get there, I mean the earnings power here is probably [250] plus in time. So, at your point about how the stock and time is undervalued and we could really see some earnings power going forward as SG&A comes down and gross margin sustains a certain number. So I guess my question is as the older products move away and the new products bounced back or come on stronger, has the gross margin change to the upside of function of those new products? Is it a function of natural gas? Maybe just explain that a little bit.

Yes it is probably all of the above, but I would -- the biggest part of it is what you just highlighted which is the products that are on the decline, coarse cat litter and coarse floor absorbent have very low margins, 10% and south in some cases. The products that are on the upswing, the [animals] and the Cat's Pride Fresh & Light and these, I have said it on other calls, have greater than our average margin at the time. And so, as one is dropping and the other one is gaining, you could theoretically not even change the sales of the Company but dramatically change the earnings power of the business as you are swapping unprofitable business for profitable business. To the extent that you are growing on top of that, that is a double win and then you highlighted natural gas which absolutely is in a good place, even though it has bubbled back up to $3 whatever, $3.80-ish. Now it is still way less than what we have historically paid because historically we were -- the rates were higher and we were forward buying and so our blended rates in past years was much higher.

So, yes, what you're saying is exactly what is giving us confidence for fiscal '13 and then the key is to keep growing, keep the new items going, and keep the momentum.

Fantastic. And as we look at SG&A for next year, is it -- obviously it is more than fiscal '11 was. It will be less than '12, something in between is what you guys are hinting at?

Yes.

That is what we are indicating in terms of our advertising spend which was a major driver for fiscal '12.

So if you maybe annualize maybe the third fiscal quarter, it makes more sense than the fourth. Something like that.

Yes, I'm not sure we want to get into quite that level of detail.

Okay, good, no, but look, the earnings power is starting to be unleashed here. So congratulations.

Thank you.

Thanks.

[Ryan Delavier], Singular Research.

Year over year, I am just looking at your operating profit. It is flat. Is there anything beyond ad spend and new product development that you are doing to address this?

Hold on. I have got our year -- am I looking at the wrong page? You said our operating profit. Are you saying on a percentage basis or --?

Yes, on a percentage basis.

Okay, because our operating income was down significantly. And even on a percentage basis.

I am looking at 13.7% and then 13.5%.

I have got 10.079.

Correct.

10.079.

For 2012.

Interesting. All right.

I like your number better, but unfortunately I think mine is right.

(laughter). Well, we will go with your number. But we will stay with the question. Is there anything else you are doing to operating profit beyond what you have already said?

The cool thing that is starting to take hold as Jim Schwartz sort of highlighted is you are starting to see the margin enhancement, and those of you who have been involved with us for a while know our mission statement is creating value from absorbent minerals. And the key way to create value is you have to be delivering value to your customers. They have to perceive that there is a reason to be paying you more than they could pay someone else for some similar product or service. And so, our heavy investment in R&D has been paying off.

But then on the flip side, a really strong corporate initiative which we started over a year ago, we call it AIQ, our all in quality initiative, where we are very much focused on continuous improvement, on processing, processes and training our people. Those people closest to the action have to be empowered to own their processes and reduce waste, reduce loss. And it is really starting -- it is a snowball and it is really starting to show up. And it is going to continue to show up in the margins of the business. So I would say Jim's comment about the earning power of the business starting to grow is a fair observation.

So it will show up in your SG&A line?

No. That would show up in our cost of goods line.

All right.

SG&A was driven heavily last year by this incremental media spend. And we will come back to as we said somewhere between what was heavy in 2012 and what was light in 2011 will be somewhere in between will be '13.

Great. Thanks so much.

Were there any other people who have not yet been able to ask a question, I would be happy if it's Ethan, Bob, Jim, or you guys. I think hopefully you got your questions asked, answered. Any new askers?

No new askers at the moment, sir.

Okay. Well, then I think this has been a great call. I really appreciate the additional participation by John and Ryan, even Jim jumping in there. But Ethan and Bob, always appreciate your participation. So thank you.

As we have always said, we take a very long-term view of our business. Fiscal '12, we believe, will prove to be a very important year, maybe not financially because it was not, look, no one -- we are happy with the cash generation, but nobody is happy with the bottom line. But we knew it was coming because we had to spend heavily to get Fresh & Light up and off the ground. But we believe the investment made in '12 will benefit '13, '14, '15 and beyond and so time will tell.

So, let's get back together in three months and look at the numbers and take it from there. So, thank you very much and we will talk to you then.

Thank you very much for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a very good day.