Oil-Dri Corporation of America (ODC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the first-quarter 2013 Oil-Dri Corporation of America earnings conference call. My name is Shantalay, and I will be your facilitator for today's call. At this time all participants are in listen-only mode.

(Operator Instructions)

As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Dan Jaffe, President and CEO. Please proceed, sir.

Thank you, Shantalay. Welcome everyone to our teleconference. Joining me in the conference room here is Dan Smith, our CFO; Doug Graham, our General Counsel; Ronda Williams, our immediate past Director of Investor Relations; and Reagan Culbertson, who will be assuming Ronda's role as Ronda moves into a full-time marketing role at the Company. So don't fear, Ronda's staying with Oil-Dri, she's just moving on to bigger and better things and Regan we're very happy to have you take over as Director of Investor Relations. So handling for the last time the Safe Harbor provision, Ronda please.

Well thank you, I'm going to make it a good one. 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, Dan.

Great, thanks Ronda and thank you for your wonderful job these past few years. And we will turn it over to Dan Smith for a little play by play on the quarter and then as always, we will open it up to Q&A and encourage you guys to prioritize your questions because we are going to hold it to half an hour and so let's get to the most important questions first.

Dan?

Okay, thanks and good morning to everyone. Oil-Dri started the year off on a tremendously positive note. Sales were up 3% to $61.4 million for the quarter. Our EPS was up to $0.64 per diluted share for the quarter which is an all-time quarterly record on a split adjusted basis. Last year our EPS for the first quarter was $0.15.

Our retail and wholesale team delivered tremendous profit growth on a year-over-year basis. Overall cat litter sales increased about 5% driven by mix, pricing, and lower trade promotional expenditures. We were able to maintain our sales momentum we started last year while benefiting from our first-quarter plan to spend less in trade promotions and advertising. We spent $1.4 million less in trade promotions and $2.6 million less in total advertising during the quarter; however, we anticipate increasing our advertising and trade promotional spending for the remainder of the fiscal year. Our overall advertising expenses for fiscal '13 will be more than historical norms but less than fiscal '12.

Our B2B group had a strong quarter. Sales increased 4% and our contribution increased 1% over a very strong first quarter a year ago. Animal health, co-pack litters, agricultural carriers all reported sales increases for the quarter. Our sales of fluid purification products were down for the quarter. Our gross profit percentage increased substantially during the quarter. The retail and wholesale and business-to-business groups reported solid product mix, selling price increases, and less trade promotional spending which drove our gross profit percentage to 28.1%.

Our balance sheet continues to be strong. Our cash and investments balance at the end of the quarter was $35.1 million which was an increase of about $5.7 million from the first quarter of fiscal '12. Our cash and investments continued to substantially exceed our debt. We continue our strong dividend payment to our stockholders with approximately $1.2 million paid out during the quarter.

Also on December 4, we announced our intention to accelerate the payment of our fiscal third- and fourth-quarter dividends. A dividend of $0.36 per share of common stock and $0.27 per share of Class B stock will be paid before the end of the calendar year. This payment is not a special dividend or an increase but rather an acceleration of the quarterly dividends that normally would be paid over the course of fiscal 2013.

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

Dan, thank you. Very very positive, very exciting and I won't put any other adjectives on it. I'd rather respond to the questions that are on our investors' minds, so Shantalay, if we could open up the Q&A line, we'll proceed.

(Operator Instructions)

Ethan Starr, Private Investor.

Good morning and congratulations on a tremendous quarter.

Thank you, Ethan.

Thanks also to Ronda and best wishes to her as she moves into a full-time marketing role. My question is, to what extent are you still adding distribution for Cat's Pride Fresh & Light?

We are actively adding distribution. Certain new accounts have rolled in and so you're getting -- you didn't get a full year last year. Big accounts that jump to mind towards the end of the year -- Publix, for instance, was a big new added distribution towards the tail end of last year so we'll get a full year's benefit of that. A lot of the distribution we put on last year was during our fiscal second half so you're getting a year-over-year lapping effect now that's positive. We still have some major voids that we're looking to fill, but in those I really don't want to comment on until they're actively on the shelves.

Okay, how much of the voids are realistic -- you might get distribution there?

We're in about 60% ACV-ish, ballpark we're a little under 60%, that means of all the places that could sell cat litter, about 60% of them are selling our Fresh & Light and it's a little under 60% but it's close depending on how you look at it. I think realistically, if six months from now that was up to 70%, that's probably as big a jump as you're going to see.

Okay, what's your long term goal?

I mean the goal is always 99% but unless you're one of the big guys it doesn't seem to happen, even with some of them, on their individual SKUs if you looked at Arm & Hammer or even some of their SKUs, they're happy to get in the high 70%s, so for now, let's just say short-term goals by the end of the fiscal year, let's see if we can't get that up to 70%.

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

Robert Smith, Center for Performance.

Congratulations on a wonderful quarter and kind of reinforces what our discussion was in our meeting in Boston as to the possibilities here for fiscal '13 and I'm really glad to see it unfolding at least through the first quarter. So I did notice that we had only a modest increase in B2B and I'm wondering how you see the remainder of the year for that sector with emphasis on Calibrin and Verge.

Okay, and your comments are good opportunity for me just to sort of get out. We don't give guidance obviously and you guys have to do your own prognosticating and do the best you can. I guess the minimal guidance I would give you is I wouldn't just take this quarter and multiply it by four and assume that's how the year is going to turn out. I think we've given very clear guidance -- well, I'd say clear in that it's broad, but it's clear that our spending levels are going to be going up in the advertising side of our consumer business in second, third, and fourth quarters, and this quarter we were pretty quiet on that front. So you should expect total advertising to be less than it was in fiscal '12, which was during the year of the launch but that it will be more than it was in fiscal '11.

I'll take it.

Yes, good. And now let me answer your question because you really asked about the B2B. It's sort of the power of Oil-Dri is the diversification of the markets we compete in, so B2B is still a very, very important contributor to the business, but as you'll recall we had a monster year in fiscal '12 and while it would have been great to then back a monster year up in fiscal '12 with another monster year on top of that in fiscal '13, that wasn't going to be as realistic. You're going to have some things that were going well and some things that were sort of one-time big events.

Without divulging too much from a competitive standpoint, I can tell you we have some big customers around the world that are in markets that are being challenged and so their fiscal '13s if they were to run the same as ours which is August 31 to July 31, those time periods, are likely to be less in '13 than they were in '12 because of the market dynamics they're facing, so we don't believe we're losing share, you can see the sales relatively flat, earnings relatively flat. We're maintaining share, we're trying to grow in key markets and we're doing that, but several key markets are down and from our vantage point, it's more about what's happening in those individual countries than it is a statement about Oil-Dri and the efficacy of our product.

I guess you've chosen your words carefully but you kind of put this out there, but it's very, very difficult to get my arms around this. Can you add any possible color to what you've just said?

Well I could, Bob. But again I always walk the tight rope. The more details I give you the more details I'll give anyone who's trying to compete with us as well so ultimately that hurts you as an investor, so I feel your pain in a sense, you want as much transparency as you can get. On the other hand you don't want to hurt your investment in trying to get it.

Sure.

So I would say just take away from me my comments which are we don't believe that any of the weakness we're seeing in any of those individual B2B areas is due to a product problem. We believe it's more due to a market dynamic issue and feel positive that due to the diversification, because markets are up, some are down and then you've got the consumer kicking in that net-net, your investments is -- it's doing well for now.

That's good. I'll get back in the queue.

John Bair, SKA Financial Services.

Two quick questions. The TV commercials that you prepared, are those generic enough that you could replay them at a later date? Or in other words is most of the cost of that part of your advertising budget in the production of the commercials or is it more in buying the time slots on your -- whatever channels that you're doing, using?

That was your first question. For the good news is, on the TV commercials we ran them heavily last fiscal year. The production cost is all gone.

Right.

That's all spent so now any time we run it it's merely the cost of running the commercials. The good news is we have them out there on YouTube and combined they've got over 1 million hits which we think is outstanding. I mean if you go to YouTube and search cat litter commercials you're hard pressed to find any commercial that has any appreciable hits. When I did it last and this may change, there was an Arm & Hammer commercial that had like 8,000 hits and a Tidy Cat commercial that had 12,000, and then you've got us, the combine the two are in 1 million, so to us, that showed the power of the commercials and how they really resonated with the consumer.

Having said that going forward we see our media mix changing a little bit. Maybe I'll use your question as a good segue into a point that I want to get out on the call which is you didn't ask the question but I'll ask it for you. Are you happy with the movement of Fresh & Light? And the answer is no, we're not happy with the movement of Fresh & Light. As good as it's going it needs to go better, so then we dissect you get into diagnosing the problem and you start with okay, is it a lack of velocity due to poor satisfaction, meaning customers are buying it but they are not coming back to it. That would be a big problem. The answer is no, we actually have the highest repeat that IRI has been able to see in the category. We're up to 45%, so 45% of the people who buy our product purchase it again and that's very high repeat.

We can see in the first 12 months what Double Duty did with Arm & Hammer and they were around 30% and Fresh Step Extreme was around 21%, so we're eclipsing those numbers by a wide range so that's very positive. So okay, you are not getting the velocity you want but it isn't due to poor satisfaction, so then what it comes down to is it's low trial because we know when someone tries it they come back and they buy it, so they must not be trying it and this sort of gets into Ethan's question a little bit.

A function of that is the ACV is that they can't find the product or where it is on the shelves. You're getting one facing, maybe two facings which can easily be lost on a shelf of 44 items, so it's an awareness issue and it's a trial issue so we're really going to be spending our money this fiscal year and I'm going to come back to answering your question. We're really going to be spending our money on trying to gain trial and awareness and when you get into trial you say well why aren't they trying it? Is it because it's a bad value? They see it, they just don't want to buy it because it's too expensive and the answer is no, we're priced pretty much at parity, even a little bit less than the market big guys, so it isn't a value issue.

It's really they don't see the product and so we've got to load up the shelves. Well retailers are very hesitant to give you multiple facings. That's their value is their shelf space but what we are working on is trying to find other vehicles that would gain or incentivize trials. So again without divulging too much to the competition, the idea is to spend our money towards getting trial, and as such then using our media mix in a different way to support that. So I don't know if I answered your question but hopefully I gave you a good flavor for where we see the challenges on Fresh & Light going forward.

Okay. Well I would validate two of your points, and number one is yes, repeat, because I have furry critters, we have furry critters here and we've been very pleased with not only their acceptance but the overall product. And also, on the pricing, your comment on the pricing competitive to others, from my observations here locally in the Cleveland market, absolutely spot on there. So one follow-up question and I'll get out and that is you did mention about fluid purification, a product down. Can you say anything about how large as a percent of your sales that particular product is and where they're used in or what they're used in?

I don't understand the second part of your question, where they're using or what they are using?

Well it's significant enough that you made mention of it in your press release, your earnings release but what markets are your fluid purification products used and how significant in the total picture of total sales are they?

Okay, I'll let Dan, you answer that question but I'll talk to the broader question on markets and I don't want to get into specifics but that is what I was talking about in my comments to Bob Smith which is we have some, we sell those products globally. So we have a couple of product lines that really sell globally, our animal health products and fluids purification products, so on the fluids purification side some of the global markets are in all sorts of call them turmoil and purchases of the products in those markets are way down, but in our talking with our customers, it's that their business is way down. It isn't that they've thrown us out and brought in a competitive product.

Dan, do you want to comment?

I was going to say I agree with that statement and fluids purification business is north of 10% of our overall sales.

So that would be in for industrial uses then, is that a broad enough question there?

No, I'm sorry okay so fluids purification are used in two main applications. First is for edible oils so we will sell to edible oil processors who use our clay to filter out color bodies, chlorophyll, things that would cause rancidity and reduce shelf life and so that's the one application. And the other smaller application is on the non-edible oils side where our products are used to filter products like jet fuel and things like that to take those [factors] out of the product, so those are the applications.

Okay, great, thank you, I'll get in the queue then.

Ethan Starr, Private Investor.

Yes, wondering if there are any new products in the works?

Yes, and I'm not sure how much I can tell you other than we are continuing to launch new products really in almost all of our major business segments and none of them obviously are materially in the market yet, so I don't want to comment on them too much, but to say that we're continuing to focus on spending our research and development money on creating value from sorbent minerals. That's the mission of the Company and so we're staying true to that and so the products you see will either be directly related to our minerals or our minerals will be what got us to the dance as it were and then we'll have logical add-on products that will be sold around them.

Okay, so are these new products or are these like derivations or new versions of existing products?

More of the new. Less product line extension and more really new to Oil-Dri and new to the markets they compete in.

Okay, and has Calibrin gained any approvals for distribution in new markets or countries recently?

No, no major new ones.

Okay, my only other comment is I hope you will advertise the Fresh & Light to the AARP market given that it's lighter.

Yes, no, it's a great segment that would very much benefit from a lighter-weight cat litter.

Sure, so are you going to do that?

Within our regular mix. I mean I'll leave it at that.

Okay, thanks so much.

Thanks.

I look forward to next quarter.

Robert Smith, Center for Performance.

Yes, hi Dan. So I just wanted to tell you that there are many days that all I do is I spend time on YouTube watching the commercials so a large part of that 1 million is me.

Well thank you.

Of course I'm kidding, but anyway, so I've expressed my thoughts to you previously about packaging and so is there any way that you can essentially tell your story through bolder packaging at the point of sale? I mean essentially, you have 25% less weight with the same volume. I mean you say it's the next great revolution in cat litter, so but I don't know if the packaging is really telling the story for you and to capture the attention of the shopper.

Well, I really don't know how to comment. Duly noted and our team is working on it.

I'd like to join your team.

Well so would a lot of people but I appreciate that.

Yes, I'm offering you no-fee consultancy and that's what I've mentioned to you in the past.

I know you have, Bob.

I have a lot at stake here. I want to see this product zoom.

So do we, so I appreciate it.

Okay.

John Bair, SKA Financial Services.

Yes, going back to the advertising, would you then if you are not going to be doing television or cable type like on Animal Planet or whatever type, are you going to go to more conventional couponing type offering to try to encourage potential buyers to try the product?

I don't want to divulge too much. I'll stick to the media mix idea. We're going to be introducing radio, we'll leverage radio in key markets and anything to incentivize trial, I'm going to leave it at that is where we want to spend our time and money.

Okay. Very good, thank you.

Jim Schwartz, Harvey Partners.

I got so excited by the gross margin numbers I disconnected myself, sorry. No, great job, and you guys, I mean I think it's been since 2000 when you had over 28% gross margin. Obviously don't want to get too excited for a quarter because you guys are building something special here. Is it a new Oil-Dri -- it's obviously the business is changing all the time, but you guys are creating higher-margin products from your source material here, and I just want to understand as I look forward and I look at that gross margin, what are you guys doing maybe that's more similar to what you did '94 to 2000 and maybe more dissimilar from what you were doing in the interim? And as we look forward, is that 28% or 26% to 28% gross margin, it's not just a function of natural gas, it's the products are maybe more specialized that you're selling and I want to just understand that a little bit.

Yes, well first of all let me help you. So '94 to 2000 is matching apples and oranges because back then and I don't know the exact time frame but where you're referring to 28% gross margins that's because the way the accounting rules were back then, there was a lot of spending that was what's called below the line. It was below the gross profit line that they then moved up to above the line and come right off net sales, so what it did was it over-inflated our margins back then but the net was still the net because it all comes out in the wash. So I know where you're going with the question but that Company was pretty much commodity cost based, sell your tons and the profit will follow, so that was pre-2000 even though it hit 28% you've got to look at the bottom bottom because like I said you're mixing apples and oranges.

Now what you've got is for the last 10 to 12 years an entire team that's focused on trying to create value and value is trying to do something unique, trying to do specifically answer unmet needs for customers, work with them on the developmental end so that by the time they're launching products they are launching it using your clays. And that that lets them do things that they couldn't otherwise do so that it isn't just about the price and it really isn't in a sense, I mean look everything is open to bid.

It doesn't mean you can charge whatever you want and I don't mean to say that but they're much more interested in if they can make money using a specifically engineered granule or a product that's doing something very special for them they're happy, we're happy, the end-user is happy, everybody is happy versus it just being a commodity based you're selling water, what's the price of your water and if your water is not cheaper than the other guy's water I don't want it, so that's been the whole focus of the Company.

Now having said that does that mean every quarter and every year is going to keep getting better and better? No. We're going to have ups and downs especially as a small business. One big hit like we had a couple years ago or as you know with one of our major customers decided they didn't need us anymore it took us I'm proud to say only about 12 to 24 months to regain our footing and get back on track, but in any short period of time anything can happen. But long term, this is the right tack to take because just trying to double our volume, double our sales by doubling our tonnage is not a winning strategy. This is a winning strategy but there will be some ups and downs.

Absolutely, and as we look at the higher-margin products that you're selling and that was kind of a theme of last call, they hinted about the gross margin, and that we're sort of at a new level now which all the years of working on these all-in projects, they seem to be starting to happen, without jinxing it.

Absolutely. And it's fun, it's exciting, but it's also -- it keeps us humble in the sense that we've got to take what we're doing and keep investing and keep growing and that's why I said you can't just take the first quarter and multiply it by four. We're going to take a lot of this and plow it back in and try and keep the snowball rolling.

Great job, Dan.

Good. I think it's 10.30. Let's close the Q&A line and just thank you guys, and you can tell from our performance and what we do, we do listen. We do take your thoughts and input into consideration. I hope you appreciated the accelerated dividends. That was just a way of saying we thought the likelihood of tax rates going down was probably not very high and they're probably going to stay the same or go up, so let's just accelerate them into calendar '12 and see what happens, and then we'll take our usual dividend action in the June meeting, it will be on the agenda. Obviously for the last nine years, we have raised the dividend. I'd love to see this be the tenth but you know that will be a Board decision at the June meeting, so thank you guys and we'll talk to you again in three months. We have our Annual Meeting of shareholders tomorrow at 9.30.

Yes, at the Standard Club.

In Chicago if you're here, we'll see you there. Thanks very much. Bye-bye.

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