Oil-Dri Corporation of America (ODC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter Oil-Dri conference call. My name is [Esteban], and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance (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, Dan Jaffee, President and Chief Executive Officer. Please proceed, sir.

Thank you, Esteban, and welcome everyone to the fiscal year-end fiscal 2013 teleconference. With me here in Chicago is Dan Smith, our CFO; Doug Graham, our Vice President and General Counsel; and Reagan Culbertson -- I always forget if it's your maiden name or married name. Reagan Culbertson, who handles all of our IR, and she will do the Safe Harbor.

Thank you, Dan. Welcome, everyone. On today's call, comments may contain forward-looking statements regarding the Company's performance in future periods. Actual results in those periods may materially differ.

In our press release and our SEC filings, we highlight a number of important risk factors, trends, and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the Company's comments and in evaluating any investment in Oil-Dri's stock. Thank you for joining us.

Thank you. And Dan, why don't you walk us through the quarter and year end?

I will do that. Thanks, and good morning to everyone. Oil-Dri ended fiscal 2013 with record sales and record earnings. For the second year in a row, our annual sales established a new record for the Company; we reported full-year sales of about $251 million, which were up about 4% from fiscal 2012. Our fourth-quarter sales were also up about 4%.

International sales, which seems to be a hot topic on the online message boards, were up slightly in fiscal 2013 to about 22% of our total sales from approximately 20% in fiscal 2012. Our EPS of $2.07 per fully diluted share shattered our previous high of $1.33 reported in fiscal 2009.

Earnings for the full year were significantly impacted by the utilization of approximately $1.4 million of domestic AMT tax attributes. Utilization of these attributes drove our tax rate down to 16.6%, versus the 27.1% in fiscal 2012. However, it's our current expectation that our tax rate for fiscal 2014 will return to more historical levels.

Our earnings for the quarter were $0.67, compared favorably to the small loss reported in fourth quarter of fiscal 2012. If you all remember, we recorded a pretax capacity rationalization charge of $1.6 million in the fourth quarter of fiscal 2012.

Our gross profit margin increased 26.5% from 24.5% for the full year despite increased prices in natural gas we use in our manufacturing processes and increased freight costs. Our gross profit margin of 25.2% for the quarter was down slightly from the fourth quarter gross profit in fiscal 2012.

In the B2B area, our B2B team had solid sales and contribution growth for both the quarter and the full year. Sales increased 17% for the quarter and about 9% for the full year. Our animal health and fluids purification businesses were strong performers throughout the fiscal year of 2013.

In the retail and wholesale section, sales were down about 2% for the quarter but up about 1.5% for the year. Branded cat litter sales increased 5% for the year, driven by 59% increase in the sales of Cat's Pride Fresh & Light scooping litters. Fiscal 2013 group contribution was up for the quarter and significantly up for the fiscal years, compared to the same periods in fiscal 2012. A favorable product mix combined with approximately $3 million and less advertising spending drove the results.

Our balance sheet remains very, very strong. Our cash and investment balances at the end of the year were $42.5 million, which is an increase of over $6 million from fiscal 2012 year end. Our cash and investment balances continue to be larger than our debt.

This increase was achieved while spending approximately $9.8 million in capital, $4.6 million in dividends, and $3.8 million in debt repayments. Finally, during the fiscal year, we increased our dividends for the 10th consecutive year. Our quarterly dividend rate of $0.19 per share common represents about a 2.4% yield, compared to our closing stock price of $31.86.

Thanks. I'll turn the meeting back over to Dan Jaffee.

Great. Thanks, Dan. Thanks for a very positive report. And, Esteban, at this time, I'd like to open up the Q&A line. I'd like to encourage everyone to prioritize your questions. Ask your most important question first, and then pause little bit and let's let everyone have a chance to ask one unique question. And then once we are done with that, then we'll go for repeats from callers.

So, Esteban, let's open it up.

(Operator Instructions) Ethan Starr.

Good morning, and congratulations on a great year.

Thank you, Ethan.

I'm just hoping you could please add more color to the statement that you expect strong topline growth in fiscal 2014 in the retail and wholesale segment. And I'm also hoping you can please discuss the new leadership in the consumer division as well as the new competition from Tidy Cats Lightweight litter.

That sounds like three questions (laughter), but okay. We'll put it all under the umbrella of the consumer products division. You know, we've been investing heavily. We've launched new products. We're continuing to market. We've hired additional sales team. We've revamped our broker network. For all of these reasons, we've got to deliver. We expect to deliver incremental sales growth in the consumer area. So talk is cheap; we've got to deliver; let's see what happens. But that was the driving force behind those comments in the quarterly release.

You talked about new leadership. Very happy to have Paul Ziemnisky on board. I encourage you to read the release we put out covering his career. But he's got a long-time consumer packaged background; marketing; general administration. So he's hit the ground sprinting, which is great; and leading our team in our new fiscal year.

And did you ask about the new Lightweight litter? I think you did.

No, the competition from Tidy Cats Lightweight.

Yes, yes, yes. You know, from our vantage point, that's great news. We've been trying to get the ball rolling for years on getting cat litter denominated in -- by volume, not by weight. Because we all know consumers use it by volume; they don't weigh in eight, nine, 10 pounds. But by selling it by weight and putting price per pound on the shelf, really the department of Weights & Measures unwittingly has encouraged manufacturer deception. They've sort of encouraged manufacturers to densify their litter; put heavy, heavy stuff in there so that 25 pounds can be -- look like 25 pounds even though it's much smaller.

Anecdotally, we were the exclusive supplier to one of the major warehouse clubs, you can go back in our lore and figure out who, for years. We sold them a 22-pound pail of Lasting Pride. And it was in a five-gallon pail, so the consumer was getting five-gallon volume of litter. They threw us out 15 years ago because they got a much cheaper price for a 28-pound pail. And so they were pissed because, here, they were getting six more pounds and at a lower price. So they were angry at us. What we tried to explain to them, which they frankly didn't seem to care too much about, was that the volume plummeted from five gallons to 3.5 gallons.

So the consumer was getting 30% less litter, and they were only getting a little bit of a discount on price. They were just doing it on a per-pound basis. So, frankly, they weren't doing anything good. And the consumer was absolutely getting hammered.

So, as you know, we launched Fresh & Light a couple of years ago because, from everything we can see, calcium bentonite is absolutely the best raw material for cat litter. You can get other stuff that's lighter, but it doesn't perform. And with the technology available today, you can make calcium bentonite clump as well, or frankly better, than sodium bentonite. And sodium bentonite tends to run at about 70 pounds a cubic foot, and calcium bentonite tends to run between 35 and 40 pounds a cubic foot, almost half the density. Meaning you get twice as much product per pound.

So, we're sitting on all this calcium bentonite, and so we launched Fresh & Light a couple of years ago. And now it's catching on to the point where the big guys -- you know, Nestle, first into the pool, has launched Tidy Cat Light. From our vantage point, interesting that they chose not to launch it, from what we can see, in a calcium bentonite format. They chose to take a non-performing, very lightweight additive; blend it in or agglomerate it with their sodium bentonite, from what we can see; and turn it into a light, light, lightweight cat litter. But you have pretty much diluted the performance because you put in an additive that has no beneficial aspects to cat litter. It doesn't absorb; doesn't control odors; doesn't clump; doesn't do anything. It's merely in there to lighten up the cat litter. And so they'd been able to do that, but you've really weakened the performance.

So on an empirical basis, our Fresh & Light absorbs twice as much per volume -- not even per pound -- per volume as theirs. So that means if you filled a tray of theirs and a tray of ours and a cat voids 25 milliliters every time it goes to the bathroom, you'll use up their product twice as fast. And they're charging a 50% premium over Cat's Pride Fresh & Light. So when you do the math, your bill for cat litter will go through the roof if you were to switch -- but from -- if you are making the decision between Cat's Pride Fresh & Light for the year and Tidy Cat Light.

So, you know, we think it's fantastic. They've really validated the concept. They are getting retailers and consumers very focused on the idea that cat litter ought to be denominated by volume, not weight. And then, after that, let's let the best product at the best price win. And from our vantage point, it's still Cat's Pride Fresh & Light.

Okay. And I would guess they also -- their litter sounds so light that it probably tracks a lot too, I'm guessing.

We believe there is such a thing as too light. And if you get below 30 pounds a cubic foot, 32 pounds a cubic foot, you Starrt encroaching on the too-light, and theirs is well south of that. So we agree with you that tracking, over, time, is going to be a real problem for that litter.

Great. I'll get back in the queue.

Robert Smith.

Thanks for the [two plus].

You got the AMT tax attributes. And if you're ever having trouble sleeping, Dan Smith will explain it to you in detail (multiple speakers).

(laughter) Okay. So I figure that you've got about a $0.23 [nut] to work with to get back to the Starrting point, based on the more traditional tax rates for the new fiscal year. Anyway, but that's how I figured it from $1.84 to $2.07.

My question focuses on Amlan's Calibrin-Z. And I think you mentioned -- we've discussed in the past this point that you have possibilities of expanding the market greatly and that the results, whether this happens or not, will be palpable, so to speak, in maybe 18 months or so.

My question is can you give me a little more color as to what this involves? I mean, what essentially are you going for? And is the regulatory and -- how do I get my arms around this? I'd appreciate anything you could tell me, Dan.

Yes, and I think, you know, we put out news releases, so I encourage you to check the Web. But we are opening an office in China; this will be our really first foreign solely committed to the animal health business entity. We are in the process right now. We've leased our space. We're now getting all the paperwork, registration done. That's going to take a while. Management is physically going to relocate there. And the goal is to hire and do business directly as an entity in China.

And so that's, to us, a very exciting turn of events. And it's the largest animal health market and growing. So it's where you want to be.

But is that what you were speaking of? I mean, it's a broad-spectrum, so I thought it had something to do with regulatory or whatever. But it's a geographical question?

In the immediate, yes. That's what you're talking about. Over the next 18 months, that's where the growth is coming from.

Okay, and you actually spoke of sort of multiples of where the product is at the moment.

We're hoping it continues, absolutely. I mean, I -- you know I'm not going to give you any specific specifics. I never do because (multiple speakers) --

No, I just wanted to nail this -- that this is what we've been talking about.

Yes, the continued expansion and investment and growth of our Amlan animal health business.

Okay, that's great. I'll get back in the queue. Thanks so much.

It looks like currently there are no other questions. I apologize, there is one question -- one more question from Ethan Starr.

Okay, I guess despite the great results, can't get other people to join the call. But I have several other questions. Can you give us the average price per ton revenue per ton for the year?

Yes, we've disclosed that, haven't we?

I haven't.

Doug, thumbs up on price per ton?

We typically disclose it as part of the annual shareholders meeting in your performance package.

So do you have any problem with me talking about it today?

Okay, so give you a little trend line just because it's fun to look at the trend line. So what I have with me here is about six years of data.

So in fiscal 2008, it was [$2.26], then [$2.44]. It held at [$2.44]. That was, as you'll recall, when we went through [Project Comeback]. Then [$2.61], fiscal 2011; [$2.85] in fiscal 2012; and we were at [$3.05] for fiscal 2013.

Wow, quite impressive. Okay. And I'm curious, why do you have two different figures in your press release for 2013 CapEx?

I knew you'd find that. It's because Dan wanted to make sure you're reading it.

No, the [$9.8] million value is correct. The other one -- it's the difference between accrual and cash, and the cash number is correct, it said $9.8 million.

Okay. And the 10-K just says that the 2014 CapEx spending will be higher than 2013. Do you have a number for the budget that you can disclose or not?

We typically don't give that kind of expectation. We usually indicate it's going to be higher or lower, and that's usually as far as we go.

Okay. Well, in the past 10-Ks, I do recall seeing a number. But, well, I'll -- I can wait until next year on that.

So which of the cat litter products are being cannibalized by the strong growth in Fresh & Light sales?

You know, looking at the IRI, our traditional Cat's Pride scoopable clearly has suffered some cannibalization. It's positive cannibalization, in that we are growing by more on Fresh & Light, and the sales price and margins for us are better. It allows us to better support that brand through marketing. So it's a good switch from our standpoint. But I would say that was the item. We budgeted for that, and it's probably been about what we expected. So yes, Cat's Pride scoopable, probably the big one.

Okay. And last quarter, I think you mentioned, like, five areas -- five channels which you weren't in yet. And you got -- you filled one of them with Dollar General. You were -- and two of them are clearly Target and the club stores. Can you tell us what are the two you're looking to fill with cat litter products?

I don't think so. I think we'll pass on that one just because we don't need to tip the competition as to where we're going. Those ones you've mentioned are obvious, and I'd rather leave it at that.

Sure. Okay, that's fine. What's new in R&D? R&D spending increased about 30% last year.

Yes, I mean hey, that's the beauty and that's how we're getting the incremental sales per ton, is we've been plowing money more and more and more into R&D. The only conversations I ever have with them is hire more and spend more. And that's what they've been doing. So part of that incremental spending was on pure exploratory science, where we for the first time hired scientists who aren't even assigned to a division. They are just doing basic research on our minerals to try and figure out other things they might be able to do, and it's been exciting. They're finding stuff, nothing commercializing anytime in the near future -- or short-term, anyway. But all helping us for the long-term.

So, as you know, our mission is creating value from sorbent minerals. And the better we understand our minerals, the better chance we have of creating that value.

Sure. So they're finding things that you totally -- totally were unknown before?

Yes, kind of really cool stuff.

Okay. Sounds good. Which products accounted for the increase dollars in foreign sales in the last year?

Our foreign sales are derived basically in three areas. There are foreign operations, which we disclosed in footnote number three; that's the Canadian office and the UK office. And we also sell quite a bit of both animal health and fluid purification business overseas.

Yes, and the latter two really drove the growth.

Okay. Sounds good. I have no further questions for now, but I hope the next year will be just as good hopefully, or even better. We'll see.

Okay, good. Good. Well, thank you, and thanks for continued loyal participation in the Company. I appreciate it.

Yes. Thank you.

Esteban, any other questions?

We do have questions from Robert Smith.

Whew, I thought I was going to be cut off. Anyway, so, here I am again. By the way, this being the annual call for the annual period, maybe we can go a few extra minutes.

But anyway, so just circling back, Dan, to this question of Calibrin. So, I recall that you said something to the effect that the Holy Grail really is, down the road, the possibility of this replacing antibiotics. I mean, isn't -- didn't you make such a statement?

Sure, and that still is.

Okay. So that would essentially be more than just a question of geography; it's a question of how the product is used as far as this penetration goes.

Yes.

Okay. So that's still out there, so to speak.

Absolutely.

Okay. And if that's so, what has to happen, so to speak, to make that become a reality?

Well, I think it's (multiple speakers) --

Is it a concern of the use of antibiotics in the food supply?

Sure. I mean, so if you drew a -- if you plot today and go out in time, do you believe that the pressure to get away from antibiotics in the food chain is going to stay the same, decline, or go up?

I think it's going to go up.

I do too.

So, okay, over time, then, you are going to have more and more pressure to get out of it. And, as we are launching and continuing to expand the acceptance of our products -- and in -- in a large part, you know, the selling proposition is this. It's a non-antibiotic solution to a currently, in many areas, antibiotic solution. And so, that -- our continued launch is going to go up and up and up. So it's just time and effort.

So let me ask you this. In the natural foods sector, essentially is all that being produced with either your product or something else instead of antibiotics? I mean, what kind of a read can you give me on that?

Yes, I'm not qualified to answer that question. So I'd have to get our animal health guys (multiple speakers).

Okay, but it's a valid observation.

Yes, it is. I'm just not going to -- I mean, I could make something up (multiple speakers).

Okay. So then you could say in a way that you may be a direct beneficiary of the trend to eating healthy in natural foods?

Yes, I mean, because ours is a natural solution. But it's -- that's a stretch in the sense that it's (multiple speakers) --

Well, why would it be a stretch?

I don't know.

Okay. Anyway, let's think about it.

I'm not qualified -- Bob, I'm not qualified to answer the question, so if you want to keep pushing (multiple speakers) --

Maybe you can get -- lean on someone and get back to me as to what an answer might be. What can you tell me about unit labor costs?

Am probably not going to tell you anything about unit labor costs. I don't -- Doug or Dan, you want to tell him anything about unit labor costs?

No, we don't disclose anything like that.

So, nothing. I'm not telling you anything about unit labor costs.

I'm interested in -- just in trends.

What do you mean? What are you interested in?

I'm interested in productivity.

I mean, I track stuff like net sales and gross profit and net income per employee, but I don't know that we ever disclose that stuff. But generally, look, it moves in line with the profitability of the Company. So you can generally assume we're more productive today than we were five years ago.

Yes. I mean, Robert, you've got the sales number. I think we disclosed the number of employees. You can take A, divide it by B.

Right, that's pretty much what we do.

Yes, okay. The stock buyback program, where is that?

No buybacks this year.

There was authorized shares, but no activity.

Okay. How many shares left? About?

I believe it's disclosed in the 10-K.

Okay.

Over 250,000 authorized to buy back.

Okay. I want to congratulate you again on the 10-year record of increased dividends.

Thank you.

It means a lot to me and hopefully to others in the investment community as well.

I have a suggestion for you guys. If you want to put something on YouTube, you have some people throwing around the Tidy Cats product in the bags and they break. Anyway, I just offer that as a chuckle.

(laughter) But Ethan Starr, when he said that I hope you have as good as year, gee, I'd be a little disappointed. I'd hope you continue to grow. And I want to wish you the best. Thanks.

All right, thank you.

Thank you.

All right, Esteban, I think we're pretty much out of time. So I'm going to thank everybody for your interest and support, and we'll talk to you again in 90 days-ish. Thanks very much.

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