Oil-Dri Corporation of America (ODC) 2014 Q3 法說會逐字稿

Ladies and gentlemen and welcome to the Oil-Dry Corporation of America, Q3 2014 Earnings Conference Call. My name is Lisa and I will be your Operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session.

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I will now like to turn the conference over to your host for today, Mr. Dan Jaffee, President and CEO.

Thank you, Lisa. Welcome everybody to our third quarter teleconference. Joining me in the conference room here in Chicago, Dan Smith, CFO, Doug Graham, VP and General Counsel and back by popular demand, Ronda Williams will be covering our Investor Relations and our Safe Harbor. So, Ronda.

Right, thank you. It's great to be back here. 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 an investment in Oil-Dri stock. Thank you.

Thank you and don't panic, Reagan is just on vacation. We didn't punish her for this quarter. Dan, do you want to take us through?

Sure, good morning. Oil-Dri sales for the third quarter in the first nine months have benefited from enhanced private label cat litter business from the MFM acquisition and improved branded cat litter sales.

However, our earnings reflect our long-term promotional investments in our consumer brands, continued packaging freight material and fuel cost pressures and some weakness in our B to B area.

Sales of $67.4 million for the quarter and $200.3 million for the first nine months reflected solid business growth over the same periods last year. Our EPS was $0.10 per diluted share for the quarter which was down significantly from fiscal '13's quarter EPS of $0.46.

The quarter's results brought our year-to-date EPS to a $1.11 versus $1.40 for the same period in fiscal '13. Our retail and wholesale team reported strong topline sales growth for both the quarter and the year. Overall, cat litter sales increased about 18% for the quarter with both private label and branded business showing improvements.

However, the retail and wholesale growth reported a loss for the quarter due to increased costs and our continuing investment in advertising and promotional spending. We continue to expect that our advertising and promotional spending for the fiscal '14 will be greater than fiscal '13.

In the B to B area, quarter sales for the B to B team was behind the third quarter of fiscal '18 by about 8%. Our egg products reported a 38% drop in sales driven primarily by reduction in business with our corn rootworm formulators. Our animal health business was also down but our fullest purification product sales were up for the quarter.

A combination of reduced sales and increased costs, adverse and impact reverse income for the quarter, the quarterly results led to nine-month income a month that were less than the year-to-date value for fiscal '13.

Our gross profit percentage for the quarter was down roughly to 21% as compared to the 26% reported in the third quarter fiscal '13. Our gross profit percentage for the first nine months was approximately 24% versus 27% last year.

We've experienced increased packaging, freight, and material cost throughout fiscal '14. The cost of natural gas used in our manufacturing processes increased 25% for the quarter and 30% for the first nine months as compared to same periods last year.

We've increased manufacturing labor, mining and coaling costs that have all been seen in the quarter in the year-to-date. Finally, private label cat litter products generate lower gross profit per dollar sale.

We remain strong from a balance sheet perspective. Our cash investment balance at the end of the quarter was about $20 million which was down about $20 million from the third quarter of fiscal '13.

The decrease was driven in large part by an approximately $13 million expenditure on November 1st of 2013 for the asset acquisition of MSM Industries, Incorporated. Finally, we continue our strong dividend payments to our stockholders with approximately $1.2 million paid out during the quarter. Thanks and I'll turn the meeting back over to Dan Jaffee.

Great, thank you and as always, we'll open it up to Q&A. We encourage you to ask your most important question first and then go back to the end of the queue so that everyone can get a question asked if they want to. So Lisa, let's open up the question and answer line.

(Operator Instructions).

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

Good morning from four blocks away.

All right, well hello.

Just wondering, you pointed a new chief operating officer in early April and just wondering what's behind that and can you give us a little bit more flavor for that and if you're filling in traditional COO role or different role, it would be just helpful to know that.

Well, it's a great question. It's a significant you know turning point in our organizational history and probably the best way to answer it is to also to segue into something I definitely wanted to cover which is the continued success of our Fresh & Light brand. As you know, you know I came up through the cat litter side of the business and I'll get to those details at some point in the call.

But that's an area that with Paul Ziemnisky I wanted to be able to spend a lot of time, Paul is our GM but it's obviously it's something I spend 20-something years watching happen and the launch of lightweight litter and the revolution that's really taking place right now in the United States on that.

And so, what Mark Lewry is doing and he's got a wealth of experience. You know, competed in and around Mark for 20-some odd years so we've always had a mutually respectful healthy competitive relationship; highest integrity; highest skillset and so he's come in and taken all the non-consumer stuff away from me.

So he's got all the B to B in our animal health, our egg products, our fluids purification, our B to B marketing, all of that you know reports now into Mark and that's allowed me now to spend really the bulk of my time and energy on what we're calling this lightweight.

Okay, sounds good. I have more questions but I will go back in the queue.

Okay, thanks Ethan.

The next question comes from the line of Robert Smith.

Hi, good morning.

Hi, Bob.

So you know my interest in the Company is long term and I'm not interested in the next quarter but I just want to preface my comments by saying that in the past, it seems that spoilers kind of appeared when unexpected and that happened for me here in that the only thing that really concerns me is the decline in animal health sales.

I thought that this was really a secular trend upward and I was really taken aback and surprised by this and I'm wondering if you could really give me some color and dig down and just tell me just what happened here?

Yes, no, it's a great question and I share your concern. You small it's a small entity that's growing rapidly but again in any short period of time you can see big fluctuations when a couple of things hit and what hit really was - it depends on where you really want to go but in South America, we had a lot of inventory out there supplying a major customer.

That major customer shifted the product they were taking from us. They're still buying from us but now we're stuck with this big inventory hangover and we've been trying to work out of that so not a lot of new sales coming out of South America which was a horse for us and instead, it's trying to work out inventory of a product line.

Over in Asia, and I was just there for the grand opening, you know, it's really a lot about putting on a lot of expense and energy into getting something started but that isn't yielding a whole lot of benefits in the short run but I don't think that's a surprise.

I mean anything you start an entity from scratch, you know, your expenses are going to get out in front of your revenue so I can tell you though the team is extremely experienced, focused, excited, you know 50% of the world's pigs are in China; literally 50% and our caliber Z is our highest value product and it's the best product on the market for zeralinon binding which is the mycotoxin that impacts pig production.

Give you some random stats that I learned over there but it really shows you that the future for our type of technology is very bright and don't quote me on this. You've got an accountant who's also a cat litter salesman and I'm talking to you as an animal health DVM but you know that never stopped me in the past and it won't stop me now.

So my understand is the cow is the most valuable animal on the farm because you know it's producing the piglets and that's really where you want to maximize your efficiency and so the average sow in the United States is yielding about 22 piglets a year give or take a piglet or so let's say because I saw a bunch of numbers thrown in at me but it not with the 20 and that's due both they have more piglets for litter and they get more litters in, in a year.

So you combine that together and they're yielding 22 piglets a year. The average sow in China is yielding under 14 so about 13.5 piglets a year so you can imagine you've got 1.2 billion people. You've got 500 million pigs in China and they're very inefficient so they are absolutely you know heading down the path of anything they can do to improve their production of piglets per sow is - they're not going to get there by throwing more sows at the equation.

They're not going to get there by throwing more land at the equation. They're not going to get there by throwing more farmers at the equation. They're only going to get there by being more efficient and so it isn't just mycotoxin binding or that's a big piece of the equation. It's water management. It's land management. It's all sorts of things but we were sitting down; we made customer calls and we were sitting down with nutritionists and people that are you know well-engrained in the Chinese food production industry and they get it loud and clear.

And so, we're there at the right time. How upward it is, I don't know but I share your concern. In the short run, you know the expenses are going to get a clips of revenues but we almost can't help but win in China because our product work, our people are focused and you know it's that good ole thing they taught me in MBA school, they asked Willie something, the bank robber, they asked him, "Why do you rob banks" and he said, "Because that's where the money is."

And it's the same thing. Why do you open an office in China when you're in the animal health business because that's where the pigs are. That's where 40% of the world's feed production is. I mean, they're number one in so many categories so did I answer your question at all?

You really didn't because just circling back. For me, it was a question that revenues or dollars were down 11% in animal health. Are you just telling me there was an inventory adjustment in South America?

One of our key customers in South America had quite a bit of inventory hold-overs so there wasn't a lot of new sales this year.

Compared to a year ago.

Compared to a year ago

But this was small business. So you know you're going to see big wide fluctuations. You may see them in quarters where it's up 50% and that doesn't mean it's going to be a 50% every quarter. It's just you're working out of small base. It's really, are we fishing in the right pond and that was my way of telling you we are but did we pull any fish out this quarter, no. So you're right.

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

Okay.

(Operator Instructions).

Your next question comes from the line of John Bair

Good morning, thank you for taking my question. In the last couple of quarters and it's kind of historical, I guess, here the increased fluctuations in the cost of natural gas and so forth and so my question is sort of two-fold here.

I know with prices having gone up that's obviously an impact but how much additional gas usage in volume sense have you incurred with the acquisition of the Florida assets and how much is that really coming into play here? Make sense?

No, it definitely does. You know, we've reported our annual tonnage pretty much at the end of every year and last year we did 815,000 ton-ish and you know, you can do the math because we sort of said how much sales revenue we're generating and all this.

So let's just say you've added about 10% of our tons to that 815,000 but you couldn't straight line that and say you're adding 10% to your natural gas because cat litter is what's called RBM which means we don't have to dry it twice. We dry it once and so it uses less fuel than an LVM product.

So you could probably say 5% to 6% and I think you'd be pretty accurate.

Okay, and that kind of leads into a parallel question such as you know, what are you doing about or is there anything further you can do with regards to your plan efficiency. In other words, you know, are you able to run you know cure more cat litter since you're overall volume production is up. Is there some efficiencies there that you're working on or are you pretty well where you think you can maximize that at this point?

No, that's another great question. When we took it on, it was a Lucille Ball skit. There's no doubt about it. We took this big acquisition. We dropped all this tonnage into our existing facility, so we had to throw a lot of people at it and just make sure we filled the orders because these accounts, you know, Publix, Dollar General, [Myers] they were absolutely partners of us before and even bigger partners of us after so we had to make sure we were supplying.

Now, we're getting to where we absolutely - our goal is by eight one to really go those efficiencies in place where we start to you know, to have it being incrementally more efficient than it was historically.

However, as I say that, anything you're growing rapidly in a certain area, it's very difficult to do two things which is both grow rapidly, meet all orders as they come, keep your supply chain sound and cut costs and focus on what we call [blue] dollar waste in driving that out of the system.

So I mean maybe it's a good segue because I want to get this out onto the call whether anybody's going to ask me about it or not, so John, if you don't mind, can I segue into our cat litter business and how the results have been going?

Yes, absolutely and I guess where I was ultimately driving with this was can you know hopefully they'll be a tapering off of the impact as you get this stuff you know the new production and so forth kind of under control but I mean I recognize the gas prices where that track them very closely as well so you know I understand that that's pretty well out of your control and I hope you don't ever go back in and hedge like you did a number of years ago.

I think that was post-Katrina if I'm not mistaking so anyway, yes, go ahead and segue in and then 'll get back in the queue, thanks.

Okay, thanks. So it's very exciting and we get privy to this, the [INRI] information and we can use it in the ways we used it in these teleconferences so I want to just- I don't want to bombard you with a lot of numbers but I do want everyone who's an investor in Oil-Dri to realize what an incredible thing we're experiencing here.

I mean I've been involved in this category now for 25 years and this is as good as it gets so Cat's Pride and Fresh & Light let me start with 24-week data and this is multi-outlet so this includes Walmart; it includes grocery. It includes you know mass and all the different chains that turned their numbers in so this is the biggest number you can get your arms around.

We generally think it represents 65% to 70% of the category. You still get like the clubs that are not turning in their data, Pet Smart and Petco does not turn in their data but everybody else does, Target, Walmart, Kruger, you name it so you're getting a good, good healthy sample size.

So the category grew at 5.6% in dollars for the 24-week period which is a healthy category and that growth is driven by lightweight cat litter. So Cat's Pride and Fresh & Light which you guys know we launched three years ago, our distribution was up 5.6% so that gives you an idea.

If our velocity stays the same, if we sold the same per point of distribution and we grow our distribution by 5.6%, you would say your sales would go up by 5.6%. And even above that and you're increasing your velocity, any and below that and you're really playing a churn game. You're just putting on new real estate but you're losing more as you put in on and you're not growing.

So again, up 5.6% which is exactly what the category dollar sells for. So the 24-week period, Cat's Price, Fresh & Light dollars were up 56%, five, six then the decimal point not 5.6%; 56% for the 24-week period. It's astounding. I mean I can give you the 4-week, the 12-week, the 52-week, they're all in line with what you would want to see.

So I like the sort of a half year because you really can't juice it too much by one promotion or two promotions but it's not so long that you know you're missing what is a very important trend line. So the lightweight phenomenon is here. Tidy Cat is into it. We heard Fresh Step is going to be launching and this is something we started that we've got a lot of intellectual property around, we've got a lot of mineral reserves around and we got the moment - the consumers bet is betting every week on this. We've got the best lightweight product. It's the best blend of performance and lightweight. We now call it a hybrid. It's sort of like the Prius.

Yes, you're going to sell a few bolts and you'll sell some test [loads] but the dominant winner in the car market is the hybrid. It's sort of the one that does both; it add performance and you're getting a good jump in gas mileage. Well, that's what you're getting out of Fresh & Light because it is 25% lighter than the pure sodium bentonite players out there so there's a huge carbon footprint impact for the retailers, the efficiency impact for the retailers and then a real noticeable difference for women 25 to 54 who are a demographic purchaser of cat litter.

When they go and take cat litter home, they want it lighter but guess what? They don't it too light. I encourage you guys to go out to Amazon, go out to Walmart.com and read the reviews on Fresh & Light and then read the reviews on the other guys and you'll start to see a dramatic difference. We're getting rave reviews and that's why we're growing so fast.

Some of the other guys have gone too light where they're density is below 30 pounds cubic foot so we know at that point, migration out of a box or what's called in the industry as tracking, goes way up and so they're getting a lot of complaints on dust and tracking and stuff that's ending up all over the house so we believed it and the market's proving it.

We found the sweet spot. You want light; you don't want too light and you've got to have performance and so, I wanted to make sure you guys who are long-time investors are realizing the investment we're making in trying to feed this tiger as it's running, you've got a tiger by the tail; you've got to let him run, but it's working and it's working in a big, big way.

Lisa, I'd like to open it back up to questions. That was sort of my little Cat's Pride and Fresh & Light soliloquy.

Thank you, Sir. You next question is a follow up on the line of Ethan Starr.

Very exciting to hear the news from Fresh & Light and can you elaborate a little bit more on the - there's a new product for the pet specialty stores?

Well, you've got to be more specific. There's always new products in the pet specialty stores.

Okay, well that was mentioned in the queue so -

Oh, our new product; I thought you met a competitors.

Oh, I thought you were saying you spotted something because you do a lot of retails. Yes, no, we've got a specific product that we've tailored for the pet specialty. It's doing well right now; advanced and you know just all I can tell you outperforming our expectations and I think it's meeting or exceeding Pet Smart's expectations so it's been a positive turn of events.

Okay, is it considered a Fresh & Light derivative or not?

You know, I don't know so I'm not going to answer that question. I don't know how they positioned it and I don't remember the final formula so I'm not going to answer the question. I don't know.

Okay, can I do a quick follow-up?

Sure.

For a different thing however. How's MDO9 doing?

Okay, well it's doing very well actually. This is all about what are known as wet droppings which are basically chicken diarrhea and you know something near and dear to my heart and I can tell you, you know, when I was in Asia for instance have a big distributor and I don't want to get into too much specifics but they've been using MDO9 back from into the crawl because the product works very well and then once they sell the MDO9, they were able to sell the ANZ on the back end to then solve the mycotoxin problems.

So it's been a two-for win-for us, the product development is doing well but it's also been a great sort of work to solve the problem that everybody knows they have which is visual. You know the mycotoxin problems everyone kind of gets it but it's [timings surround] it, it's difficult you know I mean (inaudible) took this, would I get 13.8 and not 13.4? You know there's no guarantees in life.

There's a whole bunch of variables that go into production but wet droppings and visual. It's obvious. You use this product, the wet droppings go way and they can see the benefits so we're very happy with MDO9.

Okay, just one last thing and that's I would hope for another dividend increase this year.

Well I'm sure you and my family will all be in line for that one so as you know, we take that up at the June meeting every year.

Okay, well thanks very much and look forward to the next quarter.

Okay, thanks.

Your next question comes from the line of Robert Smith.

Yes, hi so the capacity and expansion for fluid purification, how much would the capacity increase?

You know, interestingly enough, you got a two-for going on there so when we hit the wall on capacity, it really forced us in a greater way to focus on the efficiency of the existing mills and then now we have the new mills coming on so it's really total capacity and you know I'm going to say 33%.

Okay.

Third mill so it's by nature third, so.

Yes, well then we've got the [workers] too but I would go 33%.

Okay, and the comment about the sales of eggs or corn rootworm can you just give me a little color on that? What's going on there?

No, I talked to our general manager and he said it's two-fold. There are really only three or four corn rootworm major customers anymore. The ones we have area actually down a little bit because their business is down but we actually lost one too. It was a price type bid thing and so it was down not just because the market is down, we also lost shares in the corn rootworm business this year so that was disappointing because that was the exact question I asked him and we're doing everything we can to try and get it back.

Okay, and is anything you can say about new product development at this point? You said you had things on the burner for next fiscal year and beyond?

No, we do, we absolutely do and no I would say nothing that's ready to be publicly disclosed at his point.

So all the points that you enumerated that added to increased costs for the quarter, what's the totality of that? Is there a number so I can kind of back it out and say, "What would have happened if that money had not been spent?"

Well, Robert, you know overall gross profit went down 5 point so there's a lot of factors going on. We try to list them all out the Q in terms of percentages.

I know you did.

Yes, but I mean you got a fairly substantial drop. Packaging is up, freights up, materials up, fuel's up. To John's earlier question, fuel change is not a usage change; that's a rate change so -

Yes, but for example the [MSM] thing was a one-time deal I mean so you can back that out and things like that I mean; the additional incremental cost for marketing Fresh & Light?

Yes, we usually disclose advertising spend at the end of the year. It's in the K. We're saying it's going to be higher than fiscal '13 and I think that's what the guidance we're proving at this time.

And for nine months, it was higher also?

It was higher.

Okay, all right, thanks much.

Okay, good and you reminded me of a good point that I definitely want to get out there which is we are going to be going out and are already talking to our customers about price increases because costs are going up and you know every year you get farther and deeper. It's the nature of the clay business and every year, pretty much regulations get aired onto the books.

I can't remember any getting taken off the books so every year it gets more and more complex and expensive to mine and process in the United States and then with natural gas on top of it, you know, there's no vow. Everyone in our industry is experiencing the same thing and so we're out there raising prices all effective eight-one, nine-one type stuff.

And so that hopefully will all repair some of the margin damage we saw here in the third quarter and you know as we finish the year.

I think we're pretty much out of time. If we have any new questioners who didn't get to ask any of them but if not, I think I'm going to just say, look, (Lisa) are there any new questioners?

No, there are not.

Okay, listen again, very much appreciate you guys patience and understanding that you know, we'd like to think of ourselves as bigger than we are. We're a small business you know, we're really only doing $250 million in sales and when you get a couple of big things all happening at the same time, you know, i.e., building a new plant in the fluids purification side, opening an office in China and growing your consumer business, this brand that you launched so I mean just going on a 52-week basis now in retail for 77%-odd of the market, it achieved $35 million in sales.

This is something we launched you know two, three years ago and you guys can put your own multiple on what a consumer brand is worth in terms of the multiple sales, but it definitely, when they get sold and not that we're selling; just going to value you know, they will command a higher reign than private label sales or something like that and for the first time, I want to say 15, 20 years, we're no longer number five so we leapfrogged above the number four player and we are now number four.

We'll see how all this shakes out but if you take the growth of the category and then say, "What has Oil-Dri's share been of that growth, it will make us a major, major player in this category so what that means is if the category started over six months ago and you say, "Okay, what percentage the growth - does Oil-Dri present" we'd be in one of the top two players in this category.

And so, will it keep playing out that way? Well, that remains to be seen but at the moment, the consumers voting and it's very exciting so we've got to keep feeding this thing. It's very hard to monetize you know your return on investment in the short run while this is happening but eventually what happens is the sales will plateau; will get the spending. It will dictate what the appropriate level of spending is and then that's when you know my family and I as the biggest shareholders expect there be a bottom line payout.

But in the short run we're very comfortable will continuing to let this thoroughbred run because you know it's winning in the marketplace. So thank you. We will see you and talk to you again at the end of the fourth quarter; our fiscal yearend and until then, be well.

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