Oil-Dri Corporation of America (ODC) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q1 2015 Oil-Dri Corporation of America earnings conference call. My name is Whitley and I will be your operator for today. (Operator Instructions)

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

Thank you, Whitley, and welcome everyone to our investor teleconference. Joining me today in Chicago is Doug Graham, our Vice President and General Counsel; Dan Smith, CFO; and Reagan Culbertson, our Investor Relations Manager. And Reagan, if you would cover the Safe Harbor, we'll be good to go.

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 evaluating any investment in Oil-Dri stock. Thank you for joining us.

Thanks, Reagan. And I'd like to turn it over to Dan Smith to review the quarter.

Thanks, Dan. Good morning. Oil-Dri's sales for the first quarter of fiscal 2015 were up 4% to about $66 million, thanks in large part to the increased sales of private-label cat litter obtained as part of the MFM asset acquisition in November of 2013. However, our sales mix negatively impacted earnings in the quarter.

Our EPS of $0.30 per diluted share for the quarter was down from $0.41 earned in the first quarter of fiscal 2014. Our gross profit percentage of the quarter was approximately 21% versus 26% in fiscal 2014. The gross profit decline was driven primarily by product mix sold and increased packaging costs. The cost of natural gas used in our manufacturing facilities decreased about 5%, but this decrease was offset by our other manufacturing cost increases.

Our retail wholesale team reported 7% sales growth for the quarter. Private-label cat litter sales increased about 50%. However, the retail and wholesale group reported reduced earnings for the quarter due to the product mix and higher resin cost. B2B sales were down slightly for the quarter. Sales of fluid purification products were down, as were co-pack cat litter sales.

Increased sales of ag products partially offset these declines. Reduced sales; higher packaging, freight, and material costs; and increased SG&A all led to lower income for the first quarter of fiscal 2015 compared to the same period in fiscal 2014. Much of the SG&A increase was related to our new Amlan Trading subsidiary in China.

From a balance sheet perspective our cash and investment balance at the end of the quarter was a little over $10 million, which was down about $22.5 million from the first quarter of fiscal 2014. Driving this change was our November 1, 2013, asset acquisition; increased capital expenditures; dividend payments; and our regularly scheduled debt payments.

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

Thanks, Dan. Whitley, we are going to open up the line for Q&A. And I just encourage everyone to prioritize your questions -- ask your most important questions first, and then get back to the end of the queue, just so everyone has a chance to ask at least one question. Thank you.

(Operator Instructions) Ethan Star, Private Investor.

Good morning. Could you please tell us more about the new and innovative lightweight branded and private-label cat litter products that you will be launching during the second half of the fiscal year? Also, does the fact that you are launching a lightweight private-label cat litter product indicate that you already have one or more customers for the product?

Good question. Let me just start 50,000 feet, and then I'll get as down to ground level as I can. You know, looking at IRI information, it's interesting to see -- if you look at what the growth of the category has been -- so you can see the scoopable sales and then what they've grown, how much of that growth is represented by lightweight -- because all the lightweight litters other than Fresh & Light are off a base of zero.

As you know, Tidy Cat lightweight has launched; Fresh Step has launched. We are out there. So 91% of the scoopable growth in the category in dollars has come from lightweight litter. So clearly, that's the trend -- that's the disruptive innovation that's going on, which is very exciting.

You know, as I have said all along, as this gets to be a significant portion of the category -- or, certainly, category growth, then retailers are going to want to have private-label lightweight litter. As you know, we don't dance till we get in the end zone. And so until we start shipping any of these customers, we are really not going to talk about any specifics.

But suffice it to say, historically, when it was all heavy and scoopable, and what I would call a race to the bottom denominated on a price-per-pound basis, we were at a significant disadvantage. So our share was less than 2% of the private-label scoop category. We expect our share going forward will be significantly higher than that on the lightweight segment. And then as the lightweight segment continues to grow and gets to be a greater percentage of the overall scoopable segment, our overall share will go up as well.

So I'm not sure I am totally answering your question other than to say we are in the best position to benefit from lightweight private-label. We have the best products. What we are starting to see is some people have made the decision that the way to get lightweight is to put in fillers -- very light-density fillers. And I call it a filler -- to me, anything that doesn't absorb or control odor is a filler, because people buy cat litter for the absorbency and then to control odor.

So if you are putting something in there that doesn't do that, then from my vantage point and from any kind of empirical in-home use test or any kind of scientific data standpoint, you are diluting the performance of the product. So you could imagine -- you could put cotton balls, you can put all sorts of things in cat litter to make it lightweight.

Well, our competitors have decided that they are going to put in fillers. They are going to put in very light-density fillers and then try and surround those fillers with clay in order to control the odors and get absorbency. So our products are the only ones with no fillers added. We have all-clay blends in our products. And so historically, with Fresh & Light, we had a blend between sodium bentonite, which is very heavy density; and calcium bentonite, which is light in density and highly absorbent. And that allowed us to make a claim of up to 25% lighter than, you know, the --

Yes, okay. I know all this.

Well, yes, but you're not letting -- I am going to answer your question if you want me to.

Okay, please do.

Okay. So you asked: what are the new products coming out? Well, so the new products coming out Oil-Dri would be utilizing 100% of our clay in the product. And obviously, it's got to perform, but now you are going to have up to 50% lighter product, because you are taking the sodium bentonite completely out of the formulation. So that's what we are excited about. That will be coming out in the second half of the year.

I don't have any sales estimates for you. All I can tell you is the trade -- as well as they have received us on 25% lighter, as equal to or more excited about this 50% entry. And one thing I have encouraged you guys to do is go out there and look at reviews that are out there on the various lightweight products. You can see that consumers still love clay.

It has been the cat litter of choice since Ed Lowe first sold a bag of clay in 1947, or whenever he did. So our no-fillers-added is going to be our position.

So this 50% lighter litter -- isn't it -- it sounds the same as your former 14-pound scoop jug that was equipment to 20 pounds.

It's not, actually, because unfortunately that product had two inherent disadvantages: very dusty and didn't clump very well. So we could never sell it at a competitive price point with other scoopable litter. So if you look at how that competed historically and how does it compete, it's what's called OPP, opening price point. It's a popular priced item -- it does very well. It's a highly-ranked item, but it sells on price.

So those consumers who want scoopable but are willing to sacrifice a little bit of performance and a little bit of dust control but want a nice price -- they go after Cat's Pride Scoopable, and they do get a nice lightweight product. This product is totally different. This product is formulated for virtually no dust, 99% dust free, and will clump as well or better than sodium bentonite. So does that help you?

Yes. And it's totally calcium bentonite?

Yes. It's total higher raw material. That is correct.

Is it flushable, then?

No, it will not be flushable.

Did you have any customers for this new private-label product?

I'm not answering those questions right now -- you've gotten a bunch. So if you wouldn't mind --

Sure. Okay -- I'll get back in the queue. Thanks.

(Operator Instructions) Ethan Star, Private Investor.

Could you please add more color to the statement that Calibrin products are gaining momentum in China and other foreign markets?

Yes. There are some issues. I'm going to probably embellish a little bit on your question, just because there are some issues I'd like to cover. Because we'd sort of talked about what the overall size of the market is on mycotoxin binding, and we are obviously excited about China, because we've got a wholly-owned entity there with feet on the street.

So I kind of prepared for this in advance to unveil a little bit more of the details surrounding it. So we estimate the size of the mycotoxic control market in Asia to be about $200 million at the end user level, maybe $100 million at the distribution level. And while we are not currently at a run rate that would exceed $10 million in sales, which, if you obviously take $10 million in sales through direct and distribution and divide it by the $100 million at distribution, you could say it's a 10 share. Sp we're not on a current run rate of a 10 share. It's certainly our hope and expectation that within 24 months, we will be able to achieve that run rate. So it gives you an idea for the magnitude of the opportunity.

And we've always said these are higher-than-average margin products for us. And so with those sales will come GP. So -- and I did digress -- I'm not sure I answered your question. What was your question?

Could you please add more color to the statement that Calibrin products are gaining momentum in China and other foreign markets?

Well, we are continuing to make sales calls, make demonstrations, participate in shows, and starting to put on incrementally new customers -- some of which won't ship until the second half of our fiscal year. But we are gaining momentum. We are continuing to be excited about the opportunity in China and Asia.

So how long do you think it may be -- I know you really can't answer this definitively -- but before the China subsidiary actually breaks even or turns a small profit?

I'll defer to Dan.

I'm thinking fiscal 2016, probably.

Fiscal 2016.

Okay, that's helpful to know. It's just -- it's hard to tell, with three different foreign subsidiaries now, which one is driving the loss, I guess. What can you tell us about the new products R&D is working on?

Well, as you know, it's not good for anybody if I tip our hand too early. Suffice it to say we are continuing to invest heavily in R&D; new product development has been a big part of our past.

I mean, I was looking at the sales trend of Fresh & Light. If you look at what we've done, I mean, we launched this item in 2011. So we only sold $759,000 of it at wholesale -- Fresh & Light for Oil-Dri. The next year we sold $12 million. The next year, $19 million; and this past year that finished July 31, we sold $25 million of Fresh & Light. This is a product that didn't exist.

And that all came out of research and development. So that's 10% of the Company now on a new product that didn't exist and really is disruptive, and that it's now allowing us to make sales calls on the private-label lightweight side on a basis where we are -- actually have the best products and the best cost of goods, because we can use all of our raw materials from Taft, California, all the way to Ochlocknee, Georgia, on that initiative.

I would say for a company our size, our research and development effort is absolutely critical to our near-term and long-term success. If we were selling floor absorbent and unscented coarse cat litter today, you wouldn't be investing in Oil-Dri, and I wouldn't have a job. So we are going to keep plowing it in. We are going to keep finding exciting new applications. But I'm really not going to talk too much about it until we actually, like I said, are in the end zone.

Okay. So that $12 million, $19 million, $25 million -- that's wholesale dollars, correct?

Correct.

Okay, that's impressive. And I guess most of the cannibalization of that was the regular Cat's Pride scoop?

Well, you say that; and we anticipated that when we launched it. In this one I don't have the wholesale numbers in front of me, so I'm going to switch metrics just to give you a relative indication. So I have the IRI data in front of me -- 52-week data ending November 9, okay?

Okay.

Cat's Pride scoopable -- we did $22.8 million, at retail, now, but it was up 6% from the prior year. So you are seeing additive. That's what I'm saying. They really go after two different consumers. Cat's Pride scoopable was always sold on price and fit for use, but a lot of trade-offs. Fresh & Light competes right at the highest level -- a higher price point, and it goes after the consumer that says, I'm willing to pay more, but I want performance.

Okay. That's impressive on the Cat's Pride scoop -- it's good they both still work, but clearly something has been -- some sales, I guess, in this coarse litter has been declining for a long time?

Coarse litter -- it has been -- and we are actually seeing -- the lightweight launch has actually sped that up a little bit. For the 52 weeks coarse-grind category was down 6% in dollars, and it's down 7% in the 12 weeks. So it's declining at 6%, 6.5%. And this comes after 20 years of decline.

So it's continuing to be a smaller piece of the category. So what I'm looking at shows retail sales of about $1.7 billion, and coarse grind is only $260 million of that.

Wow. I have more questions, but I'll get back in the queue, though.

Get back in the queue, but you are probably going to pop back up.

Okay.

Rebecca Simmons, DRZ, Inc.

Could you give a little bit more color on the input cost side? I know you called out a couple of things on the press release. Are you seeing any relief or any area outside of maybe natural gas that you are expecting to be moving lower?

Natural gas is certainly -- you identified that. That then also flows into -- or at least petroleum does -- into resin. So, Dan?

We saw resins spike up for our -- certainly in our first quarter and play out through our second quarter. We have commodity-based contracts. If the resin price continues to decline like we've been seeing in the marketplace recently, we will see a decline in our fiscal third-quarter. So that certainly is -- we are hopeful that the resin price continues to decline from its highs, and it saw some highs in September.

Okay. And any pressure that you are seeing from the retailers on the cost side, or -- I know you talked about in the past kind of different slotting fees. Anything going on there?

Pretty much the same. I mean, we have slotting in our plan for the launch of the new items that we are talking about -- the 50% lighter Fresh & Light product line. But it's all high-payback stuff. And so nothing much different than the past.

Okay. Thanks. That's all I had.

Ethan Star, Private Investor.

Yes. By directing promotional dollars for lightweight cat litters away from mass media and towards targeted trade and consumer promotion, I assume that shift -- that will shift advertising costs away from SG&A, and instead they will be accounted for as a reduction in sales?

That's correct, Ethan. It goes up to trade spending, which is a reduction of sales.

Yes. Okay, good. And then as fewer and fewer cat owners use coarse litter, for how much longer will your major co-packing agreement be significant for Oil-Dri?

You know, the good news is -- while the coarse cat litter is declining, and Fresh Step is showing they are a big percentage of that category, so they are going to decline, too -- it's still an important item for us and an important item for them. I would probably -- I am putting words in their mouth; I've never heard them say this. But when I got my MBA, you had the cash cow. I'm assuming this is the cash cow.

They don't put a lot of advertising -- I haven't seen a Fresh Step coarse cat litter commercial in probably 10, 15 years. So my guess is it's generating a lot cash for them. They are going to ride this out, and they will probably be one of the last ones on the shelf, because they do have a loyal customer base. But you are right -- you do the math, and 5, 10 years out, it's going to be a much smaller item.

Okay. And in some ways -- you know, as much as I hate to lose sales, this is kind of a good thing to be less reliant on something that's -- 10 to 15 years ago was very much more important to the Company.

You are absolutely right. And it just, again, exemplifies why we need to keep diversifying and investing in new products and our own technology, because otherwise, if we just rode out the old horses. It may look good for a quarter or two, but it's not going to good over the long haul.

Sure. Just out of sheer curiosity, I was just thinking -- this is kind of a ridiculous question -- but why do you still own land in Oregon so many years after you closed the plant there?

I'm going to build a house there someday, Ethan. No, I don't know -- you know, we closed the plant there. I don't know. It's just not high on our priority list to get out of that piece of land, but that's what it is. It's a remnant of the old --

Yes, no -- I know that, but it's just, you know, okay, just kind of curious. It's like, gee, you're still in the annual report of owning, what, like a 40 -- some small amount of tons.

So, okay. I was hoping for a better quarter. This is not bad, though. I look forward to future better quarters.

Yes, I'm with you. The thing I liked about this quarter was in the fourth quarter of fiscal 2014, we only made $0.07 a share. And while we made less this year than we did year ago, we delivered $0.30 a share.

So I think we have all recognized that that was good relative to the most recent quarter. It was not good relative to last year. But as you know, we are going to have another tough comparison in the second quarter. But third and fourth quarters, we are going to have good comparisons off last year. So it's all relative.

The good news is we are still very enthusiastic about our animal health business. And then the lightweight tsunami, as we call it, is hitting. And it did not help -- I mean, it helped this quarter in the sense of our branded sales, but as you guys know, I really think is going to be on the private-label side where we are going to have the best products at the best prices and the least competition. That's sort of good. The branded side is always going to be a tough fight.

,

Yes. One last question, actually. Is MFM now totally integrated?

Yes. We would say it is.

Okay. And it actually was -- is already accretive, I assume?

Yes.

Good. Okay, thanks so much. That's all my questions.

Okay, thanks. Whitley, any more questions?

Jim Schwartz, Harvey Partners.

Just a quick question -- just on the -- you guys have had some public filings on your patents around lightweight, and just maybe talk about the potential in terms of royalty opportunities in this lightweight category, where you are kind of spearheading this move, which is becoming bigger and bigger.

Doug, I'm happy to jump in, but I don't know if you want to field this one?

Just very quickly -- we have had intellectual property in the litter space for some time. Our patents date back from some innovations that we had 15 years ago. And, as well, we have filed some recent patents on both blends as well as some of our clumping agents.

And the good news is when we started this lightweight revolution, we anticipated this was going to be a game-changing, disruptive technology. And as the innovators and inventors of it, we wanted to benefit from it. So he filed patents around it that anticipated not only what we would do, but what anybody could do if they were trying to take advantage of this revolution.

So we've got patents out there. The patent office finally opened it, so we at least know they are going to start reviewing it. Haven't been issued. But if the patents get issued, you know, that's -- then we are going to have some interesting conversations; because we started this, we invented it, and we deserve to benefit from it.

We have some existing IP that we also believe some or all of our competitors are using, and we are in preliminary discussions around that. So as Doug has sort of cautioned me, IP monetization is a long, long-term game with a lot of expense upfront; and then, maybe, maybe way, way, way down the road, a payday. So it's a tough fight.

So what you really want to do, from my understanding -- and I'm happy to have any of our investors have experience in this reach out to me and help me -- but what I am learning in this whole thing is you really want to align yourselves with a legal team that believes as strongly as you do in your landscape, your intellectual property landscape, meaning they are willing to put money on the table, too.

And all I can tell you is we are in discussions. We've got plenty of interest. And if it gets material in terms of the negative on the short side, you'll hear about that. And we will obviously talk about why we are doing it -- where the pot of gold could possibly be.

Any percentage on $1 billion-plus category goes a long way when you only have 7 million shares.

There's real value there. And we have really educated -- none of our competitors were doing this until we educated the category and invented this. So they were all doing the opposite. They were all densifying, putting dolomite, limestone, whatever they could do to get the lowest price per pound. And so we really started this whole thing.

How discriminating is the consumer with lightweight? When you read reviews in Tidy Cat -- that it's too light, that it tracks like crazy. But marketing is marketing, and I guess you'll fool someone until you don't. But the fact that you guys are pure and the others have fillers -- how long does it take for the marketing to kind of silence itself in terms of quality?

You know, I would say that they are validating -- the competitors are validating the power of the concept, because they are able to take a product that really performs worse than their historic products -- forget about our product. If you just take Tidy Cat Lightweight and compared it to Tidy Cat regular, Tidy Cat regular was a better cat litter, by far -- on any metric. So they are taking a worse product at a higher price and they are selling it.

So it shows you the product power of the light concept, and it also shows you the power of their marketing muscle. So as I am looking at the landscape -- and I don't think I'm divulging any grand strategies -- if you said, what's the easier strategy? Going after Nestle, Clorox, and Arm & Hammer, and taking branded share away from them? Okay, that's one choice -- and we are doing it, and we are growing. We've grown our share, but -- it has not been astronomical, but it's gotten the balls moving.

Or going after private-label lightweight, where those three guys really don't do it -- they might do it for one account here or there on a strategic basis, it's not their premise. You know, Nestle would not say we are a private-label company. Clorox would not say it. Arm & Hammer would not say it.

And have the raw material from coast-to-coast. So we have the best cost of goods. And where is cost of goods most important? On the branded side or on the private-label side? I will tell you, it's on the private-label side. You've got to be cost competitive. Your pencil has to be sharp. You've got to give the retailer enough room where they can make a good, healthy margin and yet still show price separation against the brands. That's the only way they sell private-label. People aren't going in buying -- whatever retailer you want to think of -- their private-label, if it is selling at a higher price point than the brands, people will just by the brands.

So what you want to get is what's called national brand equivalent at a good price separation -- call it 15%. I will tell you that we have had multiple retail partners come to our research lab with the mindset: we need national brand equivalent, so we want Tidy Cat Lightweight. We want that as a private-label.

And when they get done with our dog and pony show and see what an inferior product it is and what a superior product clay is, they have all said the same thing -- we would not put our name on that other product. We want you to do it, and we want your clay-based solution, because we believe performance is why consumers buy cat litter; and then lightweight is an added benefit. You can't sacrifice performance just to achieve lightweight.

So I think we are going to show more traction and more benefit on the private-label side, which, you know, is a big segment. It's 20% of the dollars of the category. It's a big opportunity.

With zero share currently.

With us having almost zero share and no margin. Anytime we get anything, it's very competitive. We are on a price-per-pound basis, and it's very hard to make any margin.

Gotcha.

I expect our private-label business will grow. I expect it will be healthy. It will allow us to invest in it, grow with it, keep supporting it, and yet still be a cost-efficient solution for the retailer. Because the historic private-label competitors -- we may get a regional one here or there, but there is no national one that can cover a national account on a cost-competitive advantage to us. We will have a real competitive advantage because we have mines in Taft, California; in Mississippi -- both Blue Mountain and Ripley -- and then in Ochlocknee, Georgia. And so that's a hell of a moat. That's a hell of a barrier to entry.

Yes. That's terrific. I mean, it's the first time in a while that in your looking-forward commentary, you kind of talked about the challenges that you faced. I know the glass is always half-empty to you, and I appreciate that, but some of the challenges that you faced during the last half of fiscal 2014 moderated, which -- you know, it's basically vaguely commentary, which was nice to see.

And I would just say the glass is always 2% empty for me.

Okay.

But I want that 2%. (laughter) I mean, I -- honest, I get it. We are doing very well. We are not half empty. We are a little bit empty, and we are going to do everything that we can to fill that glass.

Yes. Well, we appreciate it and look forward to better things ahead.

Good. Thank you. And I think, Whitley, we will close the Q&A lines. We are at our time limit. I will tell you, thank you for your interest. The questions are right on target with where we see the strategy of the Company.

Doug is pointing something -- oh, yes, we've got our annual meeting of shareholders tomorrow at 9:30 at the Standard Club in Chicago, if you are in town, or hopefully you have already RSVPed. I will tell you, fortunately, we have enough votes in place, so you will not see a shakeup at the Board level or the senior management level. Fortunately or un, depending on your perspective of the whole thing.

But my mom and dad's ballot did come in. And they voted for us once again, so that was good. Thank you, guys, and we will talk to you in a quarter.

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