Oil-Dri Corporation of America (ODC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 Oil-Dri Corporation of America earnings conference call. My name is Tony and I will be your operator for today. (Operator Instructions). I would now like to turn the conference over to Mr. Dan Jaffe, President and CEO. Please proceed.

Thank you, Tony, and welcome everyone to our second-quarter and six-month teleconference for Oil-Dri. And with me in the conference room today is Laura Scheland playing the role of Reagan Culbertson. Laura is our Assistant General Counsel and Reagan is on maternity leave. So congratulations for baby girl [Louden]. Doug Graham is here, our General Counsel and Vice President and our Chief Financial Officer, Dan Smith. And so I think we will cover the Safe Harbor provision.

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

Thanks, Laura. And, Dan, will you cover the quarter and six months?

Sure will, Dan, thanks. Good morning, everyone. Oil-Dri's sales for the second quarter of fiscal 2015 were down 7% to approximately $65 million and our year-to-date sales were down about 2% to about $131 million. Our second-quarter gross profit percentage was better than the first quarter 2015 due to improved sales mix.

Our EPS was $0.39 per diluted share for the quarter, was down from $0.60 earned in the second quarter of fiscal 2014. Year to date we have generated EPS of $0.69 versus $1.01, EPS in the first six months of fiscal 2014.

Our gross profit percentage for the quarter was approximately 24% which was comparable to the second quarter of fiscal 2014. An improved sales mix and a 23% reduction in the cost for natural gas used at our manufacturing facilities helped to increase our gross profit percentage. However, increased manufacturing packaging costs adversely impacted our gross profit as compared to the second quarter and the first six months of fiscal 2014.

Our retail/wholesale business team reported 6% sales decline for the quarter compared to the second quarter of fiscal 2014. Year to date retail and wholesale sales were flat with the first six months of fiscal 2014. Earnings for retail and wholesale group were down for the second quarter and year to date as compared to the same periods last year, higher packaging, manufacturing costs along with reduced branded cat litter sales all contributed to the income decline.

On the positive side sales and income grew for our industrial products which helped both the quarter and the year to date values. Also we introduced our new Cat's Pride Fresh & Light Ultimate Care and new lightweight private label cat litter products at the end of the second quarter. We anticipate these products will provide opportunities for sales growth in the second half of fiscal 2015.

B2B sales were down 9% for the quarter and 5% for the first six months as compared to fiscal 2014. Sales of fluid purification products and co-packed cat litter were down for both the quarter and year to date. Sales of ag products were down for the quarter. Partially offsetting the sales declines were improved sales for our animal health and nutrition products.

Really the sales reductions were the primary drivers for the income reduction for the quarter and first six months for the B2B team compared to fiscal 2014.

From a balance sheet perspective, our cash and investment balance at the end of the quarter was a little under $14 million which was up about $3 million from the end of the first quarter of fiscal 2015 but down about $6 million from the second quarter of fiscal 2014. Year to date our capital expenditures were up about $3 million from the same period in fiscal 2014. Thanks. I will turn the meeting back over to Dan Jaffe.

Great, thank you, Dan. And, Tony, at this time we would like to open up the lines to Q&A. As always I would like our participants to just ask their most important question first and then go to the back of the queue so that everyone has a chance to ask at least one question. Thank you.

(Operator Instructions). Robert Smith, Center for Performance Investment.

Could you give us some color on what is happening in China?

Sure. So I would say a bright spot for the first six months has been our performance in the overall Amlan business with particular strong performance in Asia in general. No doubt having feet on the street and real senior management focus with Ron Cravens -- Dr. Ron Cravens living in China now is paying off. It is still in the -- I will call it the ramp-up phase, but growing nicely and still giving us every reason to believe that was a good investment and will pay off in the future quarters.

Dan, how many are on staff now?

I think about 10, I think.

10 full-time?

10 full-time.

Okay, sounds right.

Thanks, I will get back in the queue.

[Ethan Star].

Given the poor reviews that the competition's lightweight litters have been getting, what will you be doing to differentiate your Cat's Pride Fresh & Light litters in the marketplace?

Great question. So we were just at the global pet show down at Orlando and I can tell you lightweight was all the rage. It was very gratifying because as being the inventors of lightweight litter that felt very good.

And you are hitting the nail on the head. I mean, our approach to lightweight is everything in the product has to perform and be something that is helping to contribute to either odor control or clump strength or low dust, I suppose. Those are the major performance attributes.

Our competitors unfortunately have taken a tact that says, really we are going to take what is a good cat litter and then dilute it with lightweight fillers, we are going to put stuff in there that does not control odors, does not help the clump strength and certainly doesn't reduce dust, it merely helps the scale get lighter. So they are putting in lighter aggregates in there that don't perform as a cat litter.

So we have started a two-pronged approach, the umbrella is light done right, that is our mantra. But then underneath that is the science of no fillers added. And so, at the tradeshow we were all in lab coats and we were bringing the obvious presence that science matters and we were doing demonstrations, live demonstrations for all the major accounts and got a lot of wows. I mean they saw the difference of what happens. And we put a lot of these demonstrations out on the web for them to also access on the Internet.

So the concern would be that somehow the inferior products that are out there would poison the well. That consumers would try lightweight and say, boy, lightweights don't work. We are not seeing that at the moment. What we are seeing is that the selling proposition of lightweight is so compelling that it is such a major consumer frustration of how heavy cat litter is that they are staying with it and they are willing to try it and even the inferior products are selling at high prices.

So to me that validates the proposition that light weight is here to stay. And pretty much all of the retailers agreed with the general proposition that over time the whole category is going to go lightweight. The whole category in liquid detergent went concentrated, and that at some point in time you won't see any of the heavies. Everyone is going to have to reformulate and give consumers the performance they want at the price they want but with the light density.

Okay, are these demos available to everyone on the web?

I think so. I think they are out there -- I think they are out -- yes, I don't know what you need to Google. Maybe we can figure out how to --.

I will take that off-line. But I'm concerned basically -- I don't want people to just give up on lightweight if they try a competitor and they don't like it.

Totally agree. And fortunately at the moment we are not seeing that at all. The ramp-up rate is continuing to see it. I think we mentioned in the news release that literally 225% of the year-over-year growth in the category is in lightweight.

Lightweight at its current ramp-up rate will pass the coarse segment in about four to six months on a running rate basis at its current ramp-up rate. So we will see how that happens. And for the first time in 20 years, the scoopable segment of traditional heavy scoopable is in decline.

So you are seeing people switch to lightweight, which is very gratifying because, like I said, for the last 20 years since scoopable was launched it was growing every single period, 2%, 3%, 4%, 5%, 6% obviously more early on. And now it is actually declining. And so you are seeing the consumers change.

And, look, the retailers want this thing to change because they can put more units on a truck, they can bring in less trucks through their DCs. It is easier for their teammates to handle the product getting it onto the shelves.

Frankly, what we didn't even realize and they fed back to us at the show, it even expands the amount of retail space they can dedicate to cat litter because the heavy stuff they could never put on the top shelf because they were afraid of consumers trying to pull that down and getting hammered. But when it only weighs 12 pounds that can be a top shelf item. 20 pounds they weren't putting up there, 12 pounds they will put up on the top shelf.

So now they feel like they just got an extra 10%, 15%, 20% of retail space to dedicate towards what is a very high profit high-growth area for them. So the retailers want it to succeed, we want it to succeed and the consumers want it to succeed. I really believe it is going to succeed.

Okay. The press release mentioned new product start-up costs for branded cat litter. Is that machinery slotting or what?

You broke -- I missed your -- new product what costs?

New product start up costs.

Oh. I mean it is all of the above. Certainly on a promotional side or a trade side the slotting that it takes to get the consumer or the retailers to put it on shelf and display it and so forth and so on. And then the plants obviously, it's a ramp-up and a learning curve and you get better over time. So we are not going to be as good today as we are going to be a year from now and two years from now. So, yes, it is all of the above.

Okay, I will get back in the queue.

(Operator Instructions). Robert Smith, Center for Performance Investment.

So, then, what are the prospects for private label lightweight?

Great question. So I think I mentioned this formerly on previous calls, that we've had about a 2 share historically and very low profitability because we really weren't basic in the raw material that made up the historic private label lightweight -- private label scoopable segment, which is sodium bentonite. So we would have to source it like our competitors, a lot of them.

But it was not something that we were really operationally excellent at or had a low-cost or really at it. So it was very little margin for us. So a 2 share. We have already got commitments and/or are shipping retailers that represent 19% of the category.

So what does that mean to you? That means if 100% of the category went light weight, if scoopable private label went light weight we would have a 19 share. Well, it isn't that way yet.

So really what you can say to yourself is we have a 10 share because we have gotten a lot of the heavyweight business along with the lightweight. Because now we are supplying the lightweight and they didn't want to have two suppliers. So they gave us the heavyweight business too and we are hoping -- we are making money on the heavy but we are making good healthy margins on the lightweight because we are basic in it.

We have plants all the way from the West to the East Coast, so we have a low-cost, high-quality business model. And so I took a little look at the top retailers, the top 12 retailers, I didn't go through the whole laundry list. But the top 12 retailers represent about 68% of the private label scoopable category, okay.

And of those, like I said, 19% we are already shipping or are committed to ship and we are just working on the packaging and when they're going to cut it in and so forth and so on. 22% more were pending and feel good -- real good about. We are getting all the signals that we are going to get it but we don't have it yet.

So you have got 19% firm, I call that green; 22%, I'd sort of call it orange, if you want. Another 22% are we in play on and then only 5% have said no to us. So we have lost 5 of the 68, we still are in play or have commitments from 63% of the 68%. Does that help?

Yes. I assume that shipping begins very late in the quarter or will we see the preponderance of this in the third quarter?

No, not preponderance, you will see a continued ramp up. Your first part of your sentence was correct, very low of it hit the quarter in the second quarter. There is more ramp up going on in the third quarter. We are expecting more ramp up again in the fourth quarter with other green accounts, accounts that are committed. And then a lot of what I am talking about in the yellow and so forth categories, that is not going to hit until fiscal 2016.

Okay. And then just circling back to animal health and nutrition. In prior calls we have talked about the trials that products have been involved with and I was wondering if you could give us an update on that.

I really can't. I think what I will do is I will commit that Ron Cravens I think was on that call in particular and I will commit to having him come back and give you details. Because for me to give it to you second or third hand, I would just get myself in trouble.

On the next call?

I don't know. I mean he is in China right now, so I mean I -- I will work on it, Bob. Look, I am not trying to duck you. I am better off getting you the right answer. So maybe on the next call, hopefully on the next call, if not the next call the one after that, let's commit to that.

Okay. And as far as the geographies go where was the strength more apparent in this past quarter in animal health and nutrition?

Asia. I mean, clearly Asia was very strong where we have direct and now we have tried to replicate the model of where we don't necessarily have direct employees but we have dedicated employees through an agent and some other Asian markets. And it is working very well. So having a physical presence there is absolutely helping us grow that business.

And we should see further strong growth throughout this fiscal year?

In animal health?

Yes.

Yes.

Okay. All right, thank you.

Ethan Star.

Yes, can you identify any of the customers for lightweight private label or do you not care to do so?

It is sort of somewhere in between. Some of the customers we have a confidentiality obligation, so until they become material in the eyes of the SEC we really can't disclose who they are.

But I do think, I have told you that there are numbers of them in the top 12. And I have also -- let me give -- put a little more meat on the bone here. I have told you our approach to lightweight is to have nothing but clay -- perform -- absorbent minerals --

Sure.

in the product. So if you go out to the retailers, there is only one that has not taken us, like I said, of these top 12. And you just look at what they are selling. The one who didn't pick us picked a company that is blending recycled newspaper shreds into the products. You can literally see red and blue and yellow newspaper in the product.

And it doesn't perform -- the newspaper doesn't perform, the clay they are putting in does. But they are diluting the performance. Everybody else when you go on shelf and look at it you will see clay and you will know we are making it.

Interesting.

So -- yes. So I will let you do that. It will be a fun little mystery, yes, scavenger hunt. So you will know instantly two we are doing and who we are not doing.

Okay. So there are people who have not (inaudible). I am really surprised about that.

I was stunned and it is actually an account we have a good relationship with, they just decided to go -- they thought light in their mind is more about recycled than it is about performance. So they were leaning towards we would rather see recycled newspaper shreds and there, that is what the light customer is going to want. I don't agree with that. I think that it is an alternative approach and the mainstream customer wants a performing lightweight litter.

Sure. Understandable. I think there was -- I am not sure that I have this right, but there was a project to add capacity in Ochlockonee I think maybe for a fluids purification. Is that done?

It is in the final stages. We are probably thinking it is going to come online --.

August.

By August 1 to begin with our new fiscal year.

Okay. In light of the I guess better crop this year for soybeans does it make sense to have more capacity? I mean, you never know what the crop is going to be like. But it seems like capacity -- sales were down on that [field area]?

Well the beauty -- look, if we had a crystal ball, no. I mean, if we knew the crop. But it is a cyclical thing, that is what we tried to point out. So, yes, if this cyclical change becomes a permanent change and they never, ever need to use the same quantities of [bleaching earth] that they used in the past. And no, we are not going to need this for a while, it is still a growing market.

As the world continues to want to eat more like Western civilization they went more and more processed oils. So, but we don't believe that. We don't believe that all of a sudden what's been cyclical forever is now going to become a permanent change. So next year all of a sudden the crop could be bad and all of a sudden they could be needing a lot more clay and we will look like the smartest guys on the planet. So you never know.

Okay, roughly what percentage of the time do you have a crop like this past year that was better than average or really quite good?

I don't know. I really don't know. To me it seems like it is every four years or something like that. I remember this happening, but I don't remember it happening last year or the year before. So maybe once every four or five years it seems to go this way. But that is just me talking.

Sure, it could be different. Okay. And I assume the pricing on that is better than average?

The pricing on --?

The product.

(Multiple speakers)?

Yes, better than your average ton?

Let see, so it probably represents our average pricing. The margins tend to be a little better; I mean you can definitely make that conclusion. I mean as you guys well know, I mean the majority of our business is in cat litter and yet the majority of our gross profit is in B2B.

Sure.

Literally the B2B's have always had higher margins than -- gross margins than the cat litter. So, yes, bleaching earth has always been a healthy product line for us.

Okay, I will get back in the queue. Thank you.

Jim Schwartz, Harvey Partners.

Could you just paint kind of the revenue opportunity in private label -- lightweight private label? I mean you talked about the percentage that you are targeting, but what is the long-term revenue opportunity here for Oil-Dri?

Yes, I guess I will lead you guys to water and then you guys are going to have to make your own conclusions. But I mean what I am looking at is the total private label scoop segment, this is in the United States all outlets at retail for the last 52 weeks is $245 million, okay.

I will tell you based on my personal experience, but there is no way of knowing what this number is in exactitude that they tend to average about 40% margins. So if you take 60% of that number you are almost at $150 million, that is what is available at wholesale to manufacturers to compete for. Okay?

Yes.

That's in revenue. And as I said, historically we had about a 2 share and made very little money. So you would say maybe you were selling $2 million $3 million a year of that stuff and you weren't making a whole lot of money, it wasn't having a big financial impact.

So we have already got commitments from accounts that represent 19% of the category. So if you said to yourself, well, if the whole category goes lightweight, okay, then 19% of that number -- if it doesn't grow private label, and I actually think it is going to grow the private label segment because I believe we are giving the best quality that private label has ever had.

It is not even national brand equivalent. When you cut against national brands it does better. So, but, let's just say it holds its share. So you take 19% of that and instead of getting $3 million in sales you are at $28 million in sales. And instead of making no money you are at good margins, good healthy margins, good Oil-Dri margins, okay.

So that is just on what we have already presented to and been committed. But as I said, of the 60, the top 12 accounts represent 68% of the market. 63% of them have either committed to us or given us a signal that they are going to commit to us or we are on the early stages, but everything seems to be moving in the right direction.

So, are we going to get all of that? No. Maybe you say well you are going to get the 19% you already got. Let's say you get 75% of the ones where you feel really good, so that is another 15 points, so now you are at 34. And let's say you only get a third of the ones that are a little farther out so you are going to get seven more or something. You can get a 40 share.

Well, now do the math. I mean, so now if you have a $150 million market sort of and we end up with 40% of it, now you are at $60 million.

Yes.

That is a big number. At the same time our brand is growing and we have always known there is a strong synergy between our brand and private label partners. When we are doing their private label we tend to do better with our brand at those accounts because the efficiencies are better for them. They can order pallets instead of full truckloads of our brand. And we are a partner so they are more likely to listen and want to participate.

So it is a huge win opportunity, it is all moving in the right direction. I would say if anything it has had a negative impact on earnings so far, and that is just me talking in general. But we have had to spend all these ramp up costs, all the things we are doing and we have had very little shipments thus far. So the best is yet to come.

Yes. I mean it looks to me like just the progression of -- I mean our gross margins should, just from reading the words in the press release, it sounds like gross margins should benefit a bit in the back half of the year.

But also at some point you are talking about potentially a 25% sales boost just from this private label. I mean, all these initiatives you have been taking that have been all cost and no revenue at some point will cross over to be revenue with not as much cost. Fair to say?

Very fair to say. Clearly we are going to have to keep investing some capital to keep up with this $50 million, $60 million --

Right.

-- as it starts to come in. I would say as you are doing your models you could -- if you wanted to say, well, look, I will just guess that this stuff will be average margin to Oil-Dri. So they are making 22% -- let's say they are making 22% on the $60 million, I'm not saying we are or we aren't, I'm just saying if you are doing your models whatever.

But if you look on net income, I mean, we have been making anywhere from 4% to 5% to 3% net income. And so, if you instead say, okay, well, that is the gross, but this stuff is private label. There is no marketing beneath it.

Right.

There's maybe -- you throw a small percent commission where we have a broker put a 1% or a 2% commission again on that. So if you are making [22%] and you are paying 2% in commission you are dropping 20% to pretax, now all of a sudden at a 28% or 30% tax rate you could be showing 14% net income on this stuff when the Company has been historically making 4%. So you can start to see what it could do to the bottom line.

Yes, that's -- all right, from your lips to God's ears. Sounds good. Dan, thanks very much. Looks like the hard work is starting to pay off.

Well, yes, and look you guys have been -- everyone on this call have been loyal, loyal long-term supporters. And we don't give forward guidance, but I felt it was important to kind of give you a glimpse behind the curtain here so you can see why we are so excited about it. It could all be nothing, I've got to say that and we have given the Safe Harbor. But you've got to -- you would have to convince yourself that lightweight is not going to take hold and nobody believes that at the moment.

And then you'd have to say, well, okay, somehow lightweight takes hold but Oil-Dri, who has got the largest body of reserves and well distributed quality and quantity throughout the United States, somehow doesn't participate in the market they have already been participating in for the last 60 years. I mean it really -- you know me, I get excited about anything. But I am very excited about this opportunity. It fits with who we are.

Thanks again, Dan.

I would like to thank everyone for participating in the question-and-answer session and now turn it back over to Mr. Dan Jaffe for closing and any or additional remarks. Thank you.

Great. Well, thank you, guys, and look, I think I summed it up well there at the end of my response to Jim. We are very excited about the future. And we'll be at you next quarter. If Ron Cravens is in the country he will participate, if not I will make sure he is in the country for the next one. So in the meantime be safe and thank you very much.

Ladies and gentlemen, thank you so much for your participation in today's conference call. You may now disconnect. And everyone have a great day.