Oil-Dri Corporation of America (ODC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q3 Oil-Dri Corporation of America earnings conference call. My name is Mark, and I will be your operator for today. (Operator Instructions)

I would now like to turn the conference over to your host for today, Dan Jaffee, President and CEO. Please proceed.

Thank you, Mark, and welcome, everyone, to the third quarter and nine months investor teleconference. I am surrounded by lawyers and accountants here, so I am the envy of all. I have Laura Scheland, our Assistant General Counsel, who is also covering the investor relations duties, and Dan Smith, CFO, and Doug Graham, our General Counsel. And, Laura, will you walk us through the Safe Harbor?

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 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, Laura, and, Dan, if you would take us through the quarter and nine months.

I will. Thank you. Good morning. Oil-Dri sales for the third quarter of fiscal 2015 were down 3% to approximately $65 million, and year-to-date our sales were down about 2% to $196 million. Our third-quarter gross profit percentage was better than the third quarter of fiscal 2014, due in large part to lower natural gas costs.

Earnings-per-share of $0.19 per diluted share for the quarter was up from the $0.10 earned in the third quarter of fiscal 2014. Year-to-date we have generated $0.88 of EPS versus $1.11 in the first nine months of fiscal 2014.

Our gross profit percentage for the quarter was approximately 22%, which was better than the 21% for the third quarter of fiscal 2014. A 37% reduction in the cost of natural gas using our manufacturing facilities helped our gross profit percentage. However, increased nonfuel manufacturing and packaging costs negatively impacted our gross profit in the quarter.

Also, the increased value of the US dollar has adversely impacted our sales and margins in fiscal 2015. We have estimated a negative direct and indirect impact of the currency change to be about $900,000 of pretax profit for the first nine months of fiscal 2015.

Our retail and wholesale team reported a 4% sales decline for the quarter compared to third quarter of fiscal 2014. Year-to-date retail and wholesale sales were down about 1% compared to fiscal 2014.

Earnings for retail and wholesale group were up for the quarter but down on a year-to-date basis versus the same periods last year. Higher sales of our industrial products, lower consumer advertising expenses and lower natural gas costs help to drive the profit for the quarter. Reduced branded cat litter sales, higher nonfuel manufacturing costs and higher packaging costs partially offset the positive factors.

In the B2B area, B2B sales were down 3% for the quarter and 4% for the first nine months as compared to fiscal 2014. Sales of fluid purification products and coal pack cat litter were down for both the quarter and year-to-date. However, sales of our ag and animal health products experienced growth for both the quarter and year-to-date values.

Operating income was up about 25% for the quarter and flat on a year-to-date basis as compared to fiscal -- the same periods in fiscal 2014.

From a balance sheet perspective, our cash investment balances at the end of the quarter were a little under $15 million, which was up about $1 million from the end of the second quarter of fiscal 2015, but down about $5 million from the same period end of third quarter of fiscal 2014.

Year-to-date our capital expenditures were up about $700,000 for the same period in fiscal 2014.

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

Great. Thank you, Dan, and at this time I would like to open up the lines to questions and answers, and as always, ask your most important question first and then go back to the end of the queue. This allows everyone the opportunity to get at least one question in.

So, Mark, if you could open up the line.

(Operator Instructions). [Ethan Star].

Reading the 10-Q, it appears that retail sell-through for Cat's Pride Fresh & Light and other of your branded litter products has been suffering. How is the retail sell-through for Cat's Pride Fresh & Light and your other branded products, including the Ultimate Care product?

Yes, you are reading it correctly. It is very, very competitive at shelf right now. I know you do retail. I am not sure if other people on the line bothered to get out to the cat litter aisles.

But I guess the good news side of it is all the major competitors have launched lightweight cat litter products. So Arm & Hammer, Fresh Step, and Tidy Cats has multiple flavors now of lightweight out there. So, it is highly, highly, highly competitive.

The good news is the lightweight segment is growing rapidly, and we are continuing to see our business stable/hanging in there with these guys as it is getting very aggressive at shelf.

Okay. But you have the best product. You have -- what I have seen for my retail observations, you have the lowest price products before discounting, and yet obviously you can't compete with your -- you never compete with your competitors on just how much money you can pump into the marketing, but certainly you can do more to get free media.

Yes, we could always do more. I am not -- I would agree with that.

Okay. So your response to this retail sell-through decline is what?

What I just said. I mean it is very aggressive at shelf. So you are talking about competing in a -- everyone is focused right now on lightweight. It is growing over 100% a period. It is doubling more each year over year. It is up to now 18% of the category from 2% two and a half years ago.

So, you are talking about just a massive landgrab, and it is what everybody's focused on, and we have a 15 share of that. Our historic share of the scoopable segment was about 4% to 5%, maybe 6%. So, if the whole category goes lightweight, it is a big win for us. We see our share more than double, really go up 2.5 times, and then our historic share or private label lightweight scoop was tiny. It was under 2%. And, as I mentioned in the last call, we now have about -- we had 19% last period. We have now added not enough to approximate close to 25% of the category.

So, from our vantage point in the long run, it is a win, win, win. In the short run, it is you are in the heart of the battle right now, and this is not for the queasy. So, the team is engaged. The team is fighting, but trust me every ounce of real estate is being fought over at the moment.

Okay. Let me understand these two numbers here. You have 15% of the lightweight retail market is in branded?

Yes, right.

Correct? Okay. And you now have commitments from 25% of the private label scoopable category?

Correct.

Okay. Thank you. I will go back in the queue.

Okay, thanks. And the 25% I said was approximating. It is not an exact number.

John Bair, Ascend Wealth Advisors.

I had a question on the -- since there is a lot of shelf space battle, are your volumes -- overall volumes increasing, and so that the sales and revenues being off a little bit is more due to pricing as opposed to volume shipments?

Good question. If you combine all of our lightweight offering -- so a year ago, all we had was Fresh & Light, and this year now we have Fresh & Light and Ultimate Care, and we have seen some switching of customers from Fresh & Light to Ultimate Care. So, there has been some cannibalization.

I would say the volume, the unit movement, and I would -- unfortunately I have the dollars in front of me. I don't have the IRI data on units, so I guess I better not answer that question. I don't have the unit movement in front of me. So I really -- I can't answer that question.

Okay. And with regards to your CapEx spending, is the fourth quarter anticipated about the same level? And then what are your expectations for 2016? Will these numbers drop off? You have been pretty active in the last couple of years?

You know, I think -- this is Dan Smith -- I think the fourth quarter is going to be in the ballpark of the third quarter plus or minus, and in terms of fiscal 2016, we are working currently on the budget. So I am not prepared to have an answer on that question as of this time.

Okay.

And my belly button is that I would expect it to be lower than this year. So, that's a reasonable expectation.

Okay. And then a quick follow-up and then I will get back in the queue. So, would some of the lesser capital expenditure dollars possibly go into additional marketing?

It's good question. I mean it is not a one for one, but, yes, we're going to have to keep fighting the fight and getting people to try. We know when we get incentivized trial that we get great usage and great repeat. So we have great products, as Ethan mentioned. So, there is no doubt this is going to continue to be a battle.

Having said that, you saw the margins pop back a little bit this quarter, and that trend should continue again as we are trying to be more mindful of where we spend our marketing dollars in the middle of the storm. We could -- you can't get the incremental shelf space right now. Everybody is fighting for it. So, we could give the product away and then we would, obviously.

But it just isn't -- it is being very battled over at the moment. So I am not -- I'm not so sure how much our marketing will go up next year, not because we wouldn't want to do it, but there wouldn't be a good return on it. And so what we do spend, we will get a good return on, and we're just not going to give the product away. And especially as the lightweight private label continues to ramp up, we should start -- we will benefit from that where our branded national players don't participate in that end of the market.

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

Robert Smith, Center For Performance Investing.

Could you give us some color on the animal health and Chinese development market?

Yes, I will give you a little bit, but I will also commit I think you raised this flag last teleconference, and Dr. Ron Cravens will be here live for the next teleconference. So he will answer in detail your questions, and he will be able to talk about the year then.

But we had a good quarter at Amlan. We are continuing to see the business ramp up, albeit always at a slower rate than any of us would like. We would all like to be seeing all growth rates greater, but we are continuing to see all the trends and all the product performance attributes that led us to get into China in the first place. So our product works very well in swine production and in binding zearalenone and other toxins. And it is continuing to perform in the marketplace.

So, I guess the best thing is just to say things are continuing along the same line, and Dr. Cravens will be here in three months.

All right, Dan. What is the differential between what your expectation was and what you saw?

I mean I don't really -- we don't talk about our expectations in terms of dollars amount. It is just the general terms I gave you are going to have to suffice. We don't give (multiple speakers).

No, I mean you said you were disappointed.

No, I think we all are. I was just talking in general. Any time you start up anything, everyone who tells me it always takes longer and costs more. Guess what? We fell right into that.

So, but the good news is (multiple speakers).

But are there any particular obstacles?

No, just all the obstacles of starting an organization thousands of miles from your base in a foreign language, in a foreign currency with customers who are used to doing business with other folks. So, all the -- nothing you couldn't, wouldn't have anticipated.

Thank you, Dan.

Ethan Star.

Did the China subsidiary at least breakeven in the quarter?

I believe last time we talked about that we were not anticipating the China subsidiary as just the location to a breakeven until fiscal 2016 is the guidance I provided. If you look at the total China sales, they are positive in terms of contribution, but then you get into transfer pricing and those types of things that I am not going to talk about on those phone calls.

Okay. How much money has been saved in the cat litter division since mid-April?

That's not a -- we are not going to answer that question.

Okay. But you have been saving money?

You are starting to see the margins come up, and you should see that continue trend, which is what I said.

Okay. Just out of sheer curiosity, I know it is up a bit, but you say that resin price is coming down, but how much is one container for one jug of cat litter cost? Is it $0.01, $0.10, $0.25, I have no clue?

I think it's less than $1, but I don't know right off the top of my head either.

Definitely less than $1, but I don't know that off the top of my head either.

Okay. Thank you.

Jim Schwartz, Harvey Partners.

Just some of the math that you guys gave last quarter just on the private label market over time, you still -- that $60 million potential revs with 14% drop down to net income, [20], whatever, [2]% pretax. Those are all legit numbers that over time you hope to achieve. Correct? Those are big numbers.

Yes, those are big numbers and the math is correct, and it always going to be -- I think the thing we all have to understand is that private label is going to be a lagging indicator. It is not going to be a leading indicator. Meaning innovation starts with the brands and then as consumers get comfortable with it, you can look at liquid detergent or, yes, the liquid laundry detergent, same deal. When they went concentrated, it started in the brands, consumers got comfortable with it, and then got to the point where the private labels followed in and the ramp-up rate has occurred.

I can tell you what happened in scoopable 20 some odd years ago was eventually private label approximated 20% of the category and 80% was brand. So, if that happens here, that math is absolutely accurate. There is no reason to believe that it won't happen, but it is going to take time. Consumers tend -- the consumers who are into innovation, it comes through the brands to start. That's what TV commercials are saying. It is everything we are seeing, and then eventually they will start to say, hey, you know what, I want to save a little money. I'm going to try these other products.

The good news is we can show through laboratory demos -- and we do it out on our website and so forth -- the private label scoopable offerings we are giving our retail partners outperform the national brand, outperform Tidy, by the way.

That's what I wanted to ask you about because it sounds -- look, you guys are the only ones who actually have lightweight clay, correct? It's a lightweight -- you are actually manufacturing lightweight cat litter. You've got other big brands throwing in newspaper, print and dolomite, whatever they're doing, so it's not absorbing the same.

I guess, what happens when the private label outperforms those brands? Then I guess private label gets more and more share to your point?

Yes, I mean in Canada it is almost 40% of the market is private label. And, so, they have always had President's Choice, and it has been more of a private label driven market. But that was -- Europe has always been more private label.

Yes, for whatever reason, the competition has chosen to go lightweight by putting nonperforming lightweight things in the jug. And you touched on -- you got one sort of backwards. It is perlite. The dolomite actually made it heavier. That was another competitor who was (multiple speakers).

Right, right, right, purolite, right, exactly.

But you got the concept. The concept is they are saying all I need to do is make this jug lighter and I can claim lightweight and you can claim anything you want. But the problem is the use up rate is so much higher because 50% of what's in that jug isn't performing. So, the consumer has to buy twice as much to get the same job done.

It would be -- the equivalent in the liquid detergent analogy would be if the way they got concentrated somehow was just taking out half of whatever was in it. So instead of doing 40 loads, now you could only do 20. And the competitor is sitting there with 40.

Well, right now there is no real communication. We need to get to that, either clumps or uses or something which will highlight in very tangible terms for the consumer, you buy the other guys, and you're going to be using up twice as much material as ours. And, oh, by the way, theirs cost more. So not only you paying more, you are using more.

I have done the math, and if a consumer were to use our lightweight brands, they would spend roughly given the amount they would use and how many times they would buy it a year, roughly $90 a year. And if they buy Tidy Cats Lightweight, they are going to spend $270, 3 times the amount, because the use of rate is so much faster and it is more expensive. So, it's a double whammy.

But you also have the flip. You could have retailers saying, well, great, what do I care? If I can turn a consumer from a $90 user to a $270 user, I'm actually going to grow my category. I think that's a shortsighted win because eventually the consumers are going to say, what happened to my budget? I was spending $90 a year, $100 on cat litter, and now I am spending almost $300.

So, we will see. It is a crazy shootout right now, but I can tell you when we were sitting back four years ago knocking over the first domino with the launch of Fresh & Light, this is playing out as well or better than anything I ever could have imagined. They are all jumping in, and they are jumping in, most of them, with inferior performing products at higher prices.

(multiple speakers). Yes, oh, sorry, go ahead, Dan.

I was going to say shame on us if we can't continue to win in an arena where we have better products at better prices.

I was curious, last question, where else can you source lightweight clay outside of you guys?

Well, I mean there is plenty -- look, there are plenty of minerals out there that are lightweight, but that are lightweight and absorbing, there aren't many. And so the best one that I know about -- I am not a clay mineralogist; I'm an accountant, but I have been in the business for 20 some odd years -- the best ones I know about are the calcium bentonites and ours is a [diannamite] mix out in the West. Those are the best lightweight absorbing naturally controlling odor clays. That's why they have been the basic of cat litter for 70 years.

Perlite never sold a pound into cat litter because it doesn't work ever for 70 years, and now because the lightweight, it is light. It is nine pounds a cubic foot print. It will blow right out of your box, but that's all it does. It is not a cat litter. And newspaper, shredded newspaper, not a cat litter.

I can go on and on. Cedar, just putting cedar chips, cedar, not a cat litter. So, it is interesting. I think in my humble opinion they have made a mistake, and we will see what happens. We will see how it plays out.

Yes, thanks, Dan.

John Bair, Ascend Wealth Advisors.

Well, after that explanation you just gave, you need to get that story out somehow in a very visible manner. So, I think that is pretty compelling.

My question is, with regards to your natural gas, what is your -- how rapidly are your prices adjusted? Is that on a monthly basis and it is like with the consumers where there is a lag time either going up for cost recovery or how does that work?

No, we do not hedge our natural gas, so --.

I know that. That was not a very good deal a few years ago. I remember that quite well. Okay.

Our prices adjust with the market based on the wellhead. So we have the wellhead plus the delivery plus taxes type thing. So whatever the market is doing, we adjust with it.

For the month.

For the month.

I think it is the last three days (multiple speakers).

It is just okay. Because I know at the residential level, there is a lag time typically. Obviously, the prices if you're in a variable adjust month to month, but I think that there is a lag on a catchup if there is a big spike or whatever. So, I was just wondering how quickly your prices are adjusted?

My understanding is it is the last three trading days of the month. I think is the average of that become our price for the next month.

Okay. Okay. Very good. And I guess one last real quick question. You got quite a number of mines that you both lease and own. I was wondering on those given the nature of the clay types, do you carry those on your books at cost, or do you have to mark those to market or some kind of fair market value?

The actual minerals in general are not carried on our books. In general. When we had a business acquisition, then we had to value some of the minerals in the ground. But the vast majority of them are not carried on our books. Some are, but the vast majority are not. And the ones that are carried on our books are carried at cost.

Okay. So, if you acquire a mine -- well, okay, so if you acquire a mine, you do at that point have to make some kind of market value for the minerals, or is it just basically the property value itself?

It is if you acquire a business because we are often leasing and buying land and types things. So typically if it is just purchase of land, we put it down as land. But if you buy an actual business, then you have to allocate a portion of the cost of the acquisition of the business to the minerals.

Okay.

And various other things.

Okay. That's quite interesting. Okay. Thanks very much.

Robert Smith, Center For Performance Investing.

Dan, about 18 months ago, you indicated that you had certain trials going on I think (inaudible) for additional important uses, and I don't know whether some kind of trials. And you said that by 18 months, we should probably have some kind of a reading on that.

So, could you just give us a little more information about where we are with those important indicators?

I am going to leave that for Ron. I really am. So, he will cover all that on the next teleconference.

You can't say anything about it?

What's the point? He is so much closer to it than I am that he will give you real detail -- you are way better off asking him than me. Me, you're getting a filter. I am reading his reports. I am talking to him. But he is the guy you want to talk to you.

So, let's make the best use of his time. He is going to be on the call in three months.

Okay. Well, I hope you might consider expanding the call time maybe for the next visit. Thanks.

Ethan Star.

Are you selling either the branded or private label lightweight scoopable into Canada at all?

Yes.

Branded or private label or both?

I'm not going to get into the details of it just from a competitive standpoint, but, yes, Canada is a market. It is trailing the US. I would say lightweight is less than 2% of the Canadian market at this point, but there is no reason to believe the Canadian shoppers or Canadian cats are that much different from US shoppers and cats. So it got launched here.

It will trail us, but we believe it will show the same long-term opportunity.

Is there any lightweight competition up there? No pun intended.

Tidy Cats Lightweight just launched up there, and I think it's on the shelves. I know they have launched. I know they have going to retailers, and I'm pretty sure it is on the shelves. I haven't been to Canada in a while to physically look. But my understanding is, yes, they are up there.

Okay. Thank you very much.

I would now like to hand it off to Dan Jaffee for closing remarks.

Great. Well, thank you, and I appreciate your questions. You guys are asking all the relevant questions that we internally are asking. And the good news is, again, the lightweight is continuing to grow and continuing to be a greater and greater share of the category. It surpassed the coarse, the traditional in the most recent period, which we predicted given the trajectory. We predicted it last time and it happened.

It is -- the coarse grind segment is now under 15%, and lightweight is ever 18%. And so it has blown away the alternatives and all the stuff that is made from organic materials like wheat and corn and all that kind of stuff. And that represents less than 5% of the category.

So, it is growing. The traditional scoop is in decline. It, again, hit another 4%, 4.5%, and it hadn't declined in 20 some-odd years. So clearly the tipping point is coming and is there. As I said, it is more than doubling year over year each period. So, we will report on that again in three months.

And it is all good for Oil-Dri in the sense that we really on the heavy side we were the odd man out. Our minerals are naturally more porous, which makes them more absorbent, which makes them lighter in bulk density, which makes them a better cat litter. And so as the consumer is looking at wanting lighter weight and more performance, it is right in our wheelhouse. And I think it was John who made the point and he is right on, we have to do a better job of getting that word out. We are going to continue to work on that, and we are extremely confident about the future of our participation in the segment, which is great.

So, thank you. In three months, Dr. Ron Cravens will be with us, and we will have some more market detail for you as well. Thanks very much, everybody.

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