Oil-Dri Corporation of America (ODC) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2015 Oil-Dri Corporation of America earnings conference call. My name is Tony and I will be operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to Mr. Dan Jaffee, President and CEO. Please proceed.

Thank you, Tony, and welcome everybody to our fourth-quarter and fiscal year-end teleconference. Joining me in Chicago is Doug Graham, our Vice President and General Counsel; Dan Smith, our Chief Financial Officer; special guest, Dr. Ron Cravens, who runs -- he is the President of our Amlan International animal health division; and as always, Reagan Culbertson, our Investor Relations manager, and Reagan, if you would walk us through the Safe Harbor provision.

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

Thank you for joining us.

Dan, do you want to cover the financial side?

Sure, good morning to everyone. Oil-Dri finished the year with a strong fourth quarter, reporting earnings per share of $0.71 per diluted share. Sales, however, were down about 1% from the fourth quarter of fiscal 2014. For the full year, we generated a little over $261 million in sales, which were down about 2% from fiscal 2014.

Our earnings for the quarter and year reflected an increased net selling price per ton, increased gross profit percentage, lower kiln fuel costs, and lower SG&A. Earnings also reflected the utilization of about $1.7 million of tax attributes. Offsetting some of the positives were increases in nonfuel manufacturing and packaging costs. Our EPS of $1.59 per diluted share for the year was much better than the $1.17 reported in 2014. It was also the second best year for Oil-Dri, trailing only fiscal 2013's record value of $2.07. Our gross profit percentage for the year was 23%, was better than the 22% reported in fiscal 2014.

In addition to the positive items I have already stated, we also saw lower freight costs due to the decline in the price of diesel fuel.

Finally, our earnings in fiscal 2015 were impacted by our tax rate of about 20%, which was lower than 26% reported in fiscal 2014. The F2015 rate was lower due to the utilization of tax attributes discussed earlier. But, we currently believe that our fiscal 2016 tax rate will probably be more in line with our historical norms.

Our retail and wholesale team reported lower topline sales value for both the quarter and the year. Sales of branded products were down, but sales of private label cat litter products offset some of that decline. Sales of our industrial products were strong throughout fiscal 2015.

The retail and wholesale group reported improved earnings for the quarter and for the full year, as compared to fiscal 2014. We did a more effective job in managing our consumer advertising and promotional dollars during the year. B2B sales were up for the quarter but down for the year as compared to fiscal 2014. Sales increased to our users of animal health and agriculture products. Sales to edible oil processors remained down in the quarter compared to fiscal 2014, but the year to date trend moderated in the fourth quarter.

Finally, our co-pack traditional cat litter sales were down for the quarter and for the year.

Reduced costs for freight, kiln fuel, SG&A and improved pricing all helped increase our profits for the quarter and the year compared to the fiscal 2014 values for the B2B segment. Our balance sheet continues to be very strong. Our cash investment balances grew over $7 million during the fourth quarter of fiscal 2015 to just a little bit over $22 million. Our total assets exceeded over $190 million for the first time in Company history.

Finally, we increased our dividend payment for the 12th straight year. We paid out just over $5 million in dividends in fiscal 2015. Our dividend yield would be about 3.2% based on our 7/31 closing price of $26.26 per share and our latest quarterly dividend of about $0.21 per share.

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

Dan, thank you. And before we open up the lines for Q&A, I thought it would be good to just have a little back and forth. Ron, thank you for joining us. The investors requested your presence and you are here, so that is good. You have been with us nine years now and when you joined Oil-Dri, we knew we had this unique mineral because we were sort of stumbling our way into a mycotoxin binding application.

And why don't you walk us through the genesis of sort of the business you inherited and really where we are today and where you see us going?

Thanks, Dan. It is a pleasure to be here and I am happy to kind of go through this. It's quite a journey if you look at it, and particularly in retrospect as we have gone from basically a generic type product, designed or used or marketed for aflatoxin control, which is a single mycotoxin of concern. When I came in, we sat and discussed what we thought perhaps we would like to do, and we wanted to expand this business, maybe look at other applications and find unique ways to grow value in the business.

The basic strategy that was developed at that point is still the one we are following, and that is finding ways to apply the mineral and potentially additives to that mineral that enhance the performance of livestock animals. This is beyond just mycotoxin binding and we've at this point moved forward to cover more than mycotoxin by including endogenously produced bacterial toxins.

All of these things basically are the same from the perspective of they cause damage in the digestive system of an animal. That damage results in poorer performance or health problems, and we are working to mitigate across a broad spectrum of different toxins in that area.

And in going forward, we anticipate that we will continue along these lines, utilizing other functional additives which, for instance, we have just recently started to introduce two new products, NEOPRIME, which is targeted primarily toward the young swine market, and Varium, which is targeted for poultry production.

Excellent. And I know there is a general trend globally away from antibiotic solutions in the food chain, because if it gets into the food chain, then it gets into humans and then we start to resist the antibiotics when we need them. So talk about how our products fit into that trend.

One of the truly unique features of our products and our approach is that we are targeting a point in the pathogenesis of digestive diseases that is not currently being really addressed. Antibiotics work on the bacteria. We target the toxins that the bacteria produce that caused the damage. So, from a pathogenic perspective, our approach and our material is not an antibiotic. And yet, it provides the benefit similar to what an antibiotic would do.

These are certainly areas where we have done an extensive amount of work across the board. We have invested a considerable amount of money in research and specifically the two products that are coming to market now are the result of three years of additional research on our material. So we feel very confident that we have a -- that we understand our mechanism of action. We understand what we are trying to accomplish.

We know that we do not compete with antibiotics, and we know that we provide benefits to animals similar to that.

Excellent. I think our investors are aware that we've opened up an office in China. You spend a good amount of your time there. You've built a team.

Why don't you talk to us about what kind of infrastructure we have now in China and what the opportunity potential is, just in generic terms? But why China? Why did we go to China?

Well, as you have always said, Dan, you go where the opportunities are. We are in the livestock support industry business, and if you want to look at just round numbers, half the swine are produced in China and about a third of the poultry. There is certainly a large population and growing population that is interested in consuming more and more animal protein.

So China specifically has demographics, the economics are improving and certainly the natural animal base for us to work in. All of Asia, actually, is similar to that, as is Latin America, so they are all growing markets for us. China, specifically, we've opened the office. We are now just finished our first full year.

We are about fully staffed. We have a small office in Shenzhen, China across from Hong Kong. We've got five salespeople in the field and we have expanded our distribution base from about three or four into the low teens.

And the basic structure, the basic idea is to take advantage of the distribution systems that exist there through distributors and dealers, as well as targeting larger customers, new integrators, that you could potentially sell in the direct manner. This gives us two options on our commercialization efforts. Additionally, we will be registering and launching the new products there as soon as we can, which perhaps is a point I would like to make.

When we came in, we were not in the food industry per se mentally or from a manufacturing and compliance perspective. But we now have all of the standard global requirements in place for our manufacturing and our products. We are in a regulated environment, so we are limited as far as when and where we can market things based on what we can get approved. And yet we are truly in the human food business, because the animals that we sell to or who consume our products ultimately end up in the human food chain.

Excellent. Well, very exciting; we have barely gotten any of the oink out of the pig, pun intended. We are really at the beginning of this whole thing, and I know we are very excited for the future growth prospects.

I think what we'll do is we will open up the phone line now, Tony, for Q&A. Obviously questions on anything, the quarter, any of our business units, but anything specific to Amlan, Ron, I will send over your way.

Okay.

(Operator Instructions) Ethan Starr.

Good morning. Great quarter. I am curious what percentage of the private-label scoopable market do you think you have now. And when do you expect the private-label lightweight cat litter to really move the needle upwards on Oil-Dri's revenue and earnings?

I know the number. It is a public -- I am looking at Doug; is he going to let me say the number? I think when I tell you the number, you're going to be blown away. But there are -- this number is going to bounce around, depending on which accounts we have at which time and who is out there. But right now, I just got this number yesterday. Based on IRI, we have a 90% share. Nine-oh.

So, of the sales that have actually occurred on lightweight private label, we are manufacturing 90% of them.

The key is, and we have also publicly disclosed, that about 18%-ish of the scoopable segment is lightweight now. And then roughly 20% of any category in cat litter has gone private label. So you are basically talking at the moment maybe 3.5% of the category would be private label, but it is a lagging growth factor, not a leading. Private label is definitely lagging. People get used to it, they enjoy the brand, they enjoy the benefits, and then they say I'd like to save a little money, so I am going to try the private label.

So it is not even 3.5% at the moment. It is probably only about 1%. So yes, having 90% of 1% is nice. But the real key is, is it going to keep growing? The good news is, the lightweight segment is growing dramatically.

So, a year from now could that 17%, 18% be 25%, 30%, sure. And now, because private label has been out there for over a year, could it be a full 20%? Probably not that fast; probably if it could be at 10%, let's say, of the 30%, now you have a 3% opportunity. Oil-Dri would not be doing 90% at that point. There would be other competitive things. But if we could hold on to 50% or 60%, you can run the math. So, as you are doing your models, that is how you do it.

Okay. But how much of the total private-label scoop market, not just lightweight, what percentage of that?

What percent does Oil-Dri do of the total private-label scoop?

Yes.

Very small; I think I've reported around 2%.

Okay. And when do you think this might move the needle?

Again, I laid it out for you. You know I don't give any forward-looking anything. So I just laid it out for you. You've just got to put your own growth rate and guesses on it, and start running the math.

But we obviously have our own internal ones. But I'm not going there.

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

Robert Earl Smith, Center for Performance Investment.

Well, that was kind of garbled. Good morning and thanks for the good numbers in the quarter. So Ron, you mentioned these two new products. California just announced that they have new restrictions on antibiotics. So, what might be the opportunity over the next year, 18 months?

I think the opportunity is very good. The challenge, of course, is that we still are in regulated markets. And so what we can say and whether we can say things is determined by regulations.

The California move is consistent with a number of other changes that are -- that have occurred, I think, across the industry. Most of the poultry industry is voluntarily either removed or are removing antibiotic growth promoters and all of the pharmaceutical companies have already done so from their -- from the products. So I think the movement is there. I think understanding how and when our product can best fit within the production cycles is going to be key. And then getting some sort of regulatory read or approval that allows us to market, inside the US; you are always in a tight spot relative to what is approved and what you can say.

And Ron, it will help our investors. So in the US, you are not allowed to make what? What kind of claims?

Certainly we are not allowed to make claims relative to mycotoxin binding. But -- which has historically left us out of the market from certainly a promotional perspective.

In the new area of antibiotic restriction and customers looking for alternatives that can help them, we have data that supports that our product would fit. It will come down to what sort of regulatory view the FDA would take and if, in fact, we have to go under an FDA approval process. If that is the case, there is no short-term upside in the US. If we can find some other ways, or if there is generated interest, we can potentially gain here.

The big opportunity yet is outside of the US, where they have a different regulatory environment. Additionally, the antibiotic or the move away from antibiotics is going global. Certainly market like Brazil, China, some of the large markets that have export business or -- I guess China really isn't much of an exporter. But they are also in talks and discussions on limiting antibiotics.

So, the need for products such as ours is there and increasing. The question will be how can you effectively promote your product in the market to gain that margin.

Would you estimate that you would have an increased growth rate over the 18% that you showed this year, past year in the new fiscal year?

That's always -- I will let Dan give you the (multiple speakers).

I will give you the standard answer, which is of course we are not going to give any sort of forward guidance. We just sort of paint it out for you and you've got to run your own models.

I was afraid of that. Okay, (multiple speakers)

But I did learn your middle name is Earl. Did I hear that correctly?

Well, it was incorrect. I don't know how it got there.

(laughter) All right, so I've got to scratch that off, okay, fine. Thanks, Bob.

Ethan Starr.

Yes, what is the CapEx budget for fiscal 2016? And do you plan to continue funding promotional and advertising spending at Q4 levels in fiscal 2016?

We don't disclose our CapEx forward spending and we don't disclose what we are expecting to spend for advertising at this time. So we have not given expectations like that in the past.

Okay. Any chance -- I know you don't like to give forward guidance, but any chance the Chinese subsidiary will be profitable in fiscal 2016? Or even breakeven?

I think what we said is, it is our hope that somewhere during fiscal 2016, for a month, we might reach a breakeven point. I think that is what our past guidance has been.

Okay, thank you.

Robert Smith.

So the statement was that you had supplier commitments from over 20 major accounts. So, if you look at those 20 major accounts on a full-year basis, what would that do to sales in the new fiscal year versus the ones that just ended? And how many other major accounts are there so to speak, if you have 20?

Are you talking private-label lightweight?

Yes.

I just wanted to clarify. I really fall back on the comment I made to Ethan. Really, it is the function of the growth rate in the adoption. The good news is, and look, I have been saying this all along, and I have been saying it to accounts all along, so this is just my opinion.

My opinion is 100% of the category is going lightweight. I can't imagine why a consumer, if they can get the products they want with the performance they want, would then choose to say, I want a heavier product to carry home. They don't use the product by weight. It has no benefit.

Now, at the moment, they can't get exactly what they want. There are trade-offs. A lot of our competitors are putting fillers in there merely to make a lightweight claim. What they are putting in is nonperforming minerals that are very light in bulk density, which is allowing them to have that claim of this jug only weighs 8 pounds. And compare it in size to one that weighs 20.

You can put cotton balls in there. You can put air in there. You could have it weigh nothing, and boy, wouldn't that be a great claim? This jug weighs nothing. But meanwhile, it does not absorb, it does not control orders. So they are obviously not going that far, because they get it.

But they are diluting the performance of the product. So I can tell you that our private-label lightweights and our branded, everything in there is meant to perform. We are human. We are not going to have perfect product all the time and we are going to have issues and we are dealing with them, sometimes we might have a dust issue or maybe something did not clump as well as we wanted, and so we are focused on all that.

But the trade really gets and trusts us that everything we are putting in the jug is meant to perform. We are not merely just trying to fool the consumer into thinking they are getting a benefit when they are not. And so, I believe as the category goes 100% lightweight, we are going to continue to benefit because they are going to keep trying stuff and they are going to keep settling in.

Our repeat rate is fantastic and it is why we have gotten all 90% of the private-label lightweight, because we do cuttings against all these other -- all these major accounts don't just -- when you sell your brand, the level of quality scrutiny they put on you is much lower than when they put their name on it. So when they put their name on it, whatever you can think of the retailer, they come to our plants. They do audits. We have to do quarterly reports.

It is very -- because they get that if there is a quality problem with their name on it, it could hurt the brand of the entire store. So Target, Meyer, these accounts, they are not going to mess around with their brand. That is their brand. So there is a reason why we have a 90% share and why they have entrusted us with their business.

So I'm not going to give you specifics, but I am very excited about the adoption rate. It is going very well. I am excited that the competition has all jumped in with lightweight to validate the concept. And frankly, I could not be happier that they launched products at a higher price that are lower performance. As a competitor, you couldn't ask for any more than that.

So, you know, keep advertising lightweight and I am a happy camper because it is creating in the consumer's mind -- I need lightweight. This is a great benefit. And now, they've got to find the right one. So, Ethan asked, are we going to be spending at the same levels, less, more, and we don't give total guidance. But I can tell you the opportunity is now, and we are going to continue to go after this opportunity because we believe that as the whole category goes lightweight, Oil-Dri is in the best position to benefit from that shift.

Dan, you mentioned Target in passing. Is that -- have you solicited them?

I am not -- I am taking the Fifth. So you can do store checks and if you opened up their private label you could be able to identify anyone's we are making. If you see all clay in there, then you feel good. If you see recycled newspaper, other sort of filler minerals in there, you are going to know it isn't made by Oil-Dri.

So that will be your homework assignment. Pop into a Target. Open up their Boots & Barkley and let me know you think.

(laughter) Okay, thanks.

(Operator Instructions) Ethan Starr.

Yes, so of these 20 major accounts you said you got for private-label scoopable, are you doing all their private-label scoopable for these? Or just some of them you are doing lightweight only or one of the other, or what?

It is a blend. A lot of -- there are some that we have actually picked up there that are traditional heavy scoopable and do their lightweight. Some we are just doing the lightweight and some are branded partners of ours, so it was easy just to add the lightweight onto them.

So it is helping both our brand. It is helping our traditional scoop business.

It is definitely -- I love making sales calls. I always have. But I can tell you, before lightweight, it was not a lot of fun for Oil-Dri because we always had to defend why our price per pound was too high, even though the consumer doesn't use it by pound. But that private category was denominated.

Now it's the opposite. Everyone is going lighter. Price per pound is off the table, which is great, and it is all about performance and attributes, and I love our chances. So anyway, we had -- I guess we are pretty much out of time. We had a great quarter.

Ron, thank you for joining us and thank you investors who have hung in with the ups and downs. And I read what's out there on the message boards. One of the questions was, is it a trend or a blip? We will be back to you in 90 days and we will both have a better perspective on that. So, thank you very much and we will be back at you soon. 90 days. Take care.

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