Oil-Dri Corporation of America (ODC) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2016 Oil-Dri Corporation of America Earnings Conference Call. My name is Joyce, and I will be the operator for today. (Operator Instructions)

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

Thank you, Joyce, and welcome, everybody, to our first quarter fiscal 2016 teleconference. Hopefully, you enjoyed the news release and we will, as usual, go through the numbers and then do a Q&A. Back by popular demand is Dr. Ron Cravens, he did such a great job last time. And I saw him here in the office and I asked him to sit in with us, so he will be here to field questions on Amlan and anything else you might want to talk to Dr. Ron about. Dan Smith is here, CFO; Doug Graham, our VP and General Counsel; and Reagan Culbertson, who is our Investor Relations Manager.

Take it away, Reagan.

Okay. Thank you, Dan. Welcome, everyone. On today's call, comments may contain forward-looking statements regarding the company's performance and future periods. Actual results on 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.

Thank you, Reagan. And Dan Smith, CFO, why don't you walk us through the quarter.

Sure, thanks, Dan. Good morning to everyone. Oil-Dri reported record quarterly income for the second quarter. We reported earnings per share of $0.75 per diluted share for the first quarter of fiscal 2016 versus $0.30 for the first quarter of fiscal 2015. Driving the results for the quarter were increased sales, improved gross profit margins and sales mix. The positive results were partially offset by increased SG&A expenses. Both the B2B and retail wholesale segments contributed positively to the record quarter.

Our EPS at $0.75 surpassed the $0.71 recorded -- we reported in the fourth quarter of fiscal 2015. Our gross profit margin for the quarter was about 30%, which was significantly better than the 21% we reported in the first quarter of fiscal 2015. Lower natural gas, packaging and freight costs all helped our margin in the quarter. Our effective tax rate for the first quarter was about 28%, which was slightly higher than the 26% reported in the first quarter of fiscal 2015, but significantly higher than the effective tax rate for the fourth quarter of fiscal 2015.

Retail and Wholesale team reported slightly lower sales as compared to the same quarter last year. However, the segment achieved improved margins and significantly higher income as compared to fiscal 2015. Much of the sales reduction was attributed to our foreign operations in Canada and the U.K. Domestically, we saw improved product mix, lower natural gas, freight and commodity-driven packaging costs, which all helped our profitability. The segment's advertising and trade promotional costs were down in the quarter compared to fiscal -- first quarter of fiscal 2015. However, we expect to see a significant increase in our advertising and trade promotional expenditures for our lightweight branded cat litter in the second half of fiscal 2016.

B2B generated about a 9% sales increase for the quarter. The increase was primarily seen in our Ag products, but our Fluid Purification and our co-packed cat litter products also reported increased sales. Segment income was also significantly up as compared to the first quarter of fiscal 2015 due to many of the same factors as we experienced in the Retail and Wholesale segment.

From the balance sheet perspective, our cash and investment balance grew over $2 million as compared to the ending balance of fiscal 2015. The increase was despite all -- despite a debt payment of about $3.5 million made in the first quarter of fiscal 2016. Our net working capital was over $57 million, which was up about $9 million from the first quarter of fiscal 2015.

We paid out about $1.4 million in dividends during the quarter. Our dividend yield would be about 2.7% based on our 10/31 closing price of $31.38 and our latest quarterly dividend rate of $0.21.

Thanks. I'll turn the meeting back over to Dan.

Thank you, Dan. And before we open up the line for Q&A, couple of metrics that I often focus on and communicate myself. Our per ton and ton numbers, we sold 210,000, 211,000 tons during the quarter and so I like to do the math and our average selling price was $321 a ton, which was a record last year. For the year, we did $312 which is great.

But then when you jump to the gross profit line, the $20 million of GP we reported during the quarter, we had never had a quarter where we broke $17.2 million. So forget about an $18 million or a $19 million a quarter, we actually leaped all the way into the 20s, which was great. And then on a per ton basis, that was almost $98 a ton. Put that in context for fiscal 2015, we averaged $72 a ton, $68 a ton and $14. Actually F '13 was our record, for a year we averaged $81 a ton.

So we did $98. And no way do I think that's necessarily going to continue for the year, but as Dan mentioned, it was back-to-back record quarters. So that's good. We'll try and keep the string going, but we obviously feel good about the investments we've been making in the past, and as they're starting to materialize, I think the best part from our vantage point, is we still feel the future is brighter than the present. So we're excited about that.

So Joyce, I'd like to open it up to Q&A. I'd like to ask our questioners to ask their most important question first and then go to the back of the queue, so that we can get as many people in during our time allotted as possible. And remember, Dr. Cravens is here and he's happy to field any questions about our Amlan International animal health business.

(Operator Instructions) The first question comes from the line of Ethan Starr.

Congratulations on a truly stupendous quarter. I would just wish the market were as excited as I am by the results. In any case, what will the increased capital expenditures for the rest of the fiscal year be spent on?

Well, Ethan, we're disclosing we're increasing our advertising trade promotional expenditures and that's going to be spent on our lightweight cat litter.

Okay. You can't comment on the capital -- CapEx at all?

The normal --

-- (multiple speakers) support of that.

Yes. I think it's just, yes, in support of normal business activities, in support of the increase in our lightweight product lines. Nothing out of the norm.

Nothing off our core business.

(Operator Instructions) The next question comes from the line of Robert Smith with Center for Performance Investing.

Thanks for the encouraging numbers. My question is directed to Ron. The comment was that animal health and nutrition sales were actually down on a comparative basis. Perhaps you can speak to this and what the premise is for the rest of the fiscal year.

Okay, thanks for the question. Basically, I believe you're seeing a little bit of seasonal activity related to our business. We have pretty big fluxes just in the nature, monthly, quarterly, whatever. So we don't look too much at it. The basics were it was right, just about right on last year. We're really close or right on plan on an overall basis, and I think the year is going to be positive relative to last year and certainly the most important things are the introductions of the new products.

So Ron, could you just comment on the premise of the rest of the year in the area and maybe going to highlight the market opportunity for Varium and NeoPrime?

The opportunities for Varium and NeoPrime are substantial from the perspective of the segments that they're targeting. NeoPrime is targeted into this -- the baby pig market. Varium is targeted into the poultry, most directly into the broiler segment. Both of those are obviously growing segments in the market. The switch from use of the antibiotic growth promoters is a positive. So all the market momentum looks good for the positioning and the introduction of the new products and we expect to take advantage of that.

Is registration effective or you say you're ongoing?

Yes, we're currently in the registration process. With all of -- anytime you're in dealing with regulatory bodies, it's very difficult to predict when things are actually going to happen. We do have some registrations in a few markets, and in fact, we're out launching as we speak so --

Could you identify them?

I don't think we'll talk about specific markets, but we did get our first container order. We won't get into specifics on it, but we're very excited on the new products.

Right. And then I think the market -- the general market attitude has been very positive from the perspective of what we have disclosed at this point to our trade partners and to key customers out there.

We have a follow-up question from the line of Ethan Starr.

Yes, what can you tell us about the new Cat's Pride Fresh & Light Ultimate Care litter product and how will it differ from the two products already in the market?

Sure, excellent. As you know, I'm going to give you as much information as I can without hurting any of our opportunities for reeling in the success of these products so -- but in general, we launched 1.0 back in 2011, 2012 area and it took the competition a couple years to launch their 1.0 versions.

We then -- and that was our 25% lighter, which is a blend of sodium bentonite, which is very heavy but clumps, and calcium bentonite, which is very light and absorbent and controls odors, but naturally would need clumping additives to make it clump when urine hits it. So that was sort of what we call the hybrid, which gives consumers an entree into the market without going fully to the full Volt-type idea of sticking with the analogy of an electric car.

We then -- after they launched their 1.0s, we then launched our 2.0, which was all calcium bentonite and it was light enough to get a 20-pound jug we could fill to the same height and get to 12 pounds. The competition went very light. Tidy Cat Lightweight went all the way down to 8.5 pounds so their average bulk density was very light.

The mistake we think they made was they took real heavy stuff, sodium bentonite, 60-ish pounds, 65-pound stuff and blended it with very light stuff, from our vantage point, not real high-performing stuff, expanded perlite, which is 7 to 8 pounds a cubic foot. And the problem with that is it's so light that it migrates out of the box, it gets both tactile dust and air-floated dust and attracts like crazy to get their blended density to get to 8.5.

So what we are doing is selectively mining -- we, as you know, hundreds of millions of tons of reserve. So we're now selectively mining the lightest of our reserves in Ultimate Care 3.0, so it will be a full 50% lighter. It will be the same fill, same cubic inches, but it'll weigh 10 pounds instead of 12. We believe that's the perfect spot. The average bulk density is such that it's obviously significantly lighter for the consumer to carry home, but not so light that it migrates out of the box.

The beauty of it is, is there are no fillers. It's 100% absorbent mineral and it's all homogeneous. It's not like we're blending 8-pound stuff with 70-pound stuff and now we've decided to just put more of the lighter stuff to make it lighter.

It's all of our light density minerals, homogenous, 100% no fillers and so that's really going to be the big campaign that we're going to be communicating, which is you get all the performance and lightweight, not or.

Currently, if you're a Tidy Cat lover and they have the largest market share, you can get one or the other. If you want performance, you've got to buy their heavy, and if you want lightweight, you buy the lightweight. But if you want performance and lightweight, you can't do it because their lightweight product just doesn't -- you can't put 40% to 50% of a filler in something and expect it to perform the same as something that is 100% of that active ingredient. Theirs was sodium bentonite-calcium bentonite mix always, they've always done an agglomerated thing. ARM & HAMMER and Fresh Step had all sodium bentonite with other fillers in there. Now they're just replacing their fillers with lighter fillers.

So anyway, that's going to be Ultimate Care 3.0. I can tell you the trade is very excited about it. To us, it's our unique position because we have the quality and quantity of reserves. We are basic in this. We're not out there buying from other people. We can just mine our own product, process it, package it, selectively mine it and then give our consumers the absolute best mineral at the best price.

Sounds good. Can I ask another question?

Sure.

Okay. Are you continuing to add more private-label accounts for the lightweight scoopable litter?

We are and that's very good. There were some late adopters that we're still rolling out. We even have instances of some early adopters who, for whatever reason, went with the filler guys who were just taking sodium bentonite and throwing fillers in there and have realized the problem with that is your -- two things, really, the quality is not nearly as good, that's the biggest problem, but they're also very concerned in the cost of goods. We're basic, so nobody can really beat us from a quality and quantity standpoint.

So we're already picking up both late adopters and then even some switchers already are coming our way. So it's playing out very well for Oil-Dri.

Great. Any switchers from newspaper to clay?

Yes. In fact, that was one of the big majors that have already switched was exactly that. They had taken someone who was taking sodium bentonite and just blending in recycled newspaper to make it lighter. But again, putting in a 30% to 40% filler reduced the efficacy of the product by 30% or 40% and so that's a big problem for the consumer.

Great. Roughly what percentage of such accounts that have taken the private-label lightweight scoopable litter, are you gaining all of their private-label business?

I mean, in total, I think announced -- I don't even remember the number I threw out last time. I think it was around 90%, 80% to 90%, and that's -- we're sticking at that or more. I mean, the lightweight litter market, look, this doesn't take Oil-Dri's self-serving position. I'm having this discussion with all of the accounts.

Just take out a map of the United States and then look at where we're supplying them from and then look at where the competition is trying to make their supply chain work from. We have plants in California, Midwest, three in the Midwest and really three plants all in the same location in the East.

So we've got plants geographically distributed throughout the country with lightweight minerals where we don't have to put any fillers in there. And we can absolutely, for any national account, have the lowest delivered footprint by far or you can buy from someone who has sodium bentonite mines in Wyoming who then has to ship it somewhere and then go out in the market and buy either recycled newspaper or wood fibers, which is what they're doing, and then blend in 30% to 40% of it to dilute the performance of the product. And for the pleasure of enjoying that, you get to pay more.

So it's really an easy sales pitch. I mean, I'd love to think I'm such a great salesman and our team are. We really are, they're great, I have a great team, but you're only as good as your product and all we have to do is talk logically. We don't even have to get into any puffery, any smoke and mirrors. It's just pull out of -- and I do this now, pull out a map of the U.S., show them where our plants are, show them where their accounts are and it's like, duh, and they get it.

Next question comes from the line of John Bair with Ascend Wealth Advisors.

Great quarter. Want to go back to the Varium and NeoPrime product and wondering if the sales thus far predominantly in the U.S? I mean, you mentioned that you had a container going off. And as Bob mentioned, your press release says registration is -- in target countries is ongoing. But at this point, is it primarily domestic sales?

No, it's primarily Asia and Latin America.

Okay. So is the registration aspect then, can I assume then that you're working on -- is this something that with domestically that you have to deal with state regulators to get the product approved? Or is it something on a more national level?

Depends a lot on what level of registration efforts we go into. As a feed ingredient, we can register by the state and that's how a lot of our products -- essentially, that's how all of our products are currently marketed in the U.S. We have discussed internally the option of pursuing some other registrations, but at this point, we haven't initiated anything with a body such as FDA or anything.

So the activity in the U.S., we'll maintain state-level feed, supplement, feed additive-type approvals. But our major focus, as has been historic, has been Latin America and Asia where the livestock markets are continuing to grow and the biggest demand for these products are.

Has there been any consideration about advertising or promoting the use of this product domestically, of bringing more awareness much like some of the, let's say, the fast food chains are saying, oh, we're going to do cage-free eggs and we're going to do non-hormone growth food sources. In other words, try to bring this more to the public's awareness that in turn could drive demand for your product by your end user.

That is certainly something that internally we have been discussing and there's -- we've interacted with several different bodies. But at this point, we have not initiated any direct advertising out there in the U.S. One is that the types of situations you get into when you're in the food or feed additive-type businesses is you have to be careful about anything that you state because it may sound like a medical claim, which gets you into FDA.

And at this point, we have not chosen to do that. We have talked directly with some of the major livestock producers and we have internally discussed whether we want to go to some of the larger end user-type customers such as Chick-fil-A or Tyson or some of those organizations that go all the way to the consumer.

I think that'd be a great idea. One other quick question and that regards, switching gears here, regards the cost of shipping and basically your production costs and so forth, your resins and so forth. Are those -- are you able to lock in prices, or how does that work? Because I know last year, at one point, kind of wanting to see those resin prices and your packaging costs come down and it took a while for that to kick in. So I'm just trying to get a general idea of how that works for you?

They are commodity-driven prices in large part. There's a quarterly look at the commodity indexes. I believe we're on a one-quarter lag from a procurement perspective, but they are definitely driven by the commodities.

And while they lag on the way down, they would then lag on the way back up.

Right. Could you -- if you sensed that prices were starting to turn, are you able to kind of lock those in and maybe forward-purchase, say, double your normal buyout for six months, let's say, as opposed to three months kind of thing. Is that --

That's not something we'd be interested in doing. We've done that in the past and we have good -- our markets are rational and when resin goes up, as long as we move with it, which it would, we can get price increases. When resin goes down, our customers want to see some pricing relaxation. But if we ever got on the opposite end of the bend, we'd be in big trouble. So there's really no incentive for us to do that. So we float.

The next question comes from the line of Robert Smith.

Can you give me some idea as to the amount of the reduction in advertising and trade spending in the first quarter versus the corresponding period in the last year?

Robert, it's probably $300,000, $400,000 in terms of advertising. And trade spending, probably a little bit more than that.

Okay. And I assume that this big product introduction and increased advertising and spending, is going to invade the incremental progress that you made in the first quarter and maybe first half. Let me -- it's difficult for me to phrase this, but are you going to spend this all away? Or are you going to be looking at this in a more measured way?

Yes. It will be measured. We're not going to bankrupt the company. We're not going to lever and go out and borrow $100 million. But on the other hand, this is a game-changing disruptive technology that we invented that's both in the consumer's best interest, the retailer's best interest and Oil-Dri's best interest to see this thing come our way.

I appreciate it, yes.

Right, right. So we're going to spend heavy. This is a once-in-a-lifetime thing and we're going after it. And it will be measured, we're not just going to go out and spend before getting a lot of business. It'll be as pay-as-you-go type thing. Retailers will commit to certain shelf space and all this. And you can run the math on the ACV that they give you, the all commodity volume, and you can figure out what sales you're likely to see.

The beauty of cat litter is it doesn't go bad. There's no expiration date. So it's not like you're ever in a position where you're ever taking anything back or you're blowing, you're sending product out there that sits and then they have to throw it out. It's not like that, so that's good news.

So there really is no real Armageddon scenario. So in our models, it's all how high is up and we'll see. The competition's not just going to roll over. Last time when we launched Fresh & Light, we were able to capture 1.8 share points and hold it in our new Fresh & Light product. Could we hope to do the same this time? Well, sure. We're hoping to do the same, if not better. And at those numbers, we'll be in good shape.

And just one other point. You pointedly mentioned Verge and how well it's doing. Can you give me an idea as to what the product sales of Verge are at the moment? The amount, dollar amount?

We don't disclose that level of detail, Robert.

So it's still not big enough to warrant disclosure.

Great. I have time for one more question if anybody has one or I'm happy to close.

We do have a follow-up question from the line of Ethan Starr.

Yes, in the 10-Q, it said that, I guess, natural gas was about 22% lower this year than last year. Can you quantify that in dollar terms, by any chance? Or just give me an indication of how much less you spent?

Yes, we don't get into that level of detail, Ethan. It's in the hundreds of thousands.

It was not material to the great quarter we had because I've had people ask me that question, it was nice but it isn't why we were up so much.

Okay. And how is the Snow & Go product doing?

Snow & Go, it's great. We're in Menards and Walmart. And actually, we have this relationship now with WGN Radio Theatre where we're the exclusive sponsor at the moment. And so I was able to talk in detail about Snow & Go and all of a sudden state of Illinois jumped to number two on our selling chart. I think Colorado is still number one. But WGN at night is heard in like 35 different states anyway.

And so Snow & Go is doing great, and there hasn't been a lot of winter, but it clearly spiked right when the winter hit. So let's all do our snow dances and we'll sell a lot more Snow & Go.

Great. Thanks so much.

All right, good. Last thing, Ethan, you didn't ask this question, but I know you've reached out and talked about what were the changes in some of the senior management. And as part of our excitement around Ultimate Care 3.0, we have done a divide and conquer, similar to what I did with Mark Lewry. We brought him in as Chief Operating Officer about two years ago and he has helped immeasurably, allow me to focus more on what I'm good at and he's focused in on what he's good at. So it's been a good divide and conquer.

And so we're doing the same thing in manufacturing, in engineering and new process improvement. We divvied it up between Tom Cofsky, who is our historic Vice President of Manufacturing who had everything underneath them and that was unwieldy. He is now is retaining about half of our plants. He's focusing on the B2B side of the equation. And then Aaron Christiansen we hired and we put out that news release. He's our VP of Manufacturing on the CPG, consumer products group side and he's got about half the plants with engineering and things like that underneath him. And together, they're working very well to make sure that Ultimate Care 3.0 and all of our other initiatives get the time, focus and attention they deserve so that we make sure that, as I've always said, order number one is generated by the sales people and the marketing people. But two through infinity are the supply chain. I mean, if we don't get the product there on time in the quality and quantity that the customers ordered, you're going to have the best sales people in the world and you're not getting a repeat.

So the supply chain is critical and it was time to divide and conquer. And so that's been a huge success for both them individually and for the company collectively.

Okay, good. Well, listen, we've got our annual meeting tomorrow and it'll be much of the same, but we very much appreciate all of your guys' patience and interest in our company and we'll be back at you again at the end of the second quarter and we will keep you posted on things Oil-Dri. So thank you. Happy holidays.

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