Oil-Dri Corporation of America (ODC) 2016 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Second Quarter 2016 Oil-Dri Corporation of America Earnings Conference Call.

(Operator Instructions)

And I would now like to turn the call over to your President and CEO, Dan Jaffee.

Thank you and welcome everybody to our second quarter in six months teleconference. I'm going to turn it over to Dan Smith. We've got Doug Graham here, and Reagan is going to do Safe Harbor as always.

Yes, 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 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 in evaluating any investments in Oil-Dri stock. Thank you for joining us.

Dan, let's cover the six months and quarter and then I'm sure everyone online is going to want to hear about what's coming down the road. So, let's take a look back first.

We'll do Dan thank you. Good morning everyone. Oil-Dri reported another strong quarter. Our earnings per share of $0.53 per diluted share of the second quarter were approximately 36% more than the second quarter of fiscal 15. The quarterly results were driven by improved product mix, lower cost and higher selling prices. The positive results were partially offset by increased SG&A expenses.

The increased earnings were primarily a result of improvements in the retail and wholesale segment. Earnings for the first six months of fiscal 15 were up over 80% from fiscal 15. Our sales for the quarter and for the first six months were up 1% and 2%, respectively over the same periods in fiscal 15. Our gross profit margins were about 29% for the quarter and 30% for the first six months of fiscal 16.

Improved selling prices and product mix along with lower natural gas packaging and freight cost all helped our gross margins. Our resale, excuse me, our retail and wholesale team generate increased sales for both the quarter and on a year-to-date basis. Our branded and private label lightweight litters have contributed to the growth. The segments achieved higher income values for the second quarter and for the first six months as compared to the same periods in fiscal 15.

The income growth was driven by favorable product mix, lower trade spending and costs. However, as we look to the second half of the fiscal year, we believe that our integrated marketing campaign for our new and improved Fresh & Light Ultimate Care Lightweight cat litter will significantly increase advertising expenses and reduce earnings in the second -- excuse me, in the third and fourth quarters of fiscal 2016.

B2B had a 2% sales decline but nevertheless achieved a 2% profit increase in the second quarter. The segment sales and profits were up for the first six months. Our Agsorb and Verge product lines helped drive the profit growth for both periods. The segment also benefited from lower cost.

From a balance sheet perspective, our cash and investment balances have grown about $6.6 million from the fiscal 15 year-end totals. The increase was achieved despite spending over $11 million on capital, dividends and debt payments during the first six months of fiscal 16. We paid out about $2.8 million in dividends during the first six months of fiscal 16.

Our dividend yield would be about 2.2% based on the 1/29/16 closing price of $37.50 per share and our latest quarterly dividend of $0.21 per share. Thanks, I'll turn the meeting back over to Dan Jaffee.

Thank you Dan and Lauren, let's open up the lines for question and as always I encourage everyone to ask your most important question first and then go back to the end of the queue, so we let everybody have the chance to ask at least one question.

(Operator Instructions)

Our first question comes from John Bair from Ascend Wealth Advisor.

Good morning guys.

Hi.

Good morning. I'm on the road here so hopefully this comes through LA. Question on the new marketing campaign, how long -- can you -- can you tell us how long this engagement is?

Sure.

(Multiple Speakers)

-- is it like a one year and then as kind of a parallel question with this is the contribution of the part of the sales to the foundation, can you share how long that commitment is?

I'm sorry, we heard a little. I heard the first part of your question but not the second, what was the second part of your question?

The second part was in conjunction with the -- with the partial -- the support of the foundation, how long of the commitment that might be?

Okay, I've got it.

-- if you can share that or not -- yes.

That sort of well is going with the first part, but after an answer if I don't get it, just ask a follow-up question.

Sure.

Yes, we're getting some sort of beeping here and I don't know...

Calling...

-- why. But, anyway, hopefully you guys can't hear the beeping. And it's a multi-year deal. The goal is to have it be a real long-term partnership. I can just tell you that the Heigl's have been fantastic. I mean obviously this was something that's very near and dear to them, Jason Heigl is Katie's brother, Nancy's son, who when he was 15 years old perished. He fell out of a back of a pickup truck and he was a lover of companion animals...

Oh, wow.

-- and, they started this foundation as their star grew. And they're as excited about partnering with Cat's Pride as we are with partnering with them. So, to us, we're just -- it couldn't be going any better, the goal to have it in my opinion go on forever. But to start with, it's a multi-year deal and we'll -- our goal is to more than exceed their expectations, so that they're going to want to continue partnering with us as we move forward. Does that answer your question?

Yes -- no, that's great and that's commendable.

Great.

But I have another questions but I'll get back in the queue.

Please do.

Okay.

Next question comes from Ethan Starr, private investor.

Good morning.

Hi, Ethan.

What is the opportunity to save money and/or improve efficiency by improving the consumer products and manufacturing facility, is there a big opportunity there?

Yes, a large opportunity. As you know, we've executed a divide and conquer strategy where Tom Cofsky was a long-term Vice President of Manufacturing is overseeing certain suite of our plans and then Aaron Christiansen has come in to oversee the remainder of the plans and then they've also divided other duties. For instance the raw materials, which is something at that time has intimate knowledge is underneath him.

Aaron has engineering and process improvement under him and so that's really what he is focused on. We've already made a lot of improvements by those two, as I say dividing and conquering, it's allowing them both to get deeper into the subjects that are under their control. So, I'm not going to put a number on it for you but historically I would say we've been inefficient and it makes sense, we're in our 75th anniversary and I would say for the first 70 some odd years, we were mining and processing company.

Packaging really was just something we did to try and get the mining and processing we did to our customers, so a lot of time packaging came in the form of a railcar or a bulk bag or a 50 pound sack. And you know for the last few years now, it's been putting stuff at high speeds in the jugs, which is a totally different discipline; it's nothing that we really did in the past.

And our team has done a phenomenal job of embracing the change and moving forward, but there are a lot of best practices out there as you well know of companies that have been putting stuff in jugs at high speeds for years and rather reinvent the wheel, we want to adapt and adopt those practices and so that's where Aaron comes in. He's come from P&G and Unilever, he's been in that world and he's bringing those skills to our team. So, it's been a great marriage on our part between Tom, Aaron, and Mark Lewry who's the Chief Operating Officer, the whole supply chain really is functioning very well.

Okay, so you don't -- I know you're saying, you don't want to quantify things but you can already see things have been improving or you noticed --

Yes.

Okay, glad to know that. I'll be back in the queue.

Thanks.

Next question comes from Robert Smith from Center for Performance Investing.

Hi, good morning.

Hi, Bob.

-- caller on how China is developing?

Nothing substantial, it's proceeding. I mean Dan if you want to make any canvass, will you --

The sales are growing, but we're still trying to gain market share, we still have more [exchanging aide in] sales relative for the sales [these were in the] growth mode, so we're trying -- we're still exploring -- we're still trying to grow the market. So --

Your new products are being registered but that's still --

-- and right now, you probably well know the China com is slowing down a little bit too, so that's obviously impacting our business and everybody else's business, but --

So, for the quarter I mean the climb with China was growing?

Yes, so I mean I think that's very accurate. The currency fluctuations in South America really did a number on the animal business there. So, it's good thing that China was growing because it did help offset some of the declines we saw in South America.

I see. Okay, thanks. I'll get back in the queue.

Thanks.

Next question comes from John Bair from Ascend Wealth Advisor.

Shed some light on what you see happening in the agricultural market so far, I mean your press release showed that there was an increase in sales both for the quarter in the six months. Do you see that trend increasing or improving?

Yes, [the egg] market is really difficult to predict. It's going to depend on what the formulator decided to in terms of what they produce and they're going to look at the corn prices and things like that so we're really making a judgment call. So, it's very difficult for them to predict their business and it's very difficult for us to predict our business. So far, as we've indicated, we been strong and we hope that trend continues.

Is that primarily domestically in it or these products source out to South America or other areas?

I would say it's mostly domestic.

Okay. So, we had relatively mild winter conditions here in the mid-west, so and add prices of course are down but maybe cyclically things are going to pick up and maybe there's something higher planning and so forth so I mean that's where I kind of go with that if there's some sort of pre-emptive activity if you will coming in to the growing season.

Nothing that I can immediately point.

Fair enough. All right, I'll get back in the queue.

Next question comes from Robert Smith from Center for Performance Investing.

Hi, it's a Center for Performance Investing, so you give us some further information on private label Lightweight penetration?

Yes, so it's interesting because now [been on the shelves] long enough where you're starting to see some sales velocity and some repeatability and some actual IRI trend data, so from a dollar share remember historically our share of the Scoopable private label market was about two. From a dollar standpoint, we have a 68% share of the private label Lightweight and at the 32 we don't have. Our private label Lightweight partners are showing a sales velocity and unit per store per week and dollars per store per week. That's more than double the competition.

Now, the competition again were -- we were not naturally inclined to compete in heavy because we don't have heavy minerals, our minerals are lighter so when in the heavy market where it's all price per pound, we were at the natural disadvantage. Now, if you go to the Lightweight, they're the natural disadvantage, so what they have to do to come up with a Lightweight item is take their active ingredient which is sodium bentonite cut it by 40, 50 or 60% and then fill back in a filler to make it lighter.

But they're literally delivering 40 to 50% of the active ingredient. Our price of the label Lightweight is 100% active ingredient, it's all calcium bentonite but no fillers added. So, it's no longer in the sales velocity, it's more than double. There were consumers say anything. I mean if you -- [have to use] twice as much, laundry detergent it would have been a great innovation on the liquid concentration instead it was.

You are able to use [less into] the same number of load, so our partners are very happy with us. It's going very well. We're already seeing our couple of the major accounts that we didn't get right out of the date because they have -- they have been supplied for years by the heavy guy, so they naturally went to them, they were already switching.

So, we're already fully switched at one account and we're sort of partially switched at another and so, example I would love to say we're the world's greatest sales people and maybe we are but in reality you just stand at the raw material and our raw material because it's 100% calcium bentonite which is very absorbing, controls odors and because we have plans from the West Coast to the mid-west to the east, our freight footprint for any national account is fantastic.

So, nobody can deliver a better product to the better pricing we can, so to answer your question we currently have a 68% share. I see that share growing and I see the distance between the competition expanding too, so right now [ourselves] from two to one. I think that's just going to continue as consumers [dopes] our product.

So, Dan we're talking about 68% of 20%, is that?

Well, ultimately 20% yes. Now, you're still talking it's an [ancient] market, so it does not currently represent 20% of the private label scoop market yet, so it will be nice when it does. At the moment, I'm looking at a share that's had -- that basically represents about 1% of -- so, it could have grow 20 times, you would hope it would. But it sure does, as consumers continue to adopt Lightweight and Lightweight continues to be the norm.

I mean I can tell you all the consumers I talk to who have experienced lightweight in the past, wait don't ever switchback. I mean why did they ever say, okay I hear you putting some item in there. We have our competitors are actually launching heavy items which is interesting with no additives and they are interesting bells and whistles and features, but in a 40-pound blocks who's bringing that home? So, I've joked when I make a lot of sales calls and I joked, rather than put these additives in there, they're going to put Bengay in there, so...

-- brings it home, they can actually repair their sore back, I mean who's going to buy it? So, it's all playing out very well for the industry, very well for the consumer and very well for Oil-Dri.

Okay, thanks.

Okay.

Next question comes from Ethan Starr private investor.

Yes, thank you. How is retail sell through with the Cat's Pride Lightweight Scoopable litters going?

Well, so the media is going to hit starting next week. So, any sell through you are seeing now is just sort of advanced buzz, loading up the shelves, pipeline fill and really the big read is going to come in the next 90 days so [we're] with you in 90 days to be able to look at that IRI data, it will be 30 days in the rear, so we only have a couple of months of the date but that's okay. They will be the real proof of the efficacy of the campaign but I move very, very excited and very optimistic of course.

Okay. You can't come as the recent past?

I mean we can, but it's not relevant. You've got so many dynamic changes that it's like talking about the dead ball air versus the new ball air. The new ball is going into play next week, so I can do it for you if you want. But I mean as an investor and I know you're a big investor (and honorable), the biggest thing will be in 90 days.

Okay. That's fine.

Yes.

Take somebody else's question.

Yes.

Next question comes from Robert Smith.

Hi, Dan can you give me an idea as to the level of spending in the quarter, the third and fourth quarter, I mean [I just thought] not the level but the -- it's like going to be more spending in the third quarter would appear in the fourth quarter?

Yes. Definitely, yes because these are key viewership times and the market tends to go a little quieter during the warmer months and then the goal is to read the data, refine -- define and refine the feedback we get from our media mix both social and on TV and cable and then come back in the fall with another campaign.

So, the goal is to keep the snowball rolling and keep it growing where the investors are Lightweight litter as I described we have the natural advantages and now we need the consumer to know what a great product we have. And, that's why we are literally over the moon with our relationship with Catherine Heigl.

I mean with her style power and her -- she -- her huge scores with our demographic limit to 2054 are off the charts. She -- I feel so fortunate that we were partnered with her. It could not have gone any better.

Dan, who is doing the creative for you?

So, we have an ad agency here Chicago called [Maniani] and it was their campaign. You will be seeing the TV commercials and I -- for those of you who are -- can reach out there at May, I will be doing some investor road shows. I will be in New York in April. We'll be doing Boston again. We'll be doing Chicago and I'm going to bring the commercials obviously with me, so I'll [be in your door, be] on the air, but I'll be showing you the commercials. Next week is the global pet showdown in Orlando, we'll be unavailing in our boots on big screen TVs, all the commercials with Katie actually introducing (each of them) and talking about the partnership between [Foundation] and Cat's Pride so we're expecting a big buzz down in Orlando next week.

Thank you.

Thanks.

There are no other questions at this time.

Great. Well, yes as I said I mean really, the company is doing very well. The marketing is expanding the strategy of creating value from [silver metal] is working. You've obviously know this -- the top line is not exploding in any way it should perform but the margins are expanding that's because we keep trading a higher value profitable items and as we do that we push out some of the lower value unprofitable items rather than you keep making them, there's no point. It's -- otherwise, we're just turning up our reserves for no benefit.

However, with this campaign and you guys know the magnitude of these categories $2.2 billion of retail, you can do the math but in the SharePoint is a big deal and the question is how high is up in the 90 days I think we're in the much field for that than we have today. But I can tell you we couldn't be up here from where we're sitting today as we're going to hit the launch button starting a week all the [air] campaign next week.

You're going to love the TV spots and Katie is literally fully committed and invested to making this work and so she's going to use her -- she's already using her social power, she's got a million two Twitter follower, she's been twitting about us, she's got 4 million Facebook likes, she's got Instagram, she's been out there on the social talking about the partnership encouraging her loyal fan base to go out and try Cat's Pride Fresh & Light Ultimate Care because with each sale, a donation is made to the Jason Debus Heigl Foundation.

And so that sort of the beauty of the partnership and like I said my absolute goal is to far exceed Aaron and Nancy's expectations so that they're going to absolutely want to keep the partnership going. So, we'll be back at you at 90 days. Obviously, I'm always excited and enthusiastic -- I'm more excited and more enthusiastic than I usually am. So, thank you, everybody and we will talk to you in 90 days.

Again, ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.