Oil-Dri Corporation of America (ODC) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America third-quarter investor teleconference. My name is Whitley and I'll be your operator for today.

(Operator Instructions)

I will now turn the conference over to your host for today, Mr. Dan Jaffe, President and CEO of Oil-Dri. Please proceed.

Thank you and welcome, everybody, and thank you for listening in to our third quarter investor teleconference. With me here in Chicago is Dan Smith, our Chief Financial Officer, and Doug Graham, our Vice President and General Counsel. And Doug will be handling the Safe Harbor duties today. Doug, take it away.

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 in evaluating any investment in Oil-Dri stock.

Thank you for joining us.

Thank you, Doug.

And just to let you know, Reagan Culbertson is on vacation. She will be back next time as our Investor Relations Manager. And at this time, I want to turn it over to Dan Smith to walk us through the quarter and nine months.

Thanks, Dan. Good morning, everyone.

Oil-Dri had a $0.13 loss per diluted share for the third quarter. Last year, we generated $0.19 gain during the quarter. The loss resulted from the significant increase in advertising expenses to support the marketing program for our Cat's Pride Fresh & Light Ultimate Care cat litter. The quarterly loss was partially offset by improved product mix, lower costs and higher selling prices. Earnings for the nine months of FY16 were still over 30% higher than FY15, despite the loss for the quarter.

Our sales for the quarter were down, but up for the first nine months as compared to the same periods in FY15. Our gross profit percentage remains strong at 29% for the quarter and 30% for the first nine months of FY16. Improved selling prices, product mix, along with lower natural gas, packaging and freight costs all helped our gross margins.

Our SG&A increased approximately $7.3 million from the third quarter of last year. The increase was due to the approximate $8 million of increased advertising expenses. Year-to-date, our advertising expenses are up about $8.8 million as compared to FY15.

Retail and wholesale, consistent with our previous discussions of the retail and wholesale team, invested heavily in the marketing campaign for our Fresh & Light Ultimate Care products. The advertising investment was primarily factor that resulted in the loss for the segment for the quarter.

Sales were up for the quarter and year-to-date for our Fresh & Light product line, but the increase did not fully offset sales reduction in coarse cat litter product lines. Gross profit improvements helped to offset some of the increased advertising expenses. We expect to continue to heavily promote our Fresh & Light Ultimate Care product care line in the fourth quarter and throughout FY17.

B2B had about a 3% sales increase for the quarter and year-to-date. The segment's profits were up for the quarter and the first nine months. Gross profit also improved for B2B segment, due to better product mix and lower cost.

From a balance sheet perspective, our cash investment balances have almost doubled from April of 2015, even with the heavy advertising spending. This increase was also achieved despite spending almost $15 million on capital, dividends and debt payments during the first nine months of FY16.

Capital spending is down a little bit from FY15, in that in FY15 we incurred significant expenditures for our bleaching clay and lightweight cat litter initiatives. Year-to-date, our dividends payment of about $4.2 million would equal about a 2.5% return, based on our April, 29, 2016 closing price of $0.36 per share and our latest quarterly dividend of about $0.21 a share.

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

Thanks, Dan.

And before I open it up to Q&A, I just want to give some comments myself; and I'll zero in on the Fresh & Light Ultimate Care launch. It's going very, very well. As we signaled in the news release, the Ultimate Care itself for the four-week, most recent four-week period ending May 22, with market research data grew 63%; and Fresh & Light, the brand we launched back in 2012, grew by 12%. So we're not seeing any cannibalization, which is very positive. And then for the 12-week period, we were up 38% and 0.5% on the Fresh & Light, and so that's very positive.

I had an investor lunch yesterday and it was a very good roundtable discussion. And one of the topics we talked about was, okay, you don't give forward guidance, but where is this going to go? Do I take this most recent quarter and multiply it by four? So if lost $0.13, are you telling me you're going to lose $0.52 next year, if you keep spending the way you're spending? And that is not what we're saying.

And so, while I'm not going to give you specifics, specific guidance, I'm going to give you general guidelines under which the senior management team and I, under the Board's direction, are running the Company. So our fiscal year starts August 1, and I'll give you some of our expectations.

We expect to make money from an earnings-per-share standpoint in FY17. So I'm not going to tell you how much, but I'm just telling you we have every expectation that we're going to make money. So we are not expecting to lose money.

We are expecting, though, to spend more money in marketing in 2017 than we did in 2016. And so that's a good news scenario. But you could say, well, how can you spend more and still make money if you just spent a lot of money in this quarter and you lost money? And the real answer there lies in we really only had one quarter of spending this fiscal year, in FY16. So we had no real spending in the first and second quarters, and we're pretty much going dark now on TV and everything in the fourth quarter. So really, all the annual spending was one quarter of spending.

We're expecting to spend money in two slugs, in the fall and then back in the spring next year. And you can't just take, though, what we did this spring and double it. I'm just telling you our total media expense and advertising expense in FY17 should be north of what we spent in total in 2016. That's our expectation.

Our expectation is to maintain or grow our cash. And that would then beg the question, okay, we understand it's the Board's mandate to set the dividend and determine whether or not we raise the dividend. And that is still true. But I'm just telling you for our cash models, it is our expectation that we will actually raise the dividend again for the 14th consecutive year come next June.

We will see what the Board does. The Board will do what the Board does. The Board has raised it 12 years in a row. We will be meeting tomorrow as a Board. We'll see what we decide tomorrow on the dividend. I'm just telling you what our expectations are. So in our cash model, where I tell you we're expecting to maintain or grow that cash, we are expecting to be able to raise our dividend for the 14th consecutive year.

So those are our expectations. Those are the wide guidelines that we're running the business under, because we're in a very dynamic, disruptive innovation change period here. Very happy to announce that the Fresh & Light patent, the first 12 claims or whatever we filed way back when, five years ago plus, actually got issued in May, every single claim. So that was good news and validates our position as the inventors of lightweight cat litter.

And the trade sees us that way, the consumer sees us that way, and it's really been great for Oil-Dri to be able to sell our high quality cat litters on a volumetric basis and not on a per pound basis, knowing that the consumer uses it volumetrically, and then you have the very important secondary benefit of reducing the carbon footprint by nearly 50% by being able to get more units on a truck when you sell volumetrically versus on a per pound basis.

So everything is positive. But the other thing we talked about at the investor lunch yesterday was, this is not going to be a one or a two quarter battle, this is going to be a long, long battle. We've got reserves lasting well over 100 years. I'm not telling you this battle is going to go on for more than 100 years, but we respect our competition. These are big, multinational consumer product companies that have good products and good marketing campaigns of their own.

The good news for Oil-Dri is, we only have a 2.5 share. We don't really need to get to a 30 share to have this be a major win for the Company. We've got to keep growing, keep adding share points, and just keep moving it along. And I'm really not going to give any specific guidelines on share expectations or timing, but just to say it's going to take longer than maybe the average investor would love, and myself included. But the good news is we're small enough where we don't need seismic changes in share to have this be a very positive return on investment for Oil-Dri and our loyal shareholders.

So at this point, Whitley, I'll open it up to Q&A. And as always, I ask you to put your most important question first and then go back in the end of the queue, just so everybody has a chance to ask questions.

(Operator Instructions)

Ethan Starr, Private Investor.

Good morning.

Hello, Ethan.

Your intro was very helpful. And my question is this, how much will sales of the lightweight litter products have to increase in percentage terms before the cash flow that such sales generate in one quarter or over a period, any specific period of time, will cover the costs of advertising for the next period of time versus litter?

I'll put that to Dan Smith, since he's shaking his head. I don't think that's a question we can really answer off the top of the cuff. The goal is to continue to see forward progress. And as I said in the investor lunch yesterday, I would not feel real good if we had to borrow a lot of money to do this, because that's not a real sustainable battle. The good news is, I don't foresee that being the case.

Now, obviously, expectations, maybe a huge acquisition can bubble up and all of a sudden that changes. Obviously, that's a different scenario. But for your perspective, we are cash flowing this. You're going to have quarters on and quarters off, and it's already happening. But obviously, as the snowball gets bigger, it's going to allow us to be more aggressive with our media campaign.

Sure. No, absolutely. And it makes no sense to put TV ads on in the summertime.

Right. So we will be going quiet in the summer and then coming back on heavy in the fall.

Great. One other quick question, hopefully, what's the market share of the Ultimate Care in Fresh & Light within the lightweight category itself?

The sirens are coming for us here in Chicago. Actually, I do have that data, but I didn't print out that IRI thing. I don't know if you did, Dan. I'll tell you what, let's hold that for a question and we'll dig it out.

Okay. I'll get back in the queue.

I don't think it's in the release, is it?

No. I'll get back in the queue.

Ethan, the easiest way to do that, because again, I didn't print out the whole thing, I just brought the release with me, but Lightweight is now roughly 15.5% of the whole category. So if you just take the share and divide it by 0.155, you'll get the share of the Lightweight segment.

Great. Okay. Thank you.

(Operator Instructions)

Robert Smith, Center for Performance Investing.

Hello. Can you hear me?

Yes, thanks, Bob.

Hello. Good morning. Thanks for taking my call.

And am I mistaken, but I thought Ryan would be on the call?

No, I think he's on for October.

I see. Okay.

I misunderstood. So first, I want to thank you for putting the nearly $8 million figure up toward the front of the press release. I think that was helpful. And I talked to you about that at the meeting prior. So what can you tell us about Amlan and China, updating us since we last heard about it?

I'll keep it generic and then we'll do another deep dive, because I think Ron was on last time, right, wasn't he, or no, or was it two times ago? Was it two times ago? But he'll be on in the fall again.

But no, this got covered well yesterday, too, and it's a good question. The Amlan division is continuing to grow, which is good. Would we all like it to be growing faster? Absolutely, Ron included, myself included.

We were happy that it grew by 13% in the quarter, and Asia is continuing to grow faster than South America. South America has all sorts of political upheaval, currency upheaval, and it just seems to be a tougher road. So our investment in Asia is continuing to look like a good one. But like most investments, it tends to cost you more and take longer to monetize. So this one's not playing out any differently, but we are 100% committed to it.

It's a very high value application for our minerals. And we've got two new products, NeoPrime and Varium, that are being registered. In October, we'll give you more details on those. But we're excited. We're continuing to move forward and the team is doing well.

Dan, I just want to clarify one thing, from what you said earlier in the discussion today. So with the lack of TV ads in this quarter, we're going to see what should be a pretty strong quarter. We're going to see the benefits of the increasing Ultimate Care and the absence of those Boone expenses.

That was a statement, not a question, so okay.

I mean -- is that correct? And not -- okay, I don't know what --

I'm not giving forward guidance to that specificity, but you outlined it well and that was good.

That's good enough for me. I'll get back in the queue.

Okay. Thanks.

Ethan Starr, Private Investor.

Yes. Are you continuing to gain new Lightweight private label customers?

We are. In the most recent IRI in terms of sales data that they're showing, we have a 67 share. I think I announced a little higher share on a customer basis. The good news is we can do the math, and the 67% that we have, our units per store per week movement outsells the competition 2.5 to 1, over 250% more sales per point of distribution. The other efforts of putting paper in there or other substrates, cellulose, to try and make a lightweight litter, the consumer's not buying it.

So we're continuing to gain more. I can't really announce, but we're down to the goal line with a major one, and then we've actually got indications yesterday that we just picked up another major one. So it's continuing to go very well. We need that segment, which is growing, to continue to grow. But it's very profitable for us, profitable for the retailers and a great item for the consumer. So as you know, as a loyal follower, we had less than a 2 share of the scoopable private label market when it was denominated per pound. And in the Lightweight segment, where it's volumetric, like I said, we have a 67 share. So much better for Oil-Dri.

So you have 67%, you're making 67% of the lightweight private label litter out there?

In dollars, yes.

In dollars? Okay. I guess that's lower in volume, I guess?

I don't know. I didn't look at it. I'm just telling you, I looked at the IRI data in dollars. So I don't really know what it is in volume.

Okay. Thanks very much.

Okay. Thanks.

Robert Smith, Center for Performance Investing.

I just wanted to circle back. Has anything happened as far as progress goes in the trials of the Amlan product, products that we spoke about?

Nothing that I'm at liberty to share. And I would say let's make sure that's an agenda topic for the October discussion.

Okay. Well, all right. Okay.

Bob, if there was anything major seismic, I would tell you. So it's moving slower. I'll just keep repeating what I said. It's doing well, it's growing, it's going slower than we would all like.

Okay. And can you give us a few more words about the color about the patent issuance?

Sure. Doug, why don't you handle that?

Yes. The Fresh & Light product is a blended product, and we applied for patents on that in 2011. It's taken a long time to get those patents issued, but the first claims were granted in May of 2016, related to blended products that are lightweight.

And what does that mean competitively for you? What do you think it means?

Well, patents allow us to prosecute in the field to make sure that no one is competing with us with private, with any blends of that type compared to our lightweight product.

And is there such a contention here, present time?

In terms of are there other competitive lightweight litters out there that use our blends?

Yes.

If there are, we're looking for them and we will be alerting them to our patent. It's very difficult to deal with infringers until you have the patent. We just literally got it less than a month ago.

Okay. So that's proceeding in the way about what your tactics will be?

Exactly.

Okay. Thanks.

Ethan Starr, Private Investor.

Yes. I'm wondering how things are proceeding in the upgrading of any of the more consumer business to consumer line manufacturing lines, plants?

So you mean, how's our process improvement going?

Yes, in the factories.

Going very well, actually. We measure the OE, the operational effectiveness, equipment effectiveness, and really in all lines. It's on the upswing, we're hitting new records at each level. The tag team of Tom Cofsky and Aaron Christiansen, they're working very well together. Their teams are working well together. We have process improvement teams. We do Kaizen events. It's really taking hold throughout the organization and it's showing up in our margins. They are all meeting or beating plan under Mark Lewry, our Chief Operating Officer's leadership; he's got the whole supply chain under him. And really for the first time in years, they're, as a unit, beating their fiscal plan, which is fantastic. So it's going very well. But we're literally at the beginning of that whole thing. We think the best is absolutely yet to come.

So have you seen significant dollar savings yet, or is it --

Yes, you're seeing it. You're seeing it in the margins, and it's good. So this came up at the investor teleconference yesterday, as well, and it dovetails on your question. You know, gas is at a historic low, and so it begged us to ask the question in our margin expansion, how much is due to just purely the price of fuel and the trickle effect on resin and freight and all that kind of stuff, and then how much is really due to other stuff, our operational efficiency, the product mix that we're selling at higher prices and higher margins? And the good news is the overwhelming majority is due to our stuff, not the price.

So as an owner of the Company, yourself included, good to know that yes, when gas goes up, if it does -- what comes down usually goes back up, yes, it will have an effect on our margins. But what you're seeing in terms of margin expansion is overwhelmingly the result of process improvement and then a shift towards value-added product sales.

Okay, wonderful. Glad to know that.

I have one other quick question, hopefully. So this patent you got less than a month ago, that covers the original Fresh & Light, not the Ultimate Care, correct?

That's correct.

Okay. Thank you. I'll jump back in the queue.

Thank you.

Robert Smith, Center for Performance Investing.

First, I just caught this when you said an investor teleconference, what was this?

It was an investor -- it was an Eric May lunch. You hit the one in New York. I did one yesterday in Chicago.

Okay, when you say teleconference --

Sorry, I meant -- because of this is on the brain. My bad. Investor lunch.

Okay. Thanks for the clarification. I thought I missed something. And can you tell us anything about the R&D pipeline? In the past, you said you've been working on things that are pretty interesting or whatever. Is there anything that is in R&D now that may be making an appearance in the next 12, 18 months?

As always, I always tell you I can't tell you that, because it wouldn't be good for your investment. Because I don't want to signal the competition. It's never good to tell them what plays you're going to run.

But having said that, just trust that we're continuing upon it. We have not changed the mission of the Company in 15 years, which is creating value from sorbent minerals. And to create that value, it comes from the basic understanding of our mineral. And so, I was out at the IC just this week. I was there on Monday. The team is doing wonderful things to help us on that mission.

And I would say no real change, but the thing to report is we've got synergy across the divisions. It's really cool. Some of the things that we're looking at to enhance cat litter are the same science that could be used in the Ag division or even the Animal Health division. So they're working collaboratively now, not that they didn't before, but it was a little more siloed and now it's less so. So now we're working collaboratively out there to help us deliver our mission.

So it's all good. We're absolutely not cutting our R&D budget. We're increasing it. And it's going to help fuel the future.

Good for you to hear about the productivity of R&D. And any truth to the rumor that the clays combine the Zika Virus? Just kidding, Dan.

I thought you were going to say that Roger Goodell was dead.

I can't wait until October.

All right. Good. Ron Cravens will be on board for that.

Okay. Great. Have a great summer and thanks.

Thank you, Bob.

Best to your dad, too.

Okay. Thank you.

John Bair, Oil-Dri.

I'm not with Oil-Dri, but Ascend Wealth Advisors. Dan, the collaboration with Katherine Heigl obviously is showing some promise with, as discussed yesterday, and there was some talk about whether she might possibly be a face of Oil-Dri in the sense of the promotion. And I think that's, as I thought about it overnight, in the same context as William Shatner with Priceline and a few others out there, would just suggest that be given some good consideration. I think that might be a good idea.

All right. Well, thank you. The good news is she is very, very busy. Her pilot just got picked up by CBS. She will be starting a show in the fall called "Doubt". She's the lead character. And I won't tell you about it, but it's a good thing. And then she's got a movie coming out in the spring. So she will be then working the talk show circuit again.

And so she's very much a face of Oil-Dri, but maybe not in the way you think. But we're going to keep her on in the TV commercials. And then obviously she, a portion of our sales go to her Jason Debus Heigl Foundation. She's the CEO of that, and so she has every incentive to continue to want to see our relationship grow.

And so I can tell you personally, the Heigls have been wonderful to work with. I really enjoy the limited amount of time we get to spend together. They're busy and I'm busy, and so when we get together, it's just great. They're fun to be with. And I'm just thankful we found them. So we're going to keep that relationship going as long as they want to keep it going.

Sounds very good, and enjoyed the meeting yesterday. Thank you.

Thank you. Good. Well, Whitley, I think we're at the witching hour here, and so we will sign off.

Doug did point out, there is some overlap in the TV into the fourth quarter. And so the fourth quarter itself will not be entirely dark. And so there will be some spillover there. And then we will be quiet in the summer months and then kick back in in the fall. And that will probably even straddle a little bit of the first and then the second quarter. So that doesn't always fit perfectly into our quarters of where the spending goes.

But again, the general guidelines outlined at the front of the call are really what we're using as guideposts as we embark upon this very exciting journey, which we started years ago with this whole lightweight litter revolution. And it's working for us on the branded front, it's working for us on the store brand private label front. We have relationships with all the major retailers that we never had before and are continuing to expand our relationships with those retailers.

So if you were to go into Meyer today and pick up the in-store flyer, you will see a huge picture of Katherine Heigl holding our jug, and they're running in-store features with end cap displays and all that right today in Meyer. And we never had access to that. It is their Cat Adoption Week and they bestowed upon us the honor of giving us the featured cat litter in that flyer, which was great.

So thank you, everybody. We will definitely focus more on B2B, but obviously, right now, the heavy spending is going on in consumer and that's why we dominated the discussion today. But trust me, the B2B folks are doing very well and frankly, they're helping to fund this whole thing. So we're very proud of our B2B business and we will definitely have Dr. Ron Cravens, to the extent he's available -- if he has to be somewhere else, then he could get pulled somewhere else -- but to the extent he's available, he'll be here in October for the next teleconference. So thank you, everybody. Be safe and talk to you soon.

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