Oil-Dri Corporation of America (ODC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America fourth-quarter and fiscal 2016 investor teleconference. My name is Dave, I will be your operator for today.

(Operator Instructions)

As a reminder, the call is being recorded for replay purposes. I'd now like to turn the call over to Mr. Dan Jaffee, President and CEO of Oil-Dri. Please proceed, sir.

Thank you, Dave, and welcome everyone to the fourth-quarter and year-end Oil-Dri teleconference. With me in the conference room Doug Graham, our General Counsel; Dan Smith, Chief Financial Officer; Lisa Mak, Vice President of Marketing in the Consumer Products Division, in case we get any questions along those lines; and Dr. Ron Cravens, President of Amlan International; and finally, last but not least, Reagan Culbertson to cover the Safe Harbor provision.

Thank you, Dan. Welcome everyone --

Reagan Bryant. Right? Reagan Culbertson.

Culbertson, yes. Previously Bryant.

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 or in our press release and 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. Dan, take over from here.

Good morning everyone. Oil-Dri finished the year with similar trends for sales, gross profit spending as we reported in prior periods.

Sales for the quarter were $64.9 million and for the year were $262.3 million. Both of these values were within 1% of the comparative prior-year amounts. Our gross profit percentage was significantly improved through our efforts to sell more value-added products and because of lower natural gas, packaging and freight cost.

However, the margin improvements were offset by increased advertising and promotional spending. For the full year we spent about $13 million more in advertising and promotional costs. Also we expect continue this increase in spending in fiscal 2017.

A major factor for the EPS amount for the quarter and year was the release of a valuation allowance related to our domestic alternative minimum tax credits. This item helped drive our full-year tax rate down to 5.2% from 19.8% in fiscal 2015.

The decision to release about $1.7 million of reserves was made in large part by our ability throughout fiscal 2016 to sell more value-added products and our belief that we were able to fully utilize our remaining AMT tax credits in the future. Our tax rate was positively impacted for both fiscal 2016 and fiscal 2015 due to the release of the valuation allowance reserves. Since these attributes have now been fully utilized, it is our belief that our FY17 tax rate will probably be more in line with our historical tax rates assuming no major changes to the US tax code.

Our EPS of $1.87 per diluted share for the year was better than the $1.59 reported in fiscal 2015. Our gross profit percentage for the year of 29.4% was much better than the 23% reported in 2015.

Our retail and wholesale team reported lower top-line sales for both the quarter and the year. We walked away from about $8 million of low-margin sales in fiscal 2016 to focus on higher margin lightweight cat litter business. This decision helped increase the segment's gross profit for the quarter and the year as compared to fiscal 2015.

However, the large increase in advertising and promotional spending mentioned above resulted in a segment's operating loss for the quarter and a slightly lower profit for the full year as compared to fiscal 2015.

B2B sales were up for the quarter and the year as compared to fiscal 2015. Sales increased for our animal health, fluid purification and ag products for both the quarter and for the full year as compared to the prior year. Improved product mix, reduced costs for freight, kiln fuel and packaging all helped to increase the segment's profit for the quarter and the year compared to the same time frames in fiscal 2015.

Our balance sheet remains a strong. Our cash and investment balance grew over $6 million from the end of fiscal 2015.

Our cash flow from operating activities of $25.2 million was the third highest in the Company's history. Our total assets ended over $200 million for the first time in the Company's history.

Finally, we increased our dividend payments again this year. We paid out approximately $5.6 million in dividend in fiscal 2016. Our dividend yield would be about 2.3% based on our 7/31/16 closing price of $37.45 per share and our latest quarterly dividend rate of $0.22.

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

Great, thank you Dan. And, Dave, at this time what I'd like to do is open it up to Q&A and answer whatever questions are on our investors' minds. And as always ask your most important question first and then go to the back of the queue so we make sure everybody has time to get at least one question in.

(Operator Instructions) [Ethan Starr], private investor.

Good morning. Nice quarter and year.

I'm curious, you put out a press release on September 21 about announcing the hiring of a new scientist for R&D. And for the first time I can ever recall seeing this in the Company's history at least as long as I've been an investor in Oil-Dri, you mentioned specifically research into the uses of clay for humans. Can you please -- what do you see happening there and is there actually -- I've always thought it was only [Kaola] that worked.

Hi, Ethan, this is Ron Cravens. I will take a shot at that.

We've long known that our materials have broader potential use than just farm animals which we currently market into. The first recognition is that, in fact, humans are animals and --

Speak for yourself, Ron.

And to digestive systems, the anatomy, much of the physiology and certainly a lot of the function are similar to our monogastric animals, that being the chicken and the pig that we sell into extensively. We have a great deal of research in the area of digestive diseases and, in particular, we have interest in the clostridial diseases where we've demonstrated utility in major diseases, diseases caused by toxins from those organisms in both poultry and pigs.

And interestingly enough there is a major disease in humans called Clostridium difficile, which is also a toxin-caused disease and is the number one nosocomial infection in the United States today. So the opportunity is there.

We've expanded our capability by hiring Dr. Hongyu Xue, who is an MD researcher with a great deal of experience in the area of human gut health and nutritional management. So we see that there is some potential there. We will be exploring it as we go forward.

Thank you. I will go back in the queue.

Robert Smith, Center For Performance Investing. Please go ahead.

Hi, good morning. Thanks for my taking question. Congratulations on the year.

Glad to see Ron is aboard. I truly hope there is a way that he could come into Boston next week. I'd love to see him. I have still got a note about Clorox and so does that refer to your lightweight product?

I'm not sure what note on Clorox you are referring to.

That was a redacted agreement about the new product that you were doing for them.

It's back in the back of the 10-K. I think we just made an amendment to the agreement. I think it had something to do with barcoding.

But that's our historical, it's not a new product. Yes, that's the Fresh Step course that we manufacture and have since they --

Yes, I misinterpreted it. Something about an incremental factor, I guess, for you guys.

No, nothing new there.

So just let me circle back to this question of the life sciences in the humans. So can you tell me something about the effort as far as headcount and perhaps increase in the budget?

What are you looking for? What are your goals here?

We've looked at this for some time and we've got some core capability and we've put together some additional resources for the new MD that's come to the IC. We just brought him onboard and we're just in the process of putting the plans together.

First and foremost, we still are focused on our base business and getting our new products out and maintaining, developing a pipeline to support that. But at the same time, we will be looking more aggressively into the potential for use of the materials in humans. So that's really all I think I want to say about that at this point.

Okay, I will get back in the queue. Thank you.

Ethan Starr, private investor.

Yes, I'm curious, can you tell us a little bit about the new NeoPrime product, what countries is it registered in already? And just more generally what kind of results are your customers in China seeing? Are they seeing things that they'll talk to their fellow farmers about or people who raise pigs?

Okay, let's talk about actually both products, Varium and NeoPrime. They both have unique combinations of functional additives that have been tailored to produce a certain effects, one in poultry, the NeoPrime in the weanling pig, really about development of early gut development in both the epithelial cells as well as the immune system so that you get the animal off to a good start.

We've just recently received registration approvals in China for both products. Varium is actually slightly different, at least positioned different. We have been able to demonstrate equivalency with antibiotics which are under extreme pressure to be removed from the market.

And this product has no antibiotic activity, would not contribute in any way to antibiotic resistance and yet it's demonstrated utility in delivering reduced mortality and improved growth performance in broiler chickens. So that product actually is probably more of our focus today than NeoPrime. We have limited resources that we are going to put them on the places we think we can get the most bang for the buck.

We are registered in about 10 countries, major countries at this point. We just had an introduction this morning, in fact, at a major meeting in Mexico the CLANA meeting of poultry veterinarians. So we're actively in the process of rolling this out.

So far responses from the field have been very positive. And we anticipate this to have a good opportunity for us going forward.

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

Robert Smith, Center for Performance Investing.

So let's piggyback on this. What is your opportunity here?

Can you give us some ideas to the market size? And if you have equivalency with antibiotics, this seems like -- how would you define equivalency?

So you said it had the same action, so to speak. But if it's truly equivalent to antibiotics, then this could be really something. So let's just give me a little flavor about this.

Okay. First, we need to talk just a brief bit about the whole antibiotic issue. And this whole antibiotic issue, as you probably read regularly in the Wall Street as well as in the other popular press, is driven by low level feeding of common antibiotics, tetracycline and sulfonamide, some penicillins, clindamycins, several different antibiotics which have been used since the 1950s.

The issue is related to the development of bacteria that are resistant to these antibiotics which are still used in humans and the potential and risk of those organisms moving out of the animals and into the human population. That's what's really driving it.

From a market size historically this antibiotic feed market has been multiple billions of dollars. Europe about in 1996 banned the use of low-level antibiotics, FDA is now not banning but actively suggesting or asking manufacturers to remove those label claims.

You may have read Tyson is in the process of going at least 50% antibiotic-free production. Pilgrims has announced it's going to be fully antibiotic-free in the future here.

So there's a lot of movement in the market to try to reduce the use of antibiotics in farm animals as a means of reducing the risk to humans. The reason the products were used was that you improved health and productivity under modern management practices. What we have been able to demonstrate is that Varium will perform similarly to an antibiotic without the whole antibiotic issue.

So you are managing gut-related issues through different mechanisms than the antibiotics did. The result is the same: improved performances and reduced disease. So the market opportunity will depend on the customers' desire to eliminate antibiotics and look for alternatives that would be of value in their production.

So you could say the opportunity is billions. We are not going to sit and say that that's what it's going to be, but we anticipate that this is going to be a very attractive market going forward.

So, Ron, are the first targets at Tyson or Pilgrim that type?

We talk to all customers. Depending on who they are and what types of things they may be interested in we will talk to anybody. But we don't disclose at this point any of our customers or where we are at in that sales process.

No, I wouldn't think you would. But so on the order of priority, are you essentially going to the companies that have stated what their plans are? When they move away from antibiotics do they go and use nothing or would they gladly accept what you have to offer as opposed to a Company that --

Bob, I think we've covered enough of this. Let's move on. Obviously, we are going to do what makes sense.

So what you are outlining is perfect common sense and we try and follow that as much as we can. So we will go to those customers that we think that this will have the strongest message and will be in the best shape to receive it and value from it. But great, it's a great opportunity.

Any chance that Ron will be available next week?

Zero chance.

All right.

I'm in China next week.

He's in China next week. I will be in Boston next week. Just don't ask me any of these types of questions and it will be great.

Move the meeting to China. I will get back in the queue.

Ethan Starr, private investor.

Yes, I'm wondering if you since the last call you've gotten any more private label accounts for the lightweight cat litter?

We have. We've gotten some big ones but they haven't shipped yet. So I'm not sure we're going to talk about them.

But yes, we are continuing to put on new business. We've got some big ones shipping in December which will be exciting and we could probably talk to you at the end of that conference call or that quarter.

Since nobody has asked, I'm going to ask the question, I'm commandeering the conference call. And I want to hear from Lisa Mak. I want to hear about our 360 marketing program around the whole Ultimate Care launch.

Absolutely. So this year in March we launched our biggest media campaign ever and we are going to continue to build upon that momentum. And we know that it's been working for us in terms of building brand awareness and purchase interest and driving sales.

So this fiscal year we are going to have over a 60% increase in media investment. A lot of that is spent on TV and video because we know that that has been working really well for us. And then we're also going to have digital, social, email, native advertising, mobile, all sorts of elements of the 360 marketing plan because we want to make sure that we are touching across all of the consumer touch points as she is going from educating herself and researching products all the way to purchase, so covering that entire path to purchase.

We recently did a brand integration with Live! with Kelly starring Kelly Ripa. She is the host of the show, the number two rated syndicated talk show right behind Ellen. And we were able to get a weeklong sponsorship the week of September 19 which did extremely well for us.

So what that meant was we were sponsoring a contest that was had a grand prize of $10,000 as well as a year's worth of Cat's Pride Fresh & Light litter and we had great exposure, great participation in that contest. We had over 48,000 entries in the contest. It performed well above ABC's Live! with Kelly contest in the past.

They said it was extremely strong. We had over 87,000 video views on our micro-site. So it was on Live! with Kelly micro-site which basically showed the Katherine Heigl partnership video as well as Kelly Ripa's announcement of the contest.

And we've seen a huge uptick in our website traffic as a result of this contest. So overall we have 48 million impressions that that contest brought to us which is huge.

And we are going to continue to do more brand integrations in the spring on Good Morning America, The Today Show as well as The Talk. So great plans in store for next year.

Great. Thank you. Other questions?

Robert Smith, Center for Performance Investing.

So how much of the $18 million was media?

Did we break that out? We didn't break that out.

Well, can you give us some feel for the incremental ad spending in fiscal 2017?

Yes, we did. It's going to be up 60%.

Okay, in total? Got you.

So could you also address the question of the pension expense line which is really moving. So you have a 7.5% expected return, is that realistic in today's environment? How do you feel about that?

Robert, this is Dan. First of all, the pension expense went up because the discount rate went down. It went down to 3.36%, so the liability went up year over year.

In terms of our expectation of 7.5%, that is generally in line with our historical average for a return on our assets. And who knows what's going to happen over the next 10, 20, 30 years. I mean pension is a very long-term asset.

We'll continue to assess that as we go along. We have a committee that meets quarterly to discuss our pension assets. And so for now we believe that's a reasonable assessment given a very, very long-term view.

Great. And just finally for me, this question, you made some kind of a statement that in the last quarter that due to competitive environment the growth rate slowed in the lightweight. So can you just give us some color on that?

Sure. Yes, the good news is that the marketplace is very active both in terms of lightweight and non-. And so I'd say good because we want this lightweight thing to take hold.

I'm going to pause for a second. Yes, so I'm back. I just wanted to make sure I could talk about all this.

But, yes, I think August 7 was when the final of our patents got issued. So we have gotten 100% of our patents issued on all the lightweight that we filed five years ago. And so we want lightweight to win.

I love when the competitors invest behind lightweight media and to get that ball rolling. We believe that's all going to play to our benefit both on the private label side, the branded side and the intellectual property side. So that's good.

The downside is, you know, it's making it hard to slug it out with our little brand. But on a 52-week basis we gave you the 24 week in the IRI release. I just pulled this just to see how do we do for the year.

We are sitting here a year later. Ultimate Care was up 94% for the year and Fresh & Light, which was the core business, was down but we did walk away, some of that money that we walked away from in the dollar channel was Fresh & Light. I looked at it.

So net-net-net our total lightweight brand was up for the 52 weeks and it depends on how you want to look at it with that factor. But I will just as we are spending a lot of money on Ultimate Care and that brand is growing rapidly from a small base but it's moving well.

And then private label lightweight, well, it's still a small number, was up 955% during the year. But it's still a small piece of the category. The total sales were only $2.4 million.

Our total lightweight business at retail was $63 million for the year. That made us the number two player with a 21 share. Number one was Tidy Cat with a 46 share at $137 million, number three was Arm & Hammer Church & Dwight with a 17 share and then Fresh Step was number four with a 12 share.

So we jumped to the number two. So, obviously, if the whole category went lightweight we would be in great shape. That's what we are hoping for and I think as consumers can find the product they want at the price they want with the performance they want they are all going to choose lightweight.

I have yet to find anyone who said I prefer to take home a heavier product. So, yes, if you gave me two even products at the same relative price points, same performance, I'm going to take the one that's heavier because I just like to carry home more weight. I mean it defies logic and it's bad for the environment.

So we are going to keep pushing the message. In the upcoming year we are really going to focus on days of use and efficacy because we believe that's an area that we excel in and that some of the competitors have hurt the efficacy of the product. Just to get light they have put in lightweight fillers.

It would be very analogous to when liquid detergent went concentrated. If the loads went from 80 to 40 that wouldn't have been innovation just making it smaller. That would've been a rip off and that's sort of what's happening in some of the product lines.

So days of use is going to be something we are going to talk about. And then sort of a tertiary benefit we're testing is the whole idea of the carbon footprint and the environmental aspects of going light. You can put 50% more units or 100% more units depending on how much lighter you are getting on a truckload, which would cut the carbon footprint significantly made by cat litter.

So --

Hey, Dan, do you think that the Nestle reconsideration will be in fiscal 2017, the decision on that?

Not on the lightweight, no. We just filed suit on the lightweight. That's public knowledge too.

The earlier suit we filed was on a different technology and you could do your own homework on that. And that one these things take a long time. They just do.

So I wouldn't put a time frame on it. I've no idea.

All I can tell you is at this point we feel better today than we felt a year ago. I don't know if you want to cover the public actions that happened, and they all went in or favor. So Doug Graham will cover that real quick, but we had a good year from an IP standpoint.

Great, so there was a challenge by Nestle of our patent in the U.S. Patent Office and all of those claims that were raised against us by Nestle were dismissed. There's a rehearing on that pending. We are waiting to hear on that rehearing, but it's fairly rare for all claims to be, all patent claims to be challenged and upheld by the Patent Office. (multiple speakers)

And they were all upheld.

And on our lightweight patents we filed something like 35 claims and all 35 were issued.

All of those have been issued. We have other continuing claims, as well.

Right. So it was a good IP year for Oil-Dri.

But it's going to take a lot of years to monetize. It really is. But the good news is the lightweight patents now run through 2030 --

20-year patents.

Yes, so 2032 I want to say, ish.

2036?

No, I thought it went back to 2012, I don't know. Some of them. Some of the claims go to 2032, I think it may be some go to 2036, but anyway they go for a long time.

So we want the snowball to keep growing. And we will play it out.

Good, well thank you everybody. I hope you sense just the general enthusiasm we have.

The good news is as we communicated, so I can communicate it to you, is we truly believe as well as we're doing. And to see our gross profit margin jump during the year the way it did was what we've been predicting was going to happen as we walked away from old, unprofitable business and layered in the high-value Amlan business and Ultimate Care.

These are high-value applications for our mineral. So we generated an extra $17 million of gross profit during the year which is pretty incredible and, of course, then I spent it all.

But it allowed us to really hit the gas pedal and not hurt our balance sheet. And that's the cool thing.

So I'm going to reiterate the little bit of guidance we've ever given which is our goal is to keep this up. We are not going to drive the Company into debt and we are going to keep recommending to the Board that we increase the dividend and they will look at that every June like they always do. But my expectations are we will raise our dividend again in June, and so I'm just giving you that for guidance.

So as an investor you could say, yes, I can see the profit will come as they start to someday pull back on the spending or the sales start to be commensurate with the spending, one or the other. Right now we are investing heavily in media greater than the sales would warrant but at least they've given me the assurance they are not going to go into debt to do this whole thing and they are going to keep raising my dividend so I'm going to be in it for the long haul.

That's how me and my family look at it and that's about the best guidance or the most guidance we've ever given. So thank you. Whoever is coming to Boston next week I'll look forward to seeing you there and if not we will talk to you again in a quarter.

Thank you very much for your participation in today's conference. This concludes the presentation.

You may now disconnect. Good day.