Oil-Dri Corporation of America (ODC) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2017 investor teleconference. My name is Greta and I will be operator for today. (Operator Instructions)

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

Thank you, Greta, and welcome, everyone, to the first-quarter teleconference. Joining me today from the Oil-Dri team: Dan Smith, our CFO; Doug Graham, our General Counsel; and Reagan Culbertson, the Investor Relations Manager. And Reagan, will you cover the safe harbor?

Sure. Thanks, Dan. 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 evaluating any investment in Oil-Dri stock. Thank you for joining us.

Thanks, Reagan. And Dan, will you walk us through the quarter?

Sure will, Dan. Good morning and happy Friday. Oil-Dri reported EPS of $0.28 per diluted share for the first quarter of fiscal 2017, which was down substantially from the record quarterly earnings of $0.75 reported in the first quarter of fiscal 2016.

First-quarter sales of about $66.6 million were down about 2% from the first quarter of 2016. Sales grew about 6% for the B2B segment, but declined about 7% for retail and wholesale. Despite the sales and income decline, our gross profit percentage for the quarter improved to 31%. The margin was helped by better product mix and lower packaging costs, but reduced by higher manufacturing and fuel costs.

Earnings for the quarter were down compared to last year, primarily due to increased advertising expenses in the retail and wholesale segment.

Our retail wholesale team reported a loss of about $500,000 for the quarter. This compares to over $5 million of profit for the first quarter of fiscal 2016. The loss for the quarter was a direct reflection of the approximate $5.4 million increase in our advertising spending in the first quarter of fiscal 2017.

The spending increase was part of our ongoing marketing campaign to promote our Fresh & Light Ultimate Care lightweight cat litters and was consistent with our fiscal 2017 advertising plan. We expect our full-year advertising expenses to be greater in fiscal 2017 as compared to fiscal 2016. The sales decline in retail wholesale segment was primarily driven by our decision to walk away from low-margin cat litter sales in fiscal 2016.

B2B, our team generated a nice sales increase for the quarter. We achieved about a 53% sales growth in our animal health products. The sales of animal health products expanded in most of the international markets where they are sold.

We also saw 6% sales growth in our fluid purification product line. Growth was primarily driven by sales to producers of edible oil in Europe. The sales increase helped to generate about 3% more segment income for the first quarter of 2017 as compared to fiscal 2016.

Looking at our balance sheet, our cash investment balance is about $21.4 million, which was down about $3 million compared to a year ago. The balance was impacted by increased capital and advertising spending in the first quarter of 2017 versus the same period in fiscal 2016.

We continued our dividend philosophy and paid out about $1.5 million in the quarter for dividends. Our dividend yield will be about 2.6% based on our October 31, 2016, closing price of $33.76 per share. And our latest quarterly dividend: about $0.22.

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

Thank you, Dan. And before we open it up to Q&A, I just want to put a few comments of my own. Because the quarter played out pretty much as we anticipated and continuing the trends we've been communicating for almost a decade now, which is we are continuing to live up to our mission of creating value from sorbent minerals.

And the way we measure that value is to determine how many tons -- that is our unit of measure. How many tons are we shipping out and how many dollars are we getting back. And we continue the positive trend in this quarter.

So a year ago, we shipped 211,000 tons in the first quarter. This year: 194,000 tons. And you can do the math yourself, but I will make it easy for you on a couple of the key metrics. So our net selling price per ton in the quarter jumped from what was a then record last year of $321 a ton -- that was the record for the first quarter -- to $344 a ton this year.

So a nice healthy increase, really in a noninflationary environment, which speaks to the product mix of selling more and more value-added items that our customers are receiving value and then are sharing some of that value with us.

And then on the gross profit line, last year in the first quarter was the first time we had ever broken $20 million in GP for a quarter. And we not only did that again this quarter, we actually beat last year. So our $20.725 million in GP was an all-time record.

And then if you do the math, you can see we made just over $107 a ton. That is the first time we have ever broken $100 a ton in a quarter for GP. So the trend line is continuing, which is positive.

The top line was weaker than anyone would like, but not really than we had anticipated, as we are continuing to lap the jettisoning of some low-level, low-value items that I don't even think we were making any money on when you do the fully (sic) activity-based costing on.

And so we got out of that business, and we are still lapping some -- a quarter of that. Some of that was -- a lot of that was in the first quarter a year ago. So the tons are down, but both the sales and the GP per ton is up. We're obviously continuing to spend heavily against what is really a disruptive, game-changing innovation, which is lightweight litter.

And if you look at the IRI or the external data, which we use and subscribe to, and so we use it to kind of keep an eye on the whole market. What we can see is for the 12-week period ending November 6, 2016, the category in dollars grew at 1.5%. The cat litter category grew at 1.5%.

Lightweight grew at 2.3%. So while it did grow greater than category growth, meaning it is continuing to become a bigger part of the category, it did not grow at the same exponential level it had been growing a year or two years ago.

And the question is: Why is that? Is it because consumers don't want a lightweight litter and they would rather carry home heavy bulky containers? And the answer is no. I would use the analogy to any disruptive game-changing technology.

But until the consumer can get the product they want at the price they want without making negative trade-offs, they're going to stick to the old format, which is why we -- none of us see a lot of electric cars driving around. We're seeing more and more Teslas.

But if you could get the exact car you want at the price you want with the performance you want and have it be electric and fill up as easily as you fill up with gas, I think you would see a greater adoption of electric cars. We just don't have that. There's too many negative options.

That is what's happening in cat litter. Two of the major players -- and the numbers speak for themselves -- Arm & Hammer and Fresh Step are firmly entrenched in the old technology. So their heavyweight litters are very good. They are doing very well. You can call them the gas guzzlers. Their gas-guzzling models are doing great. And so they really don't want to see those go away. So a lot of the new launches they're making in the category are back to the heavy.

But I would argue that their consumers are only buying the heavy because they can't get Arm & Hammer lightweight or Fresh Step lightweight with the performance and price that they want. So they are willing to carry home 20 pounds instead of 10, or 40 pounds instead of 20.

But I can't imagine that if they surveyed their customers, that a Fresh Step user or an Arm & Hammer user would say yes, I prefer to carry home 40 pounds versus 20, or 20 versus 10. It defies logic because the heavy consumer in our industry, over three-quarters are women 25 years to 54 years of age.

So we continue to be fully committed to the lightweight segment and the fact that long term, it is the best for the consumer, is the best for the retailer because they can cut the number of trucks they are bringing in in half. And it's the best for the environment because you can cut the carbon footprint nearly in half. There's math involved, but let's say 40%. You can cut the carbon footprint by 40% by switching to lightweight.

So all the trendlines are in its favor. In the short run, it's a battle. And luckily for us, Nestle Purina is fully behind their lightweight and it's a very good product, albeit at a higher price than ours. But their consumers are willing to spend for that performance, which is great.

So they are behind it and we're behind it. So if you look at the brand dollar share of the lightweight scoop segment, our overall branded share is about a 3. We have just over a 20% share of the lightweight segment. We are the number two player. Nestle Purina has a 48% share. Church & Dwight is third at 16%, and then Fresh Step is at 9.6%.

Additionally, the private-label lightweight segment is growing. It is up to 2.3% of the segment. It's up 13% year over year, and we have over a 70% share of that segment.

And we can see that where we don't have it, the product really isn't moving. Our units per store per week movement is at least double and in some cases triple over what those other retailers are experiencing. So we are confident over time that the consumer will vote and want a high-performing private-label lightweight product, which is what we are delivering.

So we continue to be very bullish on our long-term prospects. We're going to continue with the strategy that we communicated at the year-end conference call, which is we're going to continue to invest heavily to generate trial and awareness behind our lightweight brands.

But that fortunately, both the B2B businesses are doing so well -- all the B2B businesses are doing well, and the consumer business is expanding margin well enough that we are healthy. We can keep funding this thing and keep fighting this fight for a long period of time.

And as I mentioned in the last teleconference, we will be recommending to the Board, as always in the June meeting, to increase the dividend, which will then be for the 14th consecutive year. Obviously, it's up to the Board to decide, but all indicators are very positive on that front as well.

So we're going to continue with the strategy. It is working. And it is just -- it's going to be a ground war. And as I have communicated to the team, it is not going to be a Hail Mary pass and bombs. It's going to be a lot of 3- and 4-yard runs and just grinding it out at retail, gaining incremental distribution, gaining incremental promotions.

Continuing communicating the message that high quality at good prices is what the consumer is ultimately going to want, and they just need to know they can find it. And Cat's Pride Fresh & Light Ultimate Care.

So with that, Greta, I would like to open up the phone line for Q&A and answer anything in particular that is on our investors' minds.

(Operator Instructions) Ethan Starr.

Good morning. Nice increase in the gross profit margin.

Thank you, Ethan.

I am very pleased to see that the foreign subsidiaries generated a profit in the first quarter. And I'm wondering are there -- are the increased sales in profitability in the foreign subsidiaries sustainable going forward?

Not only are they sustainable, I think what you are seeing is a trend line. And fortunately, the one that I am most -- it is our biggest foreign unit and it's the one that I am most focused on, which is Canada is really benefiting from the lightweight revolution. So lightweight has made its way across the border.

Canada -- I think it's something like 80% of the population lives within 100 miles of the US border. And when I lived up there for 3 years, I was constantly getting US TV and US commercials. So we know our Katherine Heigl TV commercials are spilling over the border, and our salesperson up there, Andrew Jones, is doing a great job getting distribution on Fresh & Light Ultimate Care in Canada.

And also, Canada is a very private-label-driven market. 20% of the US is private-label, but 40% of the Canadian cat litter market is private-label. And so we feel we are particularly poised to win and gain private-label lightweight customers up in Canada. So I think what you are seeing is the beginning, and hopefully you will continue to see a positive trend.

Okay. Do you have any private-label customers in Canada now?

We do. We're not going to name them, but we do.

For Fresh & Light.

Well, private-label --

I mean, private-label. That's what I'm saying. For private-label lightweight, you have customers already?

We do.

Okay, great. I will get back in the queue.

Robert Smith, Center for Performance Investing.

Thanks for taking my questions. On business-to-business, Dan, can you give us a little more color as far as the geographies go and how they divide currently and what you foresee for this fiscal year?

You got to be more specific. Are you talking about --

Animal health.

Oh, for animal health. Yes, so I'm not going to -- I think I'm going to stick to the discipline of Ron Cravens will be on pretty much every other teleconference. He is the president of our animal health division, and anything I say, he knows so much better than I do, to be honest with you.

So I would rather just defer him. So let's save our animal health questions for when Dr. Cravens is on the line, unless you have something very general. But I can --

Well, can you give me the current banner on geographies?

No, I can't. That's what I'm telling you. So I'm not going to make it up.

All right. So in private-label lightweight, do you expect to close additional contracts in this fiscal year? Of some note, I mean?

Yes. So here's how it works. You make the sales calls, you get a commitment, and then it takes anywhere from four to six months to create the packaging, get it ready, and then start shipping. So we already know when things are going to start happening.

So I'm not going to name names yet, but we are -- at the end of this month, we are going to be shipping a major new account. And then by March, we will be shipping a second major new account.

So yes, we are already -- not only is it just in the inception of it, it is already in the package design. We're already making the product. We are already getting ready to ship the December customer. We're in the package design phase with the other customer. And they are both major national players with thousands of retail outlets and so forth.

Yes. And of the current lightweight that you're making, with private-label and your own, what percentage is private-label? Of your own. Of your own lightweight.

So of our own lightweight sales, what percent is private-label.

Yes.

Okay. Currently, it's probably 10%, right around, give or take.

Okay. And last night, we had discussed that the penetration is about 20%?

Again, I'm not following you. Penetration where? You mean like --

In lightweight. Lightweight private-label, I mean.

Well, yes, nationally, private-label represents 20% of the cat litter category.

All right, got it. Thanks, I'll get back in the queue.

(Operator Instructions) Ethan Starr.

Following up on the private-label lightweight, what roughly percentage of the -- I guess the grocery store universe or the major chain universe do you have? Can you give us more color on that?

Well, I will tell you that I think I have been communicative on two of the major players we don't have.

Okay.

And I'm not sure if I want to repeat their names on this call. But let's just say we don't have two of the major players who, in the overall category, account for 30%, 35% of the ACV. Meaning, they do 35% of all the cat litter sold in the United States. 35% to even 40%.

We don't have either of those 2 accounts, yet we have about 78% of the sales, which shows that what they are selling is not moving because they represent -- instead of representing 40% of the private-label lightweight, they represent -- these 2 accounts under 20%. They represent about 16%.

So they are literally getting 67% less than their fair share of the private-label lightweight segment. And it's not because their consumer particularly loves to carry home heavy product. It's because the products that are offering their consumer in the lightweight private-label format are not performing. So they're not getting the repeat. They're getting ones-and-dones.

Okay. So the 78% -- you are selling 78% of the private-label lightweight?

In dollars. In dollars.

In dollars. Okay, makes sense. And then to what extent will the new ERP software system improve efficiency and save money for Oil-Dri?

Great, I will -- Dan, why don't you cover that one?

Ethan, first of all, we are looking at -- we're just in the beginning phases of the implementation process. And if you have been involved in those types of systems in the past, it is -- we're looking at a two-year implementation.

So really, it's too early to give you that kind of answer. Certainly, most systems provide better utilization of your inventory, better utilization of your labor force, and understanding where your productivity is in various production lines. But that is typical for most modern systems. But I -- we don't have like a specific number in mind at this time. We're way too early in the process.

Okay, thanks. I will go back in the queue.

Robert Smith.

So could you give me an idea of the -- how you measure productivity and the spend for your lightweight?

Yes. So there's a thing called the marketing mix, which helps you determine where you are spending your money and then what is your return on investment is by each area. You got digital, you got TV. We're not doing a lot of print. You've got all sorts of different marketing things that we are working on, integrations.

And you can actually get down to granularity of specific events: when we drop an FSI or when we do an instant redeemable coupon, what was the cost of it, what was the redemption and what was the repeat and so forth.

So yes, that's -- we're not going to share any of that. That's all proprietary at Oil-Dri, but that is exactly the kind of stuff we are looking so that when we go to then invest in the next quarter, we are putting our money on those areas that give us the best ROI.

Dan, can you give me an idea where the CapEx is being spent?

Dan, do we share that kind of detail?

Are you doing any bricks and mortar?

I am deferring to Dan Smith on that. I wonder if they dropped off the line. We are all in remote locations today. Dan, are you still on the line?

He's actually dropped off. I'm going to have to get them back in.

They did jump offline. Well, good, now I can talk about him. I'm not -- we're doing a lot of ROI type projects. And then also process improvement type projects, where, for instance, we were calling Ultimate Care, the relaunch a year ago, 3.0. We're now up to 3.2 because we have dramatically reduced the variability and therefore increased the product quality. It was great before, but it is really off the charts now.

So a lot of investment in process improvement. And then a lot of investment really in a high-ROI type project. Nothing like building a new mill or something this year or new greenfield plan. Nothing like that.

Did I answer your question, Bob? I think we lost everybody.

Apologies; they weren't -- I was not able to connect them back into the conference. But you do have another question from the line of Ethan Starr.

Following up on Bob's question, how is the upgrade of consumer product manufacturing lines going?

So that's what I was talking about, Ethan. It is going very well. So that's why what I call Ultimate Care now, 3.2. Because what we've been able to do is dramatically reduce the variability and increase the performance.

So I can tell you when we first launched Ultimate Care, really the benchmark for quality was we wanted to be the best lightweight out there. And so we were benchmarking ourselves at the time against Tidy Cat Lightweight.

Now we have upped the bar. We want to have the best product out there period, which we think did before, but that is literally our benchmark now. And now we go right after the number one seller, which is Tidy Cats, their heavy formula.

So we benchmark our performance and we perform extremely well if not better in all the major metrics: clumps, strength, dust, tracking, odor control. And so we now position it: it is the best litter. It's not just the best lightweight litter. We don't even need -- it's the best litter that happens to be lightweight. Not the best lightweight litter. So we're very excited about the product quality.

And our next wave of advertising. We're still going to run the Katherine Heigl spots where she is the cat therapist. But then our next wave will be more about the general efficacy and communicating -- the days of use, I think I have talked about this before, but how long does the product last? How many loads can you do in that liquid detergent analogy.

And the competition -- some of them measure very well on that metric. You can guess the guys that aren't selling as much on the lightweight part of it, their product doesn't measure up so well. So we're going to make that an issue.

Okay. When can we start seeing these new ads?

Well, you're going to see --so in the spring, you're going to see heavy on the last run of the -- they're not old, but the current ads, let's call them.

Sure.

I don't want to call them old. And we're very excited, like, for instance, we had a -- hopefully you spotted the Live with Kelly integration where we sponsored Live with Kelly Ripa for the whole week.

And ABC was so ecstatic with the reaction from their viewing audience, the number of people that entered the contest to win and everything -- they said it was really off the charts -- that they want to come back and do another integration with us in the spring. I'm not going to give you all the details around it, but soon enough, we will.

But it's going to go longer and be a bigger splash, and we're very excited about that. That will again be with the current advertising.

Then sometime in the summer, we're going to be -- we are right now working on all the analytics and then the creative behind it on the new spots. Sometime in the summer, we will be shooting hopefully the new commercials.

As you may or may not know, Katherine Heigl is expecting at the end of this month. And so she's got bigger things on her mind, and rightly so. And so she's got to focus on her and her family. But hopefully by the summer or maybe even early fall, we will be shooting the new commercials and then they will be the bedrock of our next campaign.

Okay, great. So are you seeing better reviews of the new -- of the 3.2 on your website? On the Cat's Pride website?

We're seeing great, great reviews. And you can look obviously at walmart.com, you can look at amazon.com, you can look at our website and see the reviews. And they are very, very positive on Ultimate Care. And then when you sort them, like you can for time periods, they are getting better. So that's what you want to see, that they are --

Okay, that was my key question. One last quick question. Last quarter, you mentioned that you expected a ruling on a motion for reconsideration to the Patent Trials and Appeals Board? Has a ruling been made?

I will defer to Doug for that one.

Yes. That is a publicly filed proceeding. We have not gotten word on that, but that is something that is available to everybody when it finally issues.

Okay, but it hasn't issued yet. Yes, I was looking for that. I couldn't find it, which is why I couldn't find it. Okay, thank you.

Robert Smith.

Do you plan to introduce any new research and development products that are going to come to the market in fiscal 2017?

We do. I'm not going to tell you what they are, just because I don't want to tip off the competition as to what we're doing. I'm probably not even tell you which divisions (sic).

But they will straddle both. We're going to have a new -- a lot of good innovation. Nothing -- they are sort of -- I will call them product line extensions; that makes them sound less sexy than they are. But they are in traditional markets. It's nothing that's going to get us into a new market. It's going to get us deeper into the existing markets we are in. And yes, that is definitely in the works.

Okay, thanks so much.

And I would like to turn the call back to Dan Jaffee for closing remarks.

Great. Well, Greta, thank you, and investors, thank you. And I think -- I know our transparency is paying off. The best we can do is tell you what we think is going to happen, then go ahead and execute, and then tell you what happened.

And that's really what the first quarter was all about. When you saw that record gross profit, but obviously also record media spending. And so now we're getting more transparent on the dollars that we are actually going to spend and did spend, because it's a major commitment by you, our investor, and by us, the Company.

And so we're going to continue to be as transparent as we can be without being over-transparent, where we tell the competition what plays we're going to run and when we're going to run them. So thank you. Happy holidays to everybody. We have our annual meeting next week in Chicago for any of those of you who are going to be that. But if not, I wish you and yours a happy and healthy new year. Thank you.

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