Oil-Dri Corporation of America (ODC) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Oil-Dri Corporation of America Q3 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference call, Mr. Dan Jaffee, President and CEO. You may begin, sir.

Thank you, Kevin, and welcome, everybody, to our third quarter and 9-month Oil-Dri teleconference. With me in our conference room here in Chicago is Doug Graham, our General Counsel; Dan Smith, CFO; Mike McPherson, our Chief Development Officer and here to discover animal health and animal-type questions; and then, of course, Reagan Culbertson, who heads up our Investor Relations. And Reagan will cover the safe harbor.

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 in evaluating any investment in Oil-Dri's stock. Thank you for joining us.

Great. And I'd like to turn it over to Dan Smith, Chief Financial Officer, for a review.

Okay. Good morning, everyone. Oil-Dri reported EPS of $0.44 per diluted share for the third quarter of fiscal '17. We reported a loss of $0.13 for the same quarter in fiscal '16. Year-to-date, we recorded EPS of $1.29 per diluted share, which was about 12% better than the $1.15 reported in fiscal '16.

A key driver of the income change was the decision to reduce advertising in mass media during the quarter. This decision led to an advertising reduction of about $6.4 million for the quarter as compared to the third quarter of fiscal '16. The company plans on shifting away from mass media towards more targeted trade promotions for the balance of the year.

Third quarter sales of $64.7 million were up a bit from the third quarter of fiscal '16. Our sales for the first 9 months of fiscal '17 of $196.5 million were down slightly from the same period in fiscal '16. The small sales decline resulted from lower sales in the Retail/Wholesale segment that were partially offset by improved sales in the B2B segment. The sales decline in Retail and Wholesale was largely driven by the decision to walk away from some low-margin cat litter business during the second half of fiscal '16.

Our gross margins contracted in the third quarter as compared to the third quarter of fiscal '16. Our margins were adversely impacted by greater than a 50% increase in the cost of natural gas used to dry our clay. We also experienced some other manufacturing cost pressures. Increased sales of our higher value-added product lines had helped offset some of the manufacturing cost increases.

Our Retail and Wholesale team reported a $1.5 million profit for the quarter, which was substantially better than the approximate $4 million loss generated in the third quarter of fiscal '16. Sales were down for the quarter, but the key driver of the profit increase was the reduced advertising spending. Year-to-date, the segment's profit was up about 6% from fiscal '16. Year-to-date improvement was driven by a combination of reduced advertising spending and improved sales of our Fresh & Light, Ultimate Care and private-label lightweight cat litters. These improvements were offset partially by the higher fuel and manufacturing costs that I previously mentioned.

Our B2B team continued to see sales growth for the quarter. Sales were up 8% for the quarter to $24.2 million and 6% for the first 9 months as compared to the same periods in fiscal '16. Sales were up strongly for both our fluid purification and our animal health product lines during the quarter and on a year-to-date basis. The growth of these 2 product lines offset the cost increase we have experienced and helped increase the segment's profit for the quarter and the year-to-date compared to fiscal '16.

Looking at our balance sheet. Our total assets declined over $210 million, and our debt is down to about $12.3 million. Our cash and investment balance was over $32 million, which is up over $4 million compared to a year ago and up from the second quarter of fiscal '17. Finally, we paid out about $4.4 million in dividends so far in fiscal '17.

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

Thank you, Dan. And as always, we'd like to now open it up to the Q&A and cover whatever is most important to our listeners. And please ask your most important question first and then go to the end of the queue just so everyone has time to get at least one question in.

So Kevin, let's open up the line.

(Operator Instructions) Our first question comes from Ethan Starr, who's a private investor.

I'm curious. What is the potential for your clay to be useful in water purification? I understand you're doing some research in that area in conjunction with Marquette University.

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That's skunkworks stuff. But we know our clay works in a variety of applications. I would say that would be far off into the future. But we certainly hope it materializes. But once it gets more in focus, we'll certainly discuss it.

Our next question comes from Robert Smith with Center for Performance.

Your release says that the animal health sales were up both domestically and internationally. And you saw strong growth in China. So what is the -- how would you characterize strong growth in China? Can you give me some kind of an idea of the numbers -- the ballpark numbers?

Year-to-date, the sales are up 36%.

Okay. And you certainly have a compelling product. What might we see in the next -- in the remainder of this year and into the remainder of the fiscal year? I mean, new fiscal year beginning.

Bob, I mean, we're not going to really give any kind of forward guidance. We just never do, but...

What should we be looking for, I mean, as far as the -- can you give me some color as to what's going to kind of cause this to pop?

I don't know. I would say I would look to the growth to be more linear than exponential. I mean -- so yes, could it potentially pop? Yes, but I wouldn't value that too high. I would say the chances of popping are much less than just continued linear growth as we continue to roll out new products, put on new distribution, put on new customers. It's really a creep-crawl-walk strategy versus a "Hail Mary, double the company" strategy.

Okay. And the change in distributors in Latin America, does that have to do with Brazil? And what was the change?

There was a major distributor that sold in the northern part of South America, Central America and Mexico, with most of the sales being in Mexico. And we terminated our relationship with them; bought back the inventory, which reversed the sale; and had a sizable inventory level. And we're now selling those at, obviously, a much slower rate to the new distributor.

But you say it's an anticipation of a ramp-up to serve that area, right?

Yes. Bob, let's go to the end of the queue and -- just so all the people have time to ask some questions. But hopefully, you'll have time to...

Our next question comes from John Bair with Ascend Wealth Advisors.

Wondering if you could give us any insights on trends regarding online sales. In other words, are you seeing any shift by the consumer to order your product for home delivery as they have been doing and with regards to items like apparel or electronics or other household goods. Are you seeing any impact in that regard?

Yes. We are, and the whole category is. And I guess it makes sense as long as the e-tailer is willing to eat the freight. If you, just as a consumer, tried to buy a $7 or a $10 jug of cat litter that weighed anywhere from 10 to 20 pounds depending on what you bought a light or a heavy format of it and then any kind of normal retailer to just put it in a box and ship it to you, the shipping cost would be more than the product. So it would never make sense to buy such a product online. But what's happening, as you all know, is you've got Amazon Prime, where you can pay a fee for the year and then get free 2-day shipping. You've got Chewy.com, which is similar, but it's a pet -- it's focused on our industry. And I think any order over $49, they give you free shipping. So the -- once the e-tailer, as we call them, is willing to absorb the freight, it makes sense. So the business is booming. We're happy with it because we sell either way, and so we're making our margin. Whether or not those e-tailers are going to forever want to continue to lose money on that particular item because they believe they're making it on the whole basket or whatever, that's up to them. But from our standpoint, it's definitely a rapidly growing segment. We are participating in it very heavily as are all of our competitors. And we'll see how it plays out. So a great question. It is -- and one more thing that isn't captured in scanner data like IRI or Nielsen. So again, whenever we report any kind of Nielsen information or IRI, it's getting to be a smaller and smaller percentage of what is actually captured, because that segment is growing outside of their purview.

So you're able to -- you are -- am I hearing this that you are able to see or distinguish those kind of e-tailer sales? And I guess, from their standpoint, they could just -- if they're going to give you free shipping at $49 order, they could always accommodate or bump that level up to make it $79 or whatever and -- which would drive their sales overall but would also help shelter your product or other, let's call them, bulky products like that. But I guess the question is, you are definitely seeing a shift by the consumer towards that kind of thing with the e-tailers?

Yes, and more exponential growth on that side than linear.

Our next question is a follow-up question from Ethan Starr who's a private investor.

I'm curious. So what market share did the regular non-Ultimate Care Fresh & Light litters have in the latest 12-week period in the lightweight category? Do you have that?

Well, we -- I kind of -- what market share did the non-Ultimate Care...

Fresh & Light litters.

Okay. I'll see if I have that data with me. I don't think I do. I think I just brought the summarized data.

Fine. We can do it later.

Yes. It's -- I will tell you we are strategically deemphasizing the Fresh & Light and emphasizing Ultimate Care. We're still very much behind both of them, because we market -- all the marketing is behind the "look for the green jug." But we believe as the market migrates more to lightweight and away from heavy that the consumer will want the 50% lightweight. So anytime we get new distribution and things like that, we're opting to slot the 50% lighter Ultimate Care versus the 25% lighter Fresh & Light, but they're both fabulous products and because we launched the Fresh & Light first, it's still bigger than the Ultimate Care. But what you see is basically a migration from the 25% to the 50%.

Great. Okay. And you gave figures for the Ultimate Care and for the private-label lightweight. And are those based on the same 100 -- same piece of the same pie?

Of the pie? Oh, you mean is it a combined share number? I don't...

Well, the same -- they're out of the same 100%?

If you tell me where you're looking, I can try and answer that.

Towards the end of the press release, you mentioned like 5.1% and 2.4% for the Ultimate Care...

Yes. Yes. You can add those together. We came up with the -- yes, yes, yes.

Our next question is a follow-up question from Robert Smith with Center for Performance.

So the 2 numbers that you gave for lightweight at 2.4% and private label at 30.6% for Multi-Cat, what kind of progression do you think could close that gap will you be seeing in the next, say, year?

Again, not going to get too -- I would just tell you that the lightweight private label is continuing to grow rapidly because it's both growing in terms of unit movement per point of distribution as we execute a pretty aggressive pricing strategy and because we're gaining more and more distribution. So I did always promise to tell you when we got new distribution once it was out into the marketplace. So the major shift between last quarter and this quarter was we shipped Dollar General. We are now in all of their -- I don't remember how many stores they have, close to 10,000 stores. And it's the private-label lightweight item. That is our item. I've been doing store checks. It's out there. It's looking good, and we're expecting big things out of that. They don't have to move a lot to be a big player. So that was the major thing that we had been working on. And so that is now out there. Albertsons/Safeway is out there. We're making that. So we pretty much got, as we said, about an 80 share of the private-label lightweight segment.

Our next question comes from Ethan Starr, who's a private investor.

Yes. Did the Fresh & Light Ultimate Care with pictures of Katherine Heigl in the packaging improve sell-through velocity at retail? And has that continued since the picture was removed from the packaging?

So yes. So the purpose of that was -- and the Heigls were very willing to work with us, which was great. We saw when we were running our TV that some people get excited about lightweight and then not necessarily "buy the green jug" with Katherine on it that Katherine was promoting in the commercials. So by having her picture there, it made the connection strong. I can't -- there's so many variables going on. I mean, the category is very intensely competitive right now. I mean, ARM & HAMMER just launched a new product. Nestlé is always very competitive, and Clorox has launched a new product. So I can't say for sure because of all the moving variables. We believe it was the right thing to do and it worked. But I can't really give you data that says, "Oh, it was accounted for 20% more or less or anything like that." I really can't. I don't have the data to support that.

Okay. How successful have the recent Cat's Pride trade promotions been?

It depends on how you look at it. From my vantage point, what we are looking at -- and you guys heard me say this before, I think most of the people on the call are like this where -- you know what Moneyball is, when you're trying to get into the analytics and figure out what works best for your particular company. So for us, we're spending money trying to incentivize a trial and encourage repeat. And so you can do it through the airwaves, and that also has a tangential benefit of building your brand image. So I think there's always a benefit to TV that doesn't necessarily translate directly into unit sales that period. But at the end of the day, you expect -- you spend X amount of dollars and you drive Y amount of movement. And so we did a detailed marketing mix. And based on that mix, we saw that for immediate tap, your best bet is to use trade dollars to get incremental distribution in the retail outlet because the holding power of cat litter is so limited. You think about it in one space, and you can maybe fit 3 jugs. So going from -- pick a number, if every day, Ultimate Care is at $11.99 and you run a hot deal at $9.99 but you don't put incremental products into the stores, then all you do is go out of stock on Tuesday instead of Friday because they're not going to restock the stores until after Sunday's big shop. And then midnight Sunday, they start to restock the shelf. So that's not a very efficient use of any kind of our trade dollars. So instead, what we try and do is maybe sweeten it a little bit, but get the trade to go ahead and give us an end-aisle display or 1/2 pallet or 1/4 pallet display, where they'll drop it right out either right inside the store, what they would call an action alley, or somewhere near the actual pet aisle. And when we do that, our lift goes way up, 3x, 4x, 5x, because now, there's so much more products in the shelf -- in the stores. So that's what we're doing. It is working. We're also using targeted social and digital to a greater extent and are going to keep doing that. So we're just going to keep getting smarter as we get more data against our spend.

Our next question comes from Robert Smith with Center for Performance.

Dan, can you just tell us anything about the R&D initiatives near term as far as new products? And where is the emphasis currently?

Bob, if you would go on mute, you've got a lot of background. Thank you. As always, I'm not going to get into too many specifics, because the last thing we want do is tip off our competition in what place we're going to run. But just in general, as you guys know, who are longtime investors or maybe the new to the company investors, I'll repeat, our mission is to create value from sorbent minerals. And that value creation starts almost inclusively out of the research center, where we have numerous scientists who come in every day, trying to better understand our mineral, who will bring maybe customer problems from the field where they will say, "Hey, if our mineral could solve this problem, they would certainly find value in that." And that value ultimately translates into a better value for us and for them, a value creation for the whole chain. So that's what we're working on in every business. We're really not working per se to push volume. It's really more about getting more value, being more niche oriented and having each unit drive a greater share of profitability. So you've been seeing it in the trend lines for the last 15 years. We see that continuing. We don't feel we have at all played out the opportunities for our mineral.

Will we be seeing new product introductions this time of the year from here on out?

Yes. I mean, we always have new product introductions. This past year, we've launched -- and it's still going to happen because we're still getting registrations, but NeoPrime and Varium in the animal health area. We've got targeted new products in our ag business where we're partnering with various people to use either our engineered granule or some other aspect of our core mineral to them. That is maybe we put a branding on, but it's a B2B-type application. And then in the consumer area, absolutely, we're working on stuff now. We're about to launch some new stuff to prove the efficacy of some of our ideas. And we're already in the process of launching new products that you'll see on the shelves probably in 3 to 6 months that were already proven 3 to 6 months ago.

Our next comes from Ethan Starr, who's a private investor.

Yes. In the press release, you note that you have about 30% of the private-label cat litter market. I'm wondering, how has it increased over the years? And do you see that -- do you see that share continuing to increase?

I don't have a trend line on me, so I'll give you belly-button data. Obviously, a large chunk of that is core cat litter where we have a huge share of the market. That's the non-clumping, what people might call traditional. That's been in steady decline for years. But we've been able to hang on, because, really, what's happened is more and more players have dropped off where we've made acquisitions. So we have not dropped at the same level that the overall core segment has. Having said that, we really see the growth and the excitement being around the private-label lightweight. I continue to believe that ultimately, when the consumer can get the product they want at the price they want, that all things -- those things all being equal, they are not going to want to take home twice as much weight. And especially if they start to understand the impact on the carbon footprint, as the retailers start understanding that their people have to carry around a 60-pound case, 3 20-pounds, versus a 30-pound case, 3 10 pounds, all those kind of things are going to weigh in favor of light versus heavy. It just defies logic that long term, the heavies are going to be able to hold on to a large share of the market. Obviously, our major competitors don't want to see that happen. They're heavily invested, no pun intended, in the heavy side of the market. Their supply chains are built around it. Their economic structures are built around it. So they're going to fight it hard and God love them. That's what they should do. But you're fighting logic on that standpoint. Really, the product should continue to get lighter, and they should -- we should all be focusing on performance and getting more efficient so that we can keep the price where it needs to be and the performance where it needs to be. So as that grows, our private-label lightweight business is going to really, really grow. And so that's where you're going to see the growth and there is value there, value for the retailer, value for the shopper and value for us.

Our next question comes from Robert Smith with Center for Performance.

I got bumped off the call. I'm sorry. I'm back on. When we're on the (inaudible) next call?

You broke up, Ron. I mean, Ron -- Bob, you broke up. We couldn't hear your question.

All right. Kevin, do we have another question? I think Bob is in a bad cell.

There are no other questions in queue at this time.

Okay, great. Well, listen. Thank you, everybody. We are continuing to be very positive about the long-term prospects of our business. And as we -- obviously as you're seeing, as we continue to get smarter and realign our marketing mix, you're going to see some bottom line benefit, too, because TV is an inefficient short-term vehicle. We used it to get the product launched. It was excellent. We got the whole market to jump in, thank God they did, and we got the snowball rolling. Now we're going to get efficient. We're going to keep spending a lot of money, but a lot of it could get focused on trade and digital and social. And so that's where we see the best ROI and that's where we're going to place our bet. We're still going to do TV, but it's just the marketing mix. It was skewed heavily towards TV during the first 2 years. It's now going to get more balanced towards the other. So thank you, and we'll talk to you in 3 months.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.