Oil-Dri Corporation of America (ODC) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2018 Oil-Dri Corporation of America Earnings Conference Call. (Operator Instructions) I would now like to introduce your host for today's conference, Mr. Dan Jaffee. Sir, you may begin.

Thank you, and welcome to our 6-month and second quarter teleconference. I just want to recognize that my father passed away during the quarter, and he led an incredible life. He was the best man in my wedding, he was the best man in my life, and do I miss him? Yes, but I maxed out. So he and I worked together for 31 years building this business together, and he said his biggest regret in his life was that his father didn't live long enough to see what he did with the business. His father died when he was 26 years old. And so I don't have that regret, thankfully. He got to see a lot of what we did. But he and I both believed, and I still believe, the best is yet to come. So I'm sure I will be saying in a few years, "Boy, I wish my dad could see this." But he's looking down and smiling. And so I just wanted to recognize that.

Joining me here in the conference room is Dan Smith, our CFO; Mark Lewry, our Chief Operating Officer; Laura Scheland, our VP and General Counsel; Reagan Culbertson, our Investor Relations Manager. And then on the phone from Asia is Chief Development Officer, Mike McPherson.

So Reagan, you want to take us through the safe harbor?

Thank you, 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 stock. Thank you for joining us.

Great, and I'd like to turn over to Dan Smith to review the quarter and 6 months.

Thanks, Dan. Good morning, everyone.

Oil-Dri reported sales of $68.9 million in the second quarter fiscal '18, which was a 6% increase over the second quarter fiscal '17. We also reported sales of $135 million for the first 6 months of fiscal '18, which was a record for the first 6 months of the fiscal year.

Our B2B team led the sales improvement with low- double digit growth in the second quarter and high- single digit growth in the first 6 months of the year as compared to the same period in fiscal '17.

The Retail and Wholesale team sales for the first 6 months of fiscal '18 were basically flat when compared to the same period in fiscal '17.

Despite our record sales, our earnings and diluted earnings per share were significantly impacted for the quarter and the first 6 months by an approximate $5 million tax expense and deferred tax asset adjustment. The adjustment was a result of the federal tax rate change in the 2017 Tax Cut and Jobs Act enacted in December of 2017. The tax expense adjustment effectively reduced our diluted net income per share by $0.69 for both the quarter and the first 6 months of fiscal '18. This adjustment drove our reported loss for the quarter and reduced earnings for the first 6 months of fiscal '18. Without this adjustment, our year-to-date earnings per share would have been better than the value reported for the first 6 months of fiscal '17.

Our growth profit margin remained consistent at 28.5% for the second quarter and first 6 months of fiscal '18. This was down from the 29.3% reported in the same quarter and the 30.2% in the first 6 months of '17. We experienced increased fuel, freight, manufacturing and packaging cost, which all have reduced our gross margin percentage.

Sales for the Retail/Wholesale team was down about 1% for the quarter and flat for the first 6 months of fiscal '18 as compared to fiscal '17. Branded cat litter sales were lower, but this reduction was partially offset by increased private label litter items, especially private label lightweight products. The group has seen some reduction in the branded business in brick-and-mortar stores, but the branded business has seen an uptake in activity in e-commerce area.

Profit for the first -- for the segment was up about 7% compared to the first 6 months of fiscal '17.

Although advertising was up about $1 million for the second quarter of fiscal '18, for the first 6 months, spending remained down about $2 million as compared to the same period in fiscal '17.

Advertising spending was a primary driver for the profit change in the second quarter and the first 6 months of fiscal '18. However, the group has also experienced increased costs, as I mentioned earlier. We now expect advertising spending to be down for the full year of fiscal '18 versus the full year of fiscal '17.

Profit for the quarter and for 6 months were up for the B2B segment as compared to the same periods in fiscal '17. Sales were up about 18% for the quarter and about 7% for the first 6 months as compared to fiscal '17. Sales were the key driver of increased profit for both periods. The B2B team generated strong sales growth in the second quarter in the ag, fluid purification and animal health business areas.

Our balance sheet was also impacted by the tax change. Our noncurrent assets were reduced by the deferred tax asset adjustment I discussed earlier. However, our total assets remained over $200 million.

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

Great. Thank you, Dan. And before I open it up to Q&A, I do have some tick-off questions from Bob Smith. He can't be on the call today, but I did want to cover his questions. Let's turn it over to Mike McPherson from Asia. But Mike, you've got his questions and I'll let you ask them and then answer them.

Okay. Bob's first question was what was some of the progress that was made in the last 3 months for our animal health business. And the business performed well in the quarter. Without getting into specific customer level activity, we continue to get poultry accounts and swine accounts adopting our new products Varium and NeoPrime. We continue to optimize our distribution especially in Latin America and focus on rolling these products out -- NeoPrime and Varium -- to the market, that's where the focus has been in the last 3 months. That led, I think, to a second question on what's the significance of getting a patent in China for something that we refer to as our Clay-Plus or our modified formulas that are the backbone of our NeoPrime and Varium technology. Obviously, we were very pleased to get those patents issued in China. That's one of many countries where we've applied for patents. They were the first to recognize the novelty of the technology and the formulas that went into NeoPrime and Varium.

And in terms of the value, obviously, we have our patent protection in China, which I think is going to be helpful there. It also has helped as we've promoted poultry and swine producers in other parts of the world, the recognition that the formula is unique. And I think that's generated a lot of interest in continuing to trial the product and getting further traction in the adoption of the product, again, recognizing that it's unique and patent pending still in many other countries.

Great. Thank you, Mike. And then Bob had a question on private label lightweight, which I'm sure everyone else will have as well. So it is starting -- or it has been showing up, but it's really starting to show up in greater extent in the consumer data, the Nielsen data that we subscribe to. And so we've talked in the past about what our share is of the private label lightweight segment for the 52 weeks ended February 24. A year ago, our share was 61% of that segment. It's now 72% of that segment. For the 12 weeks, we were 66% a year ago, we're now 81%. You can see we're gaining momentum and we really are the lightweight private label player, which is great because the heavy -- we're, our share is very small of the heavy. Now on the -- it's not concerning, it's just that it's growing as a percent of the whole category. Now I'm looking at units. That was dollars, these is units. Private label lightweight represented 0.4% of the category a year ago, and units is now up to 0.8%. So it's doubled, but it's small. And just to put that in perspective for you, coarse private label, this is the non-clumping, is 11.7%, and heavy private label is 7.4 %. So all private label represents 20.8% of the units sold in the category that's on a 52-week basis ending February 24, '18. So that just gives you an idea, and that's sort of consistent with what we've said in the past.

So Jimmy, at this time, I'd like to open it up to Q&A. Like everybody, to ask your most important questions first, and then get to the end of the queue so that everybody has a chance to get at least one question. And as always, we are going to have our hard stop after 30 minutes. Thanks.

(Operator Instructions) Our first question comes from Ethan Starr.

This part -- you just answered part of this, but I'm curious, to what extent is sales velocity at Retail increasing for both private label lightweight litters as a result of line pricing initiative? And also for Cat's Pride Fresh & Light as a result of the new marketing initiative with animal shelters, the Litter for Good.

So I missed the first part of your question. What was the first part?

Sales velocity at retail.

Oh, sales -- okay.

Yes. Do you see more movement up?

Absolutely, and I'm not going to get into specifics because I really can't. But I can tell you that, obviously, look, all categories I would say, other than luxury, luxury items are priced, related to some extent, of usually the lion's share of the category and then maybe niches won't be. Cat litter is absolutely that way, and we are seeing our movement where we've executed more aggressive pricing on our lightweight private labels where we've gone to parity. With the heavies, we are seeing tremendous increase in velocity. And then we're executing aggressive strategies at Retail on our brand as well where the retailer will give us incremental shelf space or end caps or quarter pallets or things like that in exchange for more aggressive pricing, and that's working. The Litter for Good program is exceeding our expectations in the short run, but it's going to be a long slog. This is a program that's going to take a lot of execution. We have to reach out to the shelters. We have to get them signed up and authorized, even receive our free litter. And so who knows? No one knows exactly how many shelters there are. But there -- and I've heard any number from 12,000 to 13,000 shelters in the U.S. So at this point, we've maybe activated 1% to 1.5% of them. And I can tell you, as a leading indicator, this is sort of what I look at -- our Cat’s Pride Club membership -- we were signing before Litter for Good maybe 1 to 2 consumers a day on average for like the 3 years leading up to Litter for Good. I think the launch of Litter for Good, which has only been really 2 full months, we're now signing up, on average, 72 a day. So a 36- to a 50-fold increase, depending on how you want to round our past numbers, and that's with 1% activation. So if you can imagine 10% activation, or got -- dreaming in HD -- 100% activation, you can imagine what that would mean. So clearly, it's resonating with the consumers and the donors that have heard about it. We've actually made our first shipment of free litter. We've made more than that, but we're up to our brand-new shelter that's new to us, that's getting a truckload of litter. We're actually going to be sending another one out in the East Coast this week, and our program manager will be out there to take pictures and do all sorts of PR around it. But the program is working, and it's very exciting.

What's your activation levels? You mentioned that -- or I just don't understand that.

Well, here's the deal. So we send out e-mail blasts to these shelters. But they then have to recognize that they've gotten this email and then they have to go on -- there's a special shelter section of our website that's private to them where they have to put in all sorts of information so that we can actually make the donation. And then they need to actively market, which they would do so, that they can get free litter to their donor base. But if they haven't taken the time to register, then they're really -- they're not active yet. And so while we send out email blasts to about 10% of the shelters, and I'll say maybe covering 30% of the adoptions, because we obviously went for the biggest ones first, and those were the easiest ones to find, ones that have a web presence and things like that. So while we send out to 10%, only about 10% of the ones we send out to actually responded. So now, we have to call them all. And that's not so easy. And you got to get names and numbers and all that kind of stuff. So it's going to be an executional war, but I love our chances there. And it's a snow ball. Once you get them activated and onboard, it's amazing. I can give you, just anecdotally, we have one huge shelter that wasn't really participating like they should have. And in the first 1.5 months, they got very few nominations. Once we reached out to them and actually put an email blast out to their donors, they got triple those donations in 3 days -- 3 nominations, sorry in 3 days. So they just need to activate their donor base. And let them know, hey, we need you to buy the green jugs so that we get free litter. So it's a great program, but it's a ground war, not an air war.

Okay. Great. (inaudible) I have more questions, and I'm happy to get back on the queue, if Bob is not on the call.

So go back in the queue, and hopefully, someone else will have a question.

And the next question comes from John Bair.

Condolences, again, to you and your family and the entire Oil-Dri family.

Thank you.

Your dad was really pretty special even though I didn't get to know him that well. But always very generous and a real gentleman. Okay. Onto business here. Noticed in the release, you said your ag carrier application granules were up rather significantly. I think it was 50%. So I was wondering if that is due to a new customer, a new product launch, or -- and is that something that you believe it will -- the momentum of that will continue, obviously, not necessarily at the 50% rate, which would be nice. But wondering if you could tell us a little bit about that.

Mike, I think I'll defer to you.

Yes. Sure, John. It's primarily driven from the acquisition of a new customer although there's several other customers in there that contributed to it, but far and away, it was one significant customer. And in general, over the last several years, there's been a resurgence in the use of our clay granules as carriers, not only in the biopesticide area, but also with traditional synthetic chemistries. And there are a number of projects that we have underway with customers that are in the works that we expect to continue coming to commercial fruition over the course of the next several quarters. So we think the future looks very bright for the continued growth of our ag carrier's business.

Okay. So this is something that has some momentum behind it. It will be recurring product sales, if you will? Is that a fair statement...

In general, yes. And also, this particular new account, yes, this isn't a one-time seasonal purchase, this is for an ongoing product if they commercialize.

Okay, but it is seasonal? Is that what I caught there?

No, I'm saying it is not seasonal. It is a new piece -- not seasonal. It's a new -- it's included in one of their formulas that they have just introduced, so we expect this to be reoccurring business, not a one-time formulation, let's say. They'll use it for a season, and then move off it in the following season.

Excellent. Great. And kind of a corollary question with Latin American sales. Is that improvement also something that you feel is a -- that will have some continuation to it?

Yes. You're referring there to animal health and...

Well, there was a reference in the release that there was an improvement in the Latin American...

John, it was due to the animal health business -- or Mike, it was due to the animal health business. That was the reference.

Yes, it was animal health, and the specialty business also was up in the quarter. On the animal health side, we've been working on a number of things, which we do expect to continue to accelerate the growth going forward versus as we have in the past. We've made a number of distribution changes. We've made changes in our marketing mix, our promotional activity, how we engage prospective customers in the region that have directly resulted in greater sales philosophy of our animal health products. And the currency situation in Brazil was improved somewhat, which has allowed greater use of our bleaching clay products in Brazil. And as long as the exchange rates remain favorable, we would expect that to continue.

And we have a follow-up question from Ethan Starr.

Yes. Are you continuing to get new private label lightweight customers?

Yes.

Will they make a difference -- a substantial difference change, or just minor?

I mean, They'll impact our overall business. They're still rolling on, and they're already committed. They're just working on packaging, and roll updates and things like that.

Okay. Can you foresee a timing somewhere in the future when, I mean, lightweight will be such a great proportion of the private label business that you can almost eliminate heavyweight?

Well, in my dreams, I would love that, sure. I would say there's nothing on the short-term horizon to say that, but that's certainly the goal. I mean, again, logically speaking, if you can give the consumer equal performance at an equal price, and they get the benefit of half the weight, nobody's valuing weights. They either don't believe they can get performance or the price. But yes. So logically speaking, there should come a day when we shouldn't be talking about heavy and lightweight, it's just cat litter, and that it's used by volume, just like animal bedding is used by volume. No one thinks about how much these cedar chips weigh that they put in their hamster's habitrail. And we want to get it to the point where weight comes out of the equation.

Okay. Hopefully, you'll be saving a little bit of money once fiscal '18 passes the new tax bill. I'm wondering, do you have any plans for the money, whatever was saved. I mean, sure if you want, you can find ways to spend it, but you might want to save it and let it accumulate in the balance sheet?

Ethan, this is Dan. We're going to continue to look at our cash balances and look at investment opportunities in terms of capital, other acquisitions as we've always done in the past. And we're not just going to discuss any individual things that may or may not be on the horizon.

Okay. I know you -- in the annual meeting, you mentioned you had (inaudible) hired an environmental manager for the company. I'm just wondering, will that help reduce cost across the company?

I wouldn't think so. We've always had an environmental manager. We just hired a new one...

Oh, okay, got it.

We're in the mining business, so...

Yes, I know. I just -- I wasn't -- I just didn't know.

And we have a follow-up question from John Bair.

Just sort of a follow-up there to Ethan's question about the cash, because you do have pretty much excess cash. Have you done any share buybacks recently on this price dip of the stock? And can you address that?

It's a valid question, and obviously, we're always looking at it. We do have shares that have been authorized, so we do have -- I don't know if we...

This is Laura Scheland. We do have around 300,000 that have been authorized, and that information, exact information, is in the 10-K that was released in October. So, and we always just consider from time to time.

Yes. It's -- got a board meeting coming up. I'm sure that will be a topic of discussion, but that's a possibility.

Sure, okay. And then in the past, you've usually made a comment about resin costs and transportation and so forth, and I know we had a spike in [net] gas prices and so forth. I'm wondering if the resin prices shipping costs have kind of abated. I know there's been a lot of tightness in the shipping area and so forth. I'm just wondering what you're seeing along those lines.

Yes, good question, John. Yes, natural gas...

And introduce yourself.

Oh, this is Mark Lewry, Chief Operating Officer. So natural gas, yes, we've seen an increase year-over-year. We certainly anticipated some of that when we budgeted because futures were up at the time. What we didn't anticipate is really the cold snap we had in January, which reached down into our southern plants, and so we had some increases in cost there. But those have already modulated and we don't expect anything significant out of natural gas the rest of the year. The freight are...

Oil prices were down pretty low. Yes, I mean, there's a pretty...

Exactly. Yes. It's under $3 an MMBtu, so we don't really see anything there. Your question on freight is a good one. Particularly in the second quarter, we saw continued tightening of the supply and demand. There's also been some changes in regulation, which have restricted driver hours. So that looks like it's going to take a little more time to even out and rebalance. And so we're expecting that to go on for a period of time before that equilibrates.

We have time for one more question from Ethan Starr.

Yes. I'm wondering how the ERP software installation is going and are you starting to see savings from that, and stuff like that. And also, I'd like to encourage you to increase the length of the conference call, even 10 or 15 minutes will be helpful. It'll be still shorter than the deposition, what you had recently.

If that's what we're going to compare it to, yes -- and whatever. I won't go there. ERP, we are coming in faster and under budget. Not. I mean, I think everybody that ever goes through these things know they take longer and they cost more. We are -- have a current go-live date of 8/1. Everyone's working very, very hard to make that happen. We believe we are on track for that. We're having to add incremental resources to make sure we meet all the deadlines necessary on the critical path in order to get that up and running. So in terms of savings, no, there are no savings at this point. It's pure cost. But long term, there should be savings. But no, it hasn't gone live yet. It comes up hopefully on 8/1.

Can you just give us an idea of the costs involved? I mean, there's potentially a boost to profits once the costs disappear.

Say, again, Ethan? You cut out.

Can you give us an idea of the cost involved that will disappear once you implement it, once it goes live and stuff? And hopefully, that will be -- accrue the profits in the future, the costs.

Yes. Yes, Ethan, we have not broken out in that level of specificity, and I'm not prepared to do that at this time, so...

Okay. I want to hear John Bair's last question.

All right, yes. Let's give John one last question. Well, we don't have to.

John Bair's currently -- your line is open once more for your last question.

Okay. (inaudible) I guess maybe I didn't hit the star 1 after I said I had one more since -- anyways. Okay. At the annual meeting, we were talking a little bit about the -- we had a, I guess, a bottleneck of some sort within China with a reformulation that kind of put things on hold with animal health -- and I was just wondering if there's been any progress with the entity due to this merger -- some Chinese companies or whatnot and kind of wondering if that's working its way through to where they may come back online with you or not?

Mike? You want to...

Yes, John, you're referring to the last quarter call?

Yes. There was -- yes, there was a drop off because this company, the Chinese company changed their formulation or mix or something. And so it bumped you out, I guess, as far as -- until they got their systems straightened out or testing or whatever it was that they were (inaudible) -- sorry, I don't remember...

Yes. They stopped making their own feed, and they have another customer of ours making the feed for them. Although that other company did order a lot of our material in the second quarter, we don't think that there -- it was enough to really indicate that they are making -- they're using our product in the feed that they're now making for our former customer. But we're going to see how it plays out over the next quarter, and then we'll have a better understanding if eventually they're going to begin to incorporate our materials into the feed they're making for the former customer, or if in fact, somewhere in the transition, we lost that opportunity. But we're in China right now, the Amlan team, and they have a lot of other exciting opportunities that we're working on. So long term, although that transition affected the one quarter, we still expect ongoing and continued growth in China.

Absolutely. And just want to thank everyone for your continued interest, and looking forward to the next 3 months, and we'll be back at you after the end of the third quarter. So thank you, everybody, and we'll talk to you then.

Ladies and gentlemen, this does conclude your program, and you may all disconnect. Everyone, have a great day.