Daniel S. Jaffee - Chief Executive Officer, President, Director and Member of Executive Committee Douglas A. Graham - Vice President, General Counsel and Corporate Secretary Daniel T. Smith - Chief Financial Officer and Vice President

Good day, ladies and gentlemen, and welcome to the Quarter 1 2014 Oil-Dri Corporation of America Earnings Conference Call. My name is Kathy, and I will be operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Dan Jaffee, President and CEO. Please proceed, sir.

Okay, thank you, Kathy, and welcome, everyone to the first quarter fiscal '14 teleconference. With me today in the Chicago conference room is Dan Smith, our Vice President and CFO; and Doug Graham, our Vice President and General Counsel. And Doug, you'll walk us through the Safe Harbor?

Sure, thank you, Dan. Welcome, everyone. On today's call, comments may contains forward-looking statements regarding the company's performance and 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. And now back to Dan.

Great. Thanks, Doug. And we'll continue with our usual format. Dan Smith will walk us through the quarter, and then we'll open it up to Q&A so that we handle any issues that are topmost on your mind. So Dan?

Thanks, Dan. Good morning. Oil-Dri started off the year slowly. We're disappointed with the financial results for the first quarter. Sales were up about 3% to $63.5 million for the quarter. Our EPS was $0.41 per diluted share for the quarter, which is down from last year's record first quarter of $0.64. Our Retail and Wholesale team make key investments in marketing initiatives during the quarter. We are encouraged by our 34% sales increase in our Fresh & Light cat litter products, but overall, our group's reported flat sales and increased spending. Our advertising and promotional spending was up about $1.6 million in the quarter in an effort to drive branded Cat Litter sales growth in fiscal '14. We also saw increased packaging, materials, freight, cost during the quarter as compared to last year. We continue to expect that our advertising and promotional spending for F '14 will be greater than F '13. Our B2B group experienced solid sales growth of 10% versus the first quarter of last year. The group saw 2% income growth, thanks to strong performance by our Fluid Purification products. Animal health products also reported increased sales. The group's income growth was reduced by increased cost for packaging materials and freight. Our gross profit percentage was down to 26% from 28% reported in the first quarter of fiscal '13. We saw 36% increase in the cost of natural gas used in our manufacturing processes, along with increased packaging material and freight cost that I just discussed. Our balance sheet remains strong. Our cash and investment balances at the end of the quarter were about $33 million, which were down by $2.2 million from the first quarter of fiscal '13. The decrease was driven by our regularly scheduled debt payments, capital expenditures, working capital changes and an $800,000 deposit we made for the second quarter asset acquisition. On November 1, we invested approximately $13 million to acquire certain assets of a cat litter manufacturer, MFM Industries Incorporated. The assets acquired include customer list, various product and material inventories, specific equipment and some intellectual property. We are currently conducting the accounting valuation process, but we believe the acquisition will be accretive to our earnings this fiscal year. Finally, our -- we continue our strong dividend payment to our stockholders with approximately $1.2 million paid out during the quarter. Thanks, I'll turn the meeting back over to Dan Jaffee.

Great. Thanks, Dan. And Kathy, what we'd like to do is open up the lines for Q&A and ask everyone to prioritize, ask your most important question first. And then go back to the end of the queue just so to allow everybody who wants to get at least one question in the time to do so.

[Operator Instructions] Please stand by for your first question which comes from the line of Ethan Star.

I have to tell you it's a nice day when Oil-Dri earns $0.41 a share in a quarter and it's disappointing.

I agree with you.

So my question is this. How will the purchase of the MFM assets in Florida benefit Oil-Dri and why was the price so high?

Well, obviously, price should be driven by value, so you got to hope that we're doing our valuation properly. And I can't remember the first part of your question? What was your first question?

How will it benefit Oil-Dri?

How it will benefit Oil-Dri? It's allowing us to become a bigger partner with some major retailers so they were supplying private label to some major manufacturers in the Southeast and even in the Midwest. And we are now assuming their position there. We are already selling most of these accounts some branded material or a significant amount in some cases. In some cases, none at all. And this is now giving us a -- call it a bigger seat at the table. And so we believe we'll not only be able to lower their delivered cost of goods by utilizing our geographically dispersed plans, so we can actually improve their profit picture on the business we acquired. But we also believe that we'll be able to further grow our branded business because you can co-load the products and there's a lot of efficiencies of doing that. So that's really the 2-pronged approach and we believe there will be a good return on that investment.

Okay, so have you already gotten the accounts that don't buy any branded products currently -- you're at the time of acquisition, or you already gotten some in there, or is it still too early?

Still too early. Yes, job 1, I mean we closed on November 1 was really just to make sure we're satisfying the private label orders, so that we can make sure the customers don't see any interruption. And then, as we sit down with these accounts and we let the figure out exactly what the cost of goods scenario is going to look like, we'll be having some good business conversations with them.

Okay. And will there be any goodwill or intangible assets added to the balance sheet as a result of the acquisition?

Ethan we're too early in the process to answer that question. We have to go through a valuation model. We have outside consultants helping us with evaluation from the accounting perspective. The accounting is always harder than the legal side. So that will take some time.

The next question comes from the line of Robert Smith, Center for Performance Investing.

I guess in my age it's best to look at the brighter side. Can you -- So I like to concentrate on animal health Calibrin-A and Z. Can you give me an idea as to where these products are sold now as far as their use? And am I correct in assuming that the product is not sold for poultry and this is a new use? And along on the same lines, can you tell me what are the target countries for registration and just educate me a little as to the registration process and how soon do you sell it afterwards, or can you sell it as per guidance?

We are selling into poultry in many countries. So that's good news already. We have Calibrin-A and Z. And I know you were interested in new products. We're happy to announce that we're beginning registration on new generation called Varium[ph], which is all about gut health. It's more than just toxin by anemia. It's getting into the whole gut health aspect, and it's specifically targeted at launch for poultry, which is good. So we're in the registration process there. A and Z are really registered globally and all the markets that we really intend to be doing business in. We still got -- there are still some holes, but we don't have any coverage there. And so we really weren't looking to do any business there. Our goal now is to grow the business where it is registered and the business is growing. And it's definitely something that we're focused on for the future.

So it's a new use there?

What's the new use, the Varium?

Yes.

Yes. I mean, it's a yes.

What differentiates than -- what does it do that the older products don't do?

This is Doug. It's focused on some specific diseases in poultry as opposed to A and Z. It's focused on a particular disease condition, which we think is a good market.

Okay, so what is the market potential for that specific disease, or diseases?

I mean...

Does that expand the market materially?

We hope so.

The next question comes from the line of Ethan Star.

Okay, back and forth between Bob and myself. By opening an office in China, will Oil-Dri eliminate the distributor or middlemen and capture both the wholesale and retail profit for itself?

No, not really. I mean what it allow us to do is to be more competitive. It has collapsed some of those layers and be more competitive. I don't think our goal is to necessarily -- it's sort of a half and half. We should be able to capture a little bit more margin and we should be able to get more competitive. So really, what it allows us to do is invoice customers directly. That opens up some more risk, you got credit, you got things like that. But it allows us to deal directly with the big players who are used to dealing directly. They don't buy through middlemen for the various reasons that their size, they can take full containers of whatever it is they're buying. And there's no value in them for middlemen. They can be their own middlemen. So really that's the idea. That should allow us to sell directly to the bigger players.

Okay. And the new product that Bob just asked about, the poultry thing. Is that something that's not an antibiotic that will kind of try to replace an antibiotic product?

It is not an antibiotic and its initial launch is not necessarily to replace an antibiotic. We still have a lot more testing to do on that front. But -- so I would just say it is not an antibiotic and its targeted launch is not to replace an antibiotic.

Okay. Are you working on anything that will hopefully replace an antibiotic?

Yes, I mean we've talked about that in the past. And those trials are still going on in studies. And so far, so good. We still have more hurdles to clear, but at the moment, very positive and as you know, definitely, a global trend towards getting out of widespread antibiotic use, and so if you have a product that is even at parity on performance, you're going to get a lot of business because they're not looking necessarily for improved performs, they're just trying to avoid the potential of humans becoming resistant to antibiotics by it being in their food stores. So anyway, it's definitely a positive industry trend for a company like ours who doesn't make antibiotics.

Sure. So those are 2 different products then?

Yes, it is. Yes.

The next question comes from Robert Smith.

So again back into animal health. So you said that B&B was up about 10%, how about animal health? Do you have some color on animal health, is that up?

Robert, we don't disclose product line information. We go down to our 2 operating segments.

Yes, did it do as well as the overall 10%?

The -- as I indicated in my comments, really the strong performance in Fluids Purification was a driver.

Margins being maintained?

I believe so yes.

Okay. The stock buyback is there anything -- how much is left in the stock buyback?

At least 250,000 shares.

The next question comes from Ethan Star.

Are you confident that Oil-Dri is getting a good return on its marketing dollars for Cat's Pride Fresh & Light? And as your plan to spend more on Fresh & Light marketing this year than last year, do you expect to increase the percentage of customers who become repeat purchasers or is the goal solely to increase trial?

Our goal is to increase trial. Our repeat is very, very strong. So I don't foresee that getting any stronger, it's strong enough where we win as we increase trials. So getting trials is a big deal. The good news with Fresh & Light is that it's continuing to gain momentum. So if you look at the 52-week data IRI, multi-outlet data, we did $28 million at retail and it was up 24% over the prior year. So then, if you look at the 4-week period, it was up 31%. So you see a faster moving snowball, which is a good thing to see. We are going to continue to spend behind it. We are going to continue to rollout new products along the Fresh & Light franchise because the light segment is becoming bigger and bigger. We believe that it will ultimately become the segment, meaning everything should be light and, no one wants heavy. And so if you can get performance and price commensurate with whatever it is you value and get lightweight, we don't believe anyone would choose to just say, I'd just rather carry home more weight. So we're excited that other retail -- other manufacturers are jumping in, validating the light segment. And we believe and our testing shows, we have the best light product by far. And so as light grows, we win. And so this has been good for Oil-Dri.

Okay, but do you see -- so you're happy with the return you're getting on your marketing dollars for Fresh & Light?

Very happy, yes.

So could you grow it more, the return?

Absolutely.

Okay. This question, you may not want to answer, but can you give us an idea of your cash balance today, post after spending almost $13 million?

Yes, we'll wait until we report the numbers for the quarter, Ethan.

Okay, that's fine. And in line with that, any plans to borrow any money soon?

We'll continue to evaluate our options as necessary based on interest rates and availability of credit and what we need.

Okay. Can you discuss a little bit the plant expansion in Ochlocknee, Georgia regarding Fluids Purification products?

Just that it's a further validation of the growth and our future outlooks on that business, so it's -- I think that's a high quote business for us, good healthy margins. And so it should have a good return.

How much additional capacity in terms of dollars will the added capacity allow you to bring in this hard revenue goes as it's all used up?

I think it gets to the forward-looking projections and all that, so I'm seeing a lot of -- and they're shaking heads, no. So I'm not get into that, but it's going to allow us to continue to support the growth of that business.

The next question comes from Robert Smith.

So is there any seasonality in animal health?

I'm going to say none that I know off. People pretty much eat year-round.

So based on this first quarter report, have you guys redrawn your annual budgets. It seems like the surprise was probably more on the top line? I mean, I would think that the increased costs were fastened in your annual plan, although I'm not sure of the natural gas price situation. So how much incremental cost did you factor in from natural gas for the first quarter?

That's a couple of different questions. So let me take the first one and then I'm sure to get to the second one. But the first one was all about, we're pretty much on plan, right? I mean just because we're down versus last year.

Yes, Robert, what we do is every year, about the 6-month point is we revalue, weight our budget and where we think we're going to be. So that's a very formal process. And after the first quarter, we don't sit down and revalue our budget.

But how we do against the plan, we're pretty much on plan. It pretty much came in the way we thought it was going to come in.

Yes, but it said you were disappointed so that -- how does that...

You don't put plans in the bank. So if I plan to be down and hit my plan, you're going to be happy, I'm not. You're going to football analogy by playing to go 4 and 12 and I go 4 and 12, you think I'm keeping my job?

Well, it depends. I mean you draw up your plans for accuracy, don't you -- so if you're on plan, why would you be disappointed?

Well you and I look at it differently. I look at it actual. Actual to actual. You put actual in the bank. I don't put plans in the bank. To me, so when somebody plans to be down. That just tells them you better redouble your efforts because being down is not acceptable. So that's fine, you and I just approach it differently.

Okay, so what -- I just -- it's a question yes or no I do know... how much did natural gas go up in the quarter -- quarter-to-quarter?

36%, Robert. Quarter-to-quarter.

All right, and...

That's used in our kiln fuel process.

Yes.

Okay. Well I hope you come into New York in February. I would love to see you.

I will, thank you. I would appreciate you come in to the Boston presentation.

The next question comes from Ethan Star.

Yes, I'm wondering about the foreign subsidiaries, Canada and U.K., and will they ever become profitable?

Right now, Ethan, they're pretty small in terms of order of priority. So we're focusing on integration of an acquisition. After that acquisition and expansion of our capacities, so I think that's where our primary focus is.

And you guys have been able to sell some of the higher value products, which has been good for the U.K. Just talk to the guy who runs Canada this morning and we've still got a lot of plans for Canada. It's just been a matter of prioritizing where do we spend our time, money and focus. So ever, ever is a long time, I'll take that bet. Yes, they will at some point and hopefully, our lifetimes be profitable. I'm going to go on that one.

Okay, I mean you're not in any rush. I mean you have your priorities and I trust you to focus on the priorities that are most important. So that doesn't bother me at all. How are sports field products doing?

Sports field products are doing well. We're continuing to expand and it's not hugely material to the company, but it's a sort of a highly visible thing and so it's important to us. It's just financial, it's not material, but it's a -- they're doing well.

Sure. How about floor absorbents?

Same deal. I would say people who are manufacturing have spent the last 25 years either not manufacturing and offshoring it, or trying to reduce how much they spill in the first place. And so those 2 things have led to a slightly declining market over time and 20 years later, you've got a smaller market. But there has been some consolidation in our industry where there used to be 3 players. Now #2 bought -- actually, #3 bought #2 and became 2. And are actually buying become 1. They probably leapfrogged over us. And so you really only got 2 players now in the floor absorbent business. And so it's doing fine.

Okay, by #3 acquiring #2, you're referring to Eagle picture acquiring Multan?

You got it.

Okay, and you didn't consider buying that?

We were in the process. We got -- we do really got our bid. It was more a deal structure. We would have done a similar thing like we did with Mid-Florida Mining. We don't really need the capacity. We just want to -- these guys actually needed the capacity. So they were willing to take on the plant and all the employees and all the reclamation and all that kind of stuff. So their bid looked better than ours.

Well, that's understandable I mean I can assume that sellers didn't want to put their employees out of work.

That is true.

I would now like to turn the call over to John Jeffrey for closing remarks.

Okay, thank you. And yes, you all put a little bit bought color on the disappointed comment. Any time you're down, you're disappointed. Now having said that, in our 74-year history, this quarter was the second best first quarter we've ever had. It just so happened it wasn't as good as last year's first quarter, which was the best first quarter we ever had. So I just thought it would be imprudent to say oh we're ecstatic with this quarter, knowing that we're down, 36%. That just seemed a little crazy. We're certainly as a value investor, it was a very good quarter. We made a lot of money, we did a lot of good things strategically to help us continue to make investments for the future and plan for the future. So that's all good news. If you're only looking at the quarter itself, you can't help but own up to the fact, you were down 36% versus the prior year and we were. So let's see how the whole year plays out and we're still very confident for both the short term, which for us is maybe a year and the midterm, which is about 5 years and the long term, which is about 10 years. So those are sort of the horizons we look at and we're still confident on all 3 fronts. So as we've said, over and over and over again, it's probably worth repeating here. We will not knowingly do something in the short run to sacrifice our long-term benefit. We may do it because we screw up, we're not going to do it on purpose. We will though knowingly hurt short-term results if we believe it benefits the long-term. So we will make investments, we will spend, do investment spending, make acquisitions, do things we need to do in the short run, which it may or may not help the immediate results. If they -- we believe, that they're going to help us in the long term. Again, we may get proven wrong on that front too. But like I said knowingly, we wouldn't knowingly sacrifice the future to make a short-term goal because we don't give you any goals so there's no reason to do it. And so that's the deal. Doug, you have one more thing?

Just a housekeeping item about the annual meeting coming up.

Okay, why don't you cover that?

Just as a reminder, the upcoming Annual Meeting is Tuesday, December 10, starting at 9:30 a.m. Central Time in the Standard Club in Chicago.

Great. We hope some or all of you can be there. And if not, we will be back at you at the end of the second quarter. So thanks very much.

Thank you for your participation in today's conference. This concludes presentation. You may now disconnect. Good day.