Oil-Dri Corporation of America (ODC) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Q1 2016 Oil-Dri Corporation of America Earnings Conference Call. My name is Joyce, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [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, Joyce. And welcome everybody to our first quarter fiscal 2016 teleconference. Hopefully you enjoyed the new release and we will as usual go through the numbers and then do a Q&A. Backed by popular demand is Dr. Ron Cravens who did such a great job last time and I saw him here in the office and I asked him to sit in with us, so he will be here to field questions on Amlan and anything else you might want to talk to Dr. Ron about. Dan Smith is here CFO; Doug Graham our VP and General Counsel and Reagan Culbertson, who is our Investor Relations Manager. Take it away, Reagan.

Thank you, Dan. Welcome, everyone. On today's call, comments may contain 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.

Thank you, Reagan and Dan Smith, CFO why don’t you walk us through the quarters?

Sure. Thanks, Dan. Good morning to everyone. Oil-Dri reported record quarterly income for the second consecutive quarter. We reported earnings per share of $0.75 per diluted share for the first quarter of fiscal 2016 versus $0.30 for the first quarter of fiscal 2015. Driving the results for the quarter were increased sales, improved gross profit margins and sales mix. The positive results were partially offset by increased SG&A expenses. Both the B2B and retail wholesale segments contributed positively to the record quarter. Our EPS of $0.75 surpassed the $0.71 we reported in the fourth quarter of fiscal 2015. Our gross profit margin for the quarter was about 30% which was significantly better than the 21% we reported in the first quarter of fiscal 2015. Lower natural gas, packaging and freight cost all helped our margin in the quarter. Our effective tax rate for the first quarter was about 28% which was slightly higher than the 26% reported in the first quarter of fiscal 2015, but significantly higher than effective tax rate for the fourth quarter of fiscal 2015. Retail and Wholesale team reported slightly lower sales as compared to the same quarter last year. However, the segment achieved improved margins and significantly higher income as compared to fiscal 2015. Much of the sales reduction was attributed to our foreign operations in Canada and U.K. Domestically, we saw improved product mix, lower natural gas, freight and commodity driven packaging cost which all helped our profitability. The segments advertising and trade promotional costs were down in the quarter compared to fiscal first quarter of fiscal 2015, however we expect to see a significant increase in our advertising and trade promotional expenditures for our light weight branded cat litter in the second half of fiscal 2016. B2B generated about a 9% sales increase for the quarter, the increase was primarily seen in our Ag products but our fluid purification and co-pack cat litter products also reported increased sales. Segment income was also significantly up as compared to the first quarter of fiscal 2015 due to many of the same factors as we experienced in the retail and wholesale segment. From a balance sheet perspective our cash and investment balance grew over $2 million as compared to the ending balance of fiscal 2015. The increase was despite a debt payment of about $3.5 million made in the first quarter of fiscal 2016. Our networking capital was over $57 million which was up about $9 million from the first quarter of fiscal 2015. We paid out about $1.4 million in dividends during the quarter. Our dividend yield will be about 2.7% based on our 10/31 closing price of $31.38 and our latest quarterly dividend rate of $0.21. Thanks. I will turn the meeting back over to Dan.

Thank you, Dan. And before we open up the lines for Q&A, a couple of metrics that I often focus on and communicate myself, our per ton and ton numbers you know we sold 210,000, 211,000 tons during the quarter. And so I like to do the math and our average selling price was $321 a ton which was a record last year. For the year we did $312 which is great, but then when you jump to the gross profit line the $20 million of GP we reported during the quarter we had never had a quarter where we broke $17 [ph] too. So forget about an $18 or $19 million quarter, we actually bleeped [ph] all the way into the 20s which was great. And then on a per ton basis that was almost $98 a ton put that in context for fiscal 2015 we averaged $72 a ton, $68 a ton in 2014 actually up $13 was our record for year, we averaged $81 a ton. So we did $98 and you know in no way do I think that’s necessarily going to continue for the year, but as Dan mentioned it was back-to-back record quarters. So that’s good, we’ll try and keep the stream going but we obviously feel good about the investments we’ve been making in the past and as they are starting to materialize and I think you know the best part from our advantage point is we still feel the future is brighter than the present. So, we’re excited about that. So Joyce, I’d like to open it up to Q&A. I’d like to ask our questioners to ask their most important question first and then go to the back in the queue so that we can get as many people in during our time allotted as possible. And remember Dr. Cravens is here and he’s happy to field any questions about our Amlan International Animal Health Business.

[Operator Instructions] The first question comes from the line of Ethan Starr. Please proceed.

Congratulations on a truly stupendous quarter.

Thank you, Ethan.

I would just wish the market was as excited as I am by the results. In any case, what will the increased capital expenditures for the rest of the fiscal year would be spent on?

Well, Ethan we’re disclosing – we’re increasing our advertising trade promotional expenditures and that’s going to be spend on our lightweight cat litter.

Okay. You can comment on the capital CapEx a little?

Yes, I think it’s just – yes, in support of normal business activities and in support of the increase in our lightweight product lines, nothing out of the norm.

Right, nothing out of our core business.

You mind if I go back in the queue. I’m going to ask, let somebody else.

No, no, back in the queue.

Okay. Thanks. We’ll get back in the queue.

Thanks, Ethan.

[Operator Instructions] The next question comes from the line of Robert Smith with Center for Performance Investment. Please proceed.

Good morning. Thanks for the encouraging numbers. My question is directed to Ron. The comment was that Animal Health and Nutrition sales were actually down on a comparative basis and perhaps you didn’t speak to this and what the promises for the rest of the fiscal year?

Okay. Thanks for the question. Basically I believe you’re seeing a little bit of seasonal activity related to our business. We have pretty big fluxes just in the nature, monthly, quarterly whatever. So, we don’t look too much at it. The basics were right, just about right on last year. We’re really close right on plan on an overall basis and I think the year is going to be positive relative to last year and certainly the most important things are the introductions of the new products.

So Ron, could you just comment on the promise of the rest of the year in the area and maybe you can highlight the market opportunity for Varium and NEOPRIME?

So, the opportunities for Varium and NEOPRIME are substantial from the perspective of the segments that they are targeting. NEOPRIME is targeted into the daily pig market; Varium is targeted into the poultry most directly into the broiler segment. Both of those are obviously growing segments in the market and the switch from use of the antibiotic growth promoters is a positive. So, all the market momentum looks good for the positioning and the introduction of the new products and we expect to take advantage of that.

Is registration effective or you say you are ongoing?

Yeah we are currently in the registration process. With all of -- any time you are in dealing with regulatory bodies, its very difficult to predict when things are actually going to happen. We do have some registrations in a few markets and in fact we are out launching as we speak, so…

Could you identify them?

I don’t think we are talking about the specific markets, but we did get our first container order we won’t get into specifics on it, but we are very excited on the new products.

Right, okay.

And then I think the market, the general market added to it has been very positive from the perspective of what we have disclosed at this point to our trade partners and to key customers out there.

Thanks. I’ll get back in the queue.

All right. Thank you Bob.

We have a follow up question from the line of Ethan Starr.

Yes, what can you tell us about the new Cat's Pride Fresh & Light Ultimate Care litter product and how will it differ from the two products already in the market?

Excellent. As you know I’m going to give you as much information as I can without you know hurting any of our opportunities first for reeling in the success of these products. So, but in general, we launched 1.0 back in 2011,'12 area and it’s sort of a competition a couple of years to launch their 1.0 versions. We then, and that was our 25% lighter which is a blend of sodium bentonite which is very heavy but clumps, and calcium bentonite which is very light and absorbent and controls orders but naturally you know would need clumping additives to make it clump when yearend hits it. So that was sort of what we call the hybrid, which gives consumers an entry into the market without going fully to the full bold type idea of sticking with the analogy of an electric car. We then after they launched their 1.0s, we then launched our 2.0 which was all calcium bentonite and it was light enough to get a £20 jug we could fill to the same height and get to £12. The competition went very light, tidy [Indiscernible] went all the way down to £8.5 so their average intensity [ph] was very light. You know the mistake we think they made was they took real heavy stuff, sodium bentonite £60ish, £65 stuff and blended it with very light stuff from our managed point not a real high performing stuff, expanded prolite which is £7 to £8 a cubic foot and the problem with that is its so light that it migrates out of the back and gets protected bus and air floated bus and attracts [ph] like crazy to get their blended density to get to 8.5. So what we are doing is selectively mining -- we have as you know hundreds of millions of tons of reserve. So we are now selectively mining the lighter stuff of our reserves and ultimate care of 3.0, so it will be a full 50% lighter, it will be the same fill, same cubic inches, put it away £10 instead of £12. We believe that’s the perfect spot. The average bulk density is such that it’s obviously significantly lighter for the consumer to carry home but not so light that it migrates out of the box. The beauty of it is there are no fill ups, it’s a 100% absorbed with minerals and it’s all homogenous, it’s not like we are blending £8 stuff with £70 stuff and now we’ve decided to just put more of the lighter stuff to make it lighter. It’s all of our light density minerals, homogenous 100% no fillers, and so that’s really going to be the big campaign that we are going to be communicating which is you get all the performance and lightweight not/or currently if you are a Tidy Cat lever [ph] and they have the largest market share you can get one or the other. If you want a performance you got to buy they are heavy, and if you want light weight you buy the light weight. But if you want performance and light weight, you can’t do it, because their light weight product just doesn’t -- you can’t put 40% to 50% of filler in something and expect it to perform the same as something that is 100% of that active ingredient that was sodium bentonite, calcium bentonite mix always -- both done in a glamorated thing. Arm & Hammer and Fresh Step had all sodium bentonite with other fillers in there. Now they are just replacing the fillers with lighter fillers. So anyway that’s going to be Ultimate Care 3.0, I can tell you the trade is very excited about it. You know, it does, it’s our unique position because we have the quality and quantity of reserves. We are basic in this, we are not authored to buy in from other people, we can just mine our own products, process it, package it, selectively mine it and then give our consumers the absolute best minerals at the best price.

Sounds good. Can I ask another question?

Sure.

Okay. Are you continuing to add more private labels accounts for the lightweight scoopable litter?

We are. And that’s very good. You know there were some late adopters that are – were still rolling out. We even have instances of some early adopters who for whatever reason met with the filler guys who were just taking sodium bentonite and throwing filler in there and have realized the problem with that is your two things really. The quality is not nearly as good, that’s the biggest problem. But they are also very concerned in the cost of goods. We’re basic. So nobody can really beat us from a quality and quantity standpoint. So, we’re already picking up both late adopters and then even some switchers already are coming our way. So, it’s playing out very well for Oil-Dri.

Great. Any switchers from newspaper to clay?

In fact that was one of the big majors that have already switched was exactly that. They had taken someone who is taking sodium bentonite and just blending in, recycled newspaper to make it lighter. But again putting in 30% to 40% filler reduced the efficacy of the product by 30% or 40%, and so that’s a big problem for the consumer.

Great. For roughly, what percentage of such accounts that have taken the private label lightweight scoopable litter are you gaining all over the private label business?

I total, I think I announced, I don’t even remember the number I threw out last time, I think it was around 90%, 80% to 90% and that we’re sticking at that or more. I mean the lightweight litter market --this doesn’t take Oil-Dri self-serving position. I’m having this discussion with all of the accounts, just take out a map of the United States and then look at where we’re supplying them from and then look at where the competition is trying to make their supply chain work from. We have plants in California, Midwest, three in the Midwest and really three plants on the same location in the east. So we’ve got plants geographically distributed throughout the country with lightweight minerals where we don’t have to put any fillers in there, and we can absolutely for any national account have the lowest delivered footprint by far. Or you can buy from someone who have sodium bentonite mines in Wyoming, who then has to ship it somewhere and then go on the market and buy either recycle newspaper or wood fibers which is what they’re know and then blend in 30% to 40% of it to dilute the performance of the product and for the pleasure and enjoyment of that you get to pay more. So, it’s really an easy sale switch. I mean, I would love to think, I’m such a great salesmen and our team are and we really are the great. I have a great team. But you only are as good as your product. And all we have to do is talk logically. We don’t even have to get into any puffery, any smoke in mere its just pull out of and I do this now. Pull out the map of the U.S., show him where our plants are, show him where their accounts and it’s like the – and they get it.

Your next question comes from the line John Bair with Ascend Wealth Advisors. Please proceed.

Good morning. Great quarter. Want to go back to the Varium and NeoPrime product and wondering if the sales thus far are predominantly in the U.S. and you mentioned that you had a container going off and as Bob mentioned, your press release says registration is in target countries is ongoing, but at this point is it primarily domestic sales?

No. It’s primarily Asia and Latin America.

Okay. So, is the registration aspect then, can I assume then that you’re working on, is it something that domestically that you have to deal with state regulators to get the product approved or is it something on a more national – at a national level?

It depends a lot on what level of registration efforts we go into. As a feed ingredient, we can register via the state and that’s how a lot of products -- essentially I felt all of products are currently marketed in the U.S. We have discussed internally the option of pursuing some other registrations, but at this point we haven’t initiated anything with the body such as FDA or anything. So activity in the U.S. will maintain state-level feed, supplement feed additive type approvals, but our major focus has been historic has been Latin America and Asia where the livestock markets are continuing to grow and the biggest demand for these products are.

Has there been any consideration about advertising or promoting the use of this product domestically to bring more awareness much like some of the, let’s say, the fast-food change of saying, oh we’re going to do [Indiscernible] free eggs and we’re going to do non-hormone growth, food sources in other words, try to bring this more to the public’s awareness that in turn could drive demand for your product by your end user.

That is certainly something that internally we have been discussing and there is – we’ve interacted with several different bodies. But at this point we have not initiated any direct advertising out there in the U.S. One is that the types of situations you get into when you’re in the food or feed additive type businesses, you have to be careful about anything that you state, because it may sound like medical claim which gets you in the FDA. And at this point we have not chosen to do that. We have talked directly with some of the major livestock producers and we have internally discussed whether we want to go to some of the larger end user type customers such as Chipotle or Tyson [ph] or some of those organizations that go all the way to the consumer.

I think that’ll be great idea. On other quick question in that regards switching gears here regards the cost for shipping and basically your production cost and so forth, you resins, and so forth are those – are you able to lock in prices or how does that work? Is that, because I know last year at one point kind of wanting to see those resin prices and your packaging cost come down and it took a while for that kick in, so I’m just trying to get a general idea of how that works for you?

They are commodity driven prices in large parts. There is a quarterly look at the commodity indexes. I believe, we’re on a one quarter lag from a procurement perspective but they are definitely driven by the commodities.

Right.

And while the drag on the way down they would then lag on the way back up.

Right. Then could you, if you sensed that the prices were going to – were starting to turn are you able to kind of lock those in and maybe forward purchase, say double your normal buyout for six months, let’s say as opposed to three months kind of thing. Is that…?

You know, it’s not something we’d be interested in doing. We’ve done that in the past and we have good – our markets are rationale and when resin goes up as long as we move with it which it would, we can get price increases. When resin goes down, our customers want to see some pricing relaxation, but if we ever got on the opposite end of the bat, we’d be in big trouble. So there is really no incentive for us to do that. So we flow.

The next question comes from the line of Robert Smith. Please proceed.

Hi. Can you give me some ideas to the amount of the reduction in advertising and trade spending in the first quarter versus the corresponding period in the last year?

Robert, it’s probably 300,000, 400,000 in terms of advertising and trade spending, probably a little bit more than that.

Okay. And I assume that is big product introduction and increased advertising and spending is going to invade the incremental progress that you made in the first quarter and maybe first half. Let me – I know, it’s difficult for me to phrase this, but are you going to spend this all away or are you going to be looking at this in a more measured way?

Yes. It will be measured when I am going to bankrupt the company. When I am going to lever and borrow a $100 million. But on the other hand, this is a game changing disruptive technology that we invented that’s both in the consumers best interest, the retailers best interest and Oil-Dri's best interest to see this thing come our way.

I appreciate it.

Right, right. So we’re going spend -- this is a once in a life time thing, and we’re going after it. And we will – it will be measured, we’re not just going to go out and spend before getting a lot of business, it will be as pay as you go type thing, retailers will commit to certain shelf space in all this and you can run the math on the ACV that they give you, the All Commodity Volume and you could figure out what sales you are likely to see. The beauty of cat litter is, it doesn’t go bad. There is no expiration dates. It’s not [Indiscernible] on the position when you taken anything back or your blowing –you’re sending product out there, it sits and then they have to throw it out. It’s not like that so that’s good news. So there really is no real Armageddon scenario. So in our models, it’s all -- how high as up and we’ll see. The competition is not just going to rollover. Last time when we launched Fresh and Light, we were able to capture 1.8 share points and hold it in our new Fresh and Light product. Could we hope to do the same this time, well sure we’re hoping to do the same if not better. And that those numbers will be in good shape.

And just one other point, you pointly mentioned is Version, how well it’s doing; can you give me an idea as to what the product sales are at the moment – amount, dollar amount?

We don’t disclose that level of detail, Robert. We’re still not big enough to warrant disclosure.

Okay. Thanks a lot.

Great. I have time for one more question; if anybody has one or I’m happy to close.

We do have a follow-up question from the line of Ethan Starr. Please proceed.

Yes. In the 10-Q it said that, natural gas was about 22% lower this year than last year. Can you quantify that in dollar terms by any chance, so just give me an indication of how much less you spent?

Yes. We don’t get into that level of detail, Ethan.

Okay.

It’s in the 100,000

Yes. It’s in 100,000.

There was not material to the great quarter we had, because I’ve had people ask me that question. It was nice, but it isn’t why we are up so much.

Okay. And how is Snow & Go product doing?

Snow & Go, it’s great. We’re in Minaj and Wal-Mart and actually we have this relationship now with WGM Radio theatre, where we are the exclusive sponsor at the moment. And so, I was able to talk in detail about Snow & Go and all of a sudden State of Illinois jump to number two in our selling chart. I think Colorado is still number one. But WGN and now it’s hurting [ph] like 35 different states anyway. And so Snow & Go is doing great and there hasn’t been a lot of winter but it clearly spiked, right, when the winter hit. So, let’s all do our snow dances and we’ll sell lot more Snow & Go.

Great. Thanks so much.

All right. Last thing, Ethan, you didn’t ask this question, but I know you’ve reached out and then talked about, what were the changes in some of the senior management and as part of excitement around ultimate care of 3.1, we have done a divide and conquer, similar to what I you know I did with Mark Lewry. We brought him as Chief Operating Officer about two years ago. And he has helped immeasurably, allowing me to focus more on what I’m good at and he is focusing on what he’s good at, so it’s been a good divide and conquer. And so, we’re doing the same thing in manufacturing, in engineering new process improvement. We divide [ph] it up between Tom Cofsky who is our Historic Vice President manufacturing about everything underneath him and that was unreliably. He now is retaining about half of plant, he’s focusing on B2B side of the equation and then Erin Christensen we hired and we put out their new release, he is our VP of manufacturing on the CPG, Consumer Products Group side and he’s got about half the plants with engineering and things like that underneath him. And together they’re working very well to make sure that ultimately KO3.0 [ph] and all of our other initiatives get the time focus and attention they deserve so that we’ll make sure that as I’ve always said, order number one is generated by the sales people and the marketing people. But through infinity over the supply chain, I mean if we don’t get the product there on time in the quality and quantity that the concern customer have ordered, you’re going to have the best sales people in the world, and you’re not getting a repeat. So the supply chain is critical and it was time to divide and conquer and so that’s been a huge success for both them individually and for the company collectively. Okay, good. Well listen, we’ve got your annual meeting tomorrow and it will be much of that same, but we very much appreciate all of your guys patience and interest in our company and we’ll be back at you again at the end of the second quarter and we will keep you posted on all things Oil-Dri. So thank you. Happy holidays.

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