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Executives

Daniel S. Jaffee - Chief Executive Officer, President, Director and Member of Executive Committee

Ronda Williams

Daniel T. Smith - Chief Financial Officer and Vice President

Analysts

Robert Smith

John Bair

James Allen Schwartz - Harvey Partners, LLC

Oil-Dri of America (ODC) Q1 2013 Earnings Call December 10, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Oil-Dri Corporation of America Earnings Conference Call. My name is Shantilay, and I will be your facilitator for today's call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Dan Jaffee, President and CEO. Please proceed, sir.

Daniel S. Jaffee

Thank you, Shantilay, and welcome, everyone, to our teleconference. Joining me in the conference room here is Dan Smith, our CFO; Doug Graham, General Counsel; Ronda Williams, our immediate past Director of Investor Relations; and Reagan Culbertson, who will be assuming Ronda's role as Ronda moves into a full-time marketing role at the company. So don't fear, Ronda is staying with Oil-Dri, she's just moving on to bigger and better things. And Reagan, we're very happy to have you take over as Director of Investor Relations. So handling, for the last time the Safe Harbor provision, Ronda, please.

Ronda Williams

Well, thank you. I'm going to make it a good one. 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, Dan.

Daniel S. Jaffee

Great. Thanks, Ronda, and thank you for your wonderful job these past few years. And we will turn it over to Dan Smith for a little play-by-play on the quarter. And then as always, we will open it up to Q&A and encourage you guys to prioritize your questions because we're going to hold it to a half an hour, and so let's get to the most important questions first. Dan?

Daniel T. Smith

Okay. Thanks, and good morning to everyone. Oil-Dri started the year off on a tremendously positive note. Sales were up 3% to $61.4 million for the quarter. Our EPS was up to $0.64 per diluted share for the quarter, which is an all-time quarterly record on a split-adjusted basis. Last year, our EPS for the first quarter was $0.15.

Our retail and wholesale team delivered tremendous profit growth on a year-over-year basis. Overall cat litter sales increased about 5% driven by mix, pricing and lower trade promotional expenditures. We were able to maintain our sales momentum we started last year while benefiting from our first quarter plan to spend less in trade promotions and advertising. We spent $1.4 million less in trade promotions and $2.6 million less in total advertising during the quarter. However, we anticipate increasing our advertising and trade promotional spending for the remainder of the fiscal year. Our overall advertising expenses for fiscal '13 will be more than historical norms, but less than fiscal '12.

Our B2B group had a strong quarter. Sales increased 4% and our contribution increased 1% over a very strong first quarter a year ago. Animal health, co-packed litters, agricultural carriers all reported sales increases for the quarter. Our sales of fluid purification products were down for the quarter. Our gross profit percentage increased substantially during the quarter. The Retail and Wholesale and Business to Business groups reported solid product mix, selling price increases and less trade promotional spending, which drove our gross profit percentage to 28.1%.

Our balance sheet continues to be strong. Our cash and investments balance at the end of the quarter was $35.1 million, which was an increase of about $5.7 million from the first quarter of fiscal '12. Our cash and investments continue to substantially exceed our debt.

We continue our strong dividend payment to our stockholders, with approximately $1.2 million paid out during the quarter. Also, on December 4, we announced our intention to accelerate the payment of our fiscal third and fourth quarter dividends. A dividend of $0.36 per share of common stock and $0.27 per share of Class B stock will be paid before the end of the calendar year. This payment is not a special dividend or an increase, but rather an acceleration of the quarterly dividends that normally would be paid over the course of fiscal 2013.

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

Daniel S. Jaffee

Dan, thank you. Very, very positive, very exciting. And I won't put any other adjectives on it, I'd rather respond to the questions that are on our investors' mind. So Shantilay, if we could open up the Q&A line, we'll proceed.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ethan Starr, private investor.

Unknown Attendee

My question is this, to what extent are you still adding distribution for Cat's Pride Fresh & Light?

Daniel S. Jaffee

We are actively adding distribution. Certain new accounts have rolled in, and so you're getting -- you didn't get a full year last year, big accounts that jump to mind, towards the end of the year, Publix, for instance, was a big new added distribution towards the tail end of last year, so we'll get a full year's benefit of that. A lot of the distribution we put on last year was during our fiscal second half, so you're getting a year-over-year lapping effect now that's positive. We still have some major voids that we're looking to fill. But in those, I really don't want to comment on until they're actively on the shelves.

Unknown Attendee

Okay. How much of the voids are real -- I think about -- you might get distribution there?

Daniel S. Jaffee

We're in about 60% ACV-ish. At ballpark, we're a little under 60%. That means of all the places that could sell cat litter, about 60% of them are selling our Fresh & Light. And it's a little under 60%, but it's close, depending on how you look at it. I think realistically, if 6 months from now, that was up to 70%, that's probably as big a jump as you're going to see.

Unknown Attendee

Okay, what's your long-term goal?

Daniel S. Jaffee

I mean, the goal is always 99%, but it never -- unless you're one of the big guys, it doesn't seem to happen. Even with some of them, their individual SKUs, if you looked at Arm and Hammer or even some of their SKUs, they're happy to get in the high 70s. So for now, let's just say short-term goals, by the end of the fiscal year, let's see if we can't get that up to 70%.

Operator

Your next question comes from the line of Robert Smith of Center for Performance.

Robert Smith

It kind of reinforces what the discussion was in our meeting in Boston as to the possibilities here for fiscal '13. I'm really glad to see it unfolding, at least through the first quarter. So I did notice that we had only a modest increase in B2B, and I'm wondering how you see the remainder of the year for that sector, with an emphasis on Calibrin and Verge.

Daniel S. Jaffee

Okay. And your comments are a good opportunity for me just sort of get out -- we don't give guidance, obviously, and you guys have to do your own prognosticating and do the best you can. I guess, the minimal guidance I would give you is I wouldn't just take this quarter, multiply it by 4 and assume that's how the year is going to turn out. I think we've given very clear guidance in -- well, I'd say clear in that's it's broad, but it's clear that our spending levels are going to be going up in the advertising side of our Consumer business in second, third and fourth quarters. And this quarter, we were pretty quiet on that front. So you should expect total advertising to be less than it was in fiscal '12, which was during the year of the launch, but then it will be more than it was in fiscal '11.

Robert Smith

I'll take it.

Daniel S. Jaffee

Yes, good. So that -- and now let me answer your question, because you really asked about the B2B. It's sort of the power of Oil-Dri is the diversification of the markets we compete in. So B2B is still a very, very important contributor to the business, but as you'll recall, I mean, we had a monster year in fiscal '12. And while it would've been great to then back a monster up in fiscal '12 with another monster year on top of that in fiscal '13, that wasn't going to be as realistic. You're going to have some things that were going well and some things that were sort of onetime big events. Without divulging too much from a competitive standpoint, I can tell you we have some big customers around the world that are in markets that are being challenged. And so their fiscal '13, if they were to run the same as ours, which is August 1 to July 31, those time period, are likely to be less than '13 than they were in '12 because of the market dynamics they are facing. So we don't believe we're losing share. You can see the sales relatively flat, earnings relatively flat, we're maintaining share, we're trying to grow in key markets and we're doing that, but several key markets are down. And from our vantage point, it's more about what's happening in those individual countries than it is a statement about Oil-Dri and the efficacy of our product.

Robert Smith

Well, I guess you've chosen your words carefully, but to kind of put this out there, but it's very difficult to get my arms around this. Can you add any possible color to what you've just said?

Daniel S. Jaffee

Well, I mean, I could, Bob. But again, I always walk the tight rope. The more details I give you, the more details I'll give anyone who's trying to compete with us as well. So ultimately, that hurts you as an investor. So I feel your pain in a sense. You want as much transparency as you can get. On the other hand, you don't want to hurt your investment in trying to get it. So I would just say, take away from me, my comments, which are, we don't believe that any of the weakness we're seeing in any of those individual B2B areas is due to a product problem. We believe it's more due to a market dynamic issue and feel positive that due to the diversification, because markets are up, some are down, and then you've got the Consumer kicking in, that net-net, your investments is doing well for now.

Operator

Your next question comes from the line of John Bair of SKA Financial Services.

John Bair

Two quick questions. The TV commercials that you prepared, are those generic enough that you could replay them at a later date? Or is most -- in other words, is most of the cost of that part of your advertising budget in the production of the commercials? Or is it more in buying the time slots on your -- whatever channels that you're doing, using?

Daniel S. Jaffee

Okay. And that was your first question. The good news is on the TV commercials, we ran them heavily last fiscal year. The production cost is all gone. I mean, that's all expensed, so now any time we run it, it's merely the cost of running the commercials. The good news is we have them out there on YouTube and combined, they've got over 1 million hits, which we think is outstanding. I mean, if you go to YouTube and search cat litter commercials, you're hard-pressed to find any commercial that has any appreciable hits. I mean, when I did it last, and this may change, there was an Arm and Hammer commercial that had like 8,000 hits and a Tidy Cat commercial had like 12,000. And then you got us to combine the 2, we're in 1 million. So to us, that showed the power of the commercials and how they really resonated with the consumer. Having said that, going forward, we see our media mix changing a little bit. We -- maybe I'll use your question as a good segue into a point that I want to get out on the call, which is, you didn't ask the question, but I'll ask it for you. Are you happy with the movement of Fresh & Light? And the answer is no. We're not happy with the movement of Fresh & Light. As good as it's going, it needs to go better. And so then we dissect -- you get into diagnosing the problem and you start with, okay, is it a lack of velocity due to poor satisfaction? Meaning customers are buying it, but they're not coming back to it? That would be a big problem. The answer is no, we actually have the highest repeat that IRI has been able to see in the category. We're up to 45%, so 45% of the people who buy our product purchase it again. And that's very high repeat. We can see in the first 12 months what Double Duty did with Arm and Hammer. And they were around 30%, and Fresh Step Extreme was around 21%. So we're eclipsing those numbers by a wide range. So that's very positive. So okay, so you're not getting the velocity you want, but it is isn't due to poor satisfaction. So then what it comes down to, is it slow trial, because we know when someone tries it, they come back and they buy it. So they must not be trying it. And this sort of gets into Ethan's question a little bit, a function of that is the ACV, it's that they can't find the product or even where it is on the shelves. You're getting one facing, maybe 2 facings, which can easily be lost on a shelf of 44 items. So it's an awareness issue, and it's a trial issue. So we're really going to be spending our money this fiscal year, and this is -- I'm going to come back to answering your question, we're really going to be spending our money on trying to gain trial and awareness. And when you get into trial, you say, well, why aren't they trying it? Is it because it's a bad value? They see it, they just don't want to buy it because it's too expensive. And the answer is no, we're priced pretty much at parity, even a little bit less than the market big guys. So it isn't a value issue, it's really, they don't see the product, and so we've got to load up the shelves. While retailers are very hesitant to give you multiple facings, that's their value is their shelf space, but what we are working on is trying to find other vehicles that would gain or incentivize trials. So again, without divulging too much to the competition, the idea is to spend our money towards getting trial and as such, then using our media mix in a different way to support that. So I don't know if I answered your question, but hopefully I gave you a good flavor for where we see the challenges on Fresh & Light going forward.

John Bair

Okay. Well, I would validate 2 of your points, and number one is that yes, repeat, because I have 3 critters, we have 3 critters here. And we've been very pleased with, not only their acceptance, but the overall product. And also on the pricing, your comment on the pricing, competitive to others, from my observations here locally in the Cleveland market, absolutely spot on there. So one follow-up question, and then I'll get out, and that is you did mention about fluid purification, a product down. Can you say anything about how large is the percentage of your sales that particular product is? And where they're used in? What they're used in?

Daniel S. Jaffee

I don't understand the second part of your question, where they're uses in or what they're used in?

John Bair

Well, it's significant enough that you made a mention of it in your press release, your earnings release. But what markets are your fluid purification products used in, and how significant in the total picture of total sales are they?

Daniel S. Jaffee

Okay. I'll let Dan answer that question, but I'll talk to the broader question on markets. And don't want to get into specifics, but that is what I was talking about in my comments to Bob Smith, which is we have some -- we sell those products globally. So we have a couple of product lines that really sell globally. Our animal health products and then our fluids purification products. So on the fluids purification side, some of the global markets are in all sorts of, call them turmoil, and purchases of the products in those markets are way down. But in our talking with our customers, it's that their business is way down. It isn't that they've thrown us out and brought in a competitive product. Dan, you want to comment on that?

Daniel T. Smith

I was going to say, I agree with that statement, and the fluids purification business is north of 10% of our overall sales.

John Bair

Okay. So that would be in, for industrial uses then? Is that a broad enough question there?

Daniel S. Jaffee

No, okay. So fluids purification are used in 2 main applications. First is for edible oils. So we will sell to edible oil processors who use our clay to filter out color bodies, chlorophyll, things that would cause rancidity and reduce shelf life. And so that's the one application. And the other smaller application is on the nonedible oil side, where our products are used to filter products like jet fuel and things like that, to take some [indiscernible] out of the product. So those are the applications.

Operator

Your next question comes from the line of Jim Schwartz of Harvey Partners. And Mr. Schwartz has just removed his question. Your next question comes from the line of Ethan Starr, a follow-up, private investor.

Unknown Attendee

Yes, I'm wondering if there are any new products in the works?

Daniel S. Jaffee

Yes. And I'm not sure how much I can tell you other than we're continuing to launch new products, really, in almost all of our major business segments, and none of them obviously are material -- materially in the market yet. So I don't want to comment on them too much. But to say that we're continuing to focus on spending our research and development money on creating value from sorbent minerals, that's the mission of the company. And so we're staying true to that, and so the products you see will either be directly related to our minerals or our minerals will be what got us to the dance as it were, and then we'll have logical add-on products that will be sold around them.

Unknown Attendee

Okay. Are these new products or are these derivations, or new versions of existing products?

Daniel S. Jaffee

More of the new, less product line extension and more really new to Oil-Dri and new to the markets they compete in.

Unknown Attendee

Okay. And has Calibrin gained any approvals for distribution in new markets or countries recently?

Ronda Williams

No, no major new ones.

Unknown Attendee

Okay. My only other comment is I hope you're going to advertise the Fresh & Light to the AARP market, given that it's lighter.

Daniel S. Jaffee

That's a great segment that would very much benefit from a lighter weight cat litter.

Unknown Attendee

Sure. So are you going to do that?

Daniel S. Jaffee

Within our regular mix. I'll leave it at that.

Operator

Your next question comes from the line of Robert Smith, it's a follow-up, Center for Performance.

Robert Smith

So I just wanted to tell you that there are many days that all I do is spend time on YouTube watching the commercials, so a large part of that million is me.

Daniel S. Jaffee

Well, thank you.

Robert Smith

Of course, I'm kidding. But anyway, so I've expressed my thoughts to you previously about packaging. And so is there any way that you can essentially tell your story through bolder packaging at the point-of-sale. I mean, essentially, you're -- you have 25% less weight with the same volume. I mean, you say it's the next great revolution in cat litter. So -- but I don't know if the packaging is really telling the story for you, to capture the attention of the shopper.

Daniel S. Jaffee

Well, I really don't know how to comment. Duly noted, and our team is working on it.

Robert Smith

And I'd like to join your team.

Daniel S. Jaffee

Well, so would a lot of people. I appreciate that.

Robert Smith

You know, I'm offering you no fee consultancy, and that's why I've mentioned it to you in the past.

Daniel S. Jaffee

I know you have, Bob.

Robert Smith

I have a lot at stake here. I want to see this product zoom.

Daniel S. Jaffee

All right. So do we. I appreciate it.

Operator

Your next question comes from the line of John Bair, SKA Financial Services, with a follow-up.

John Bair

Yes, going back to the advertising, would you then, if you're not going to be doing television or cable type, like on Animal Planet or whatever type, are you going to go to more conventional couponing type offering to try to encourage potential buyers to try the product?

Daniel S. Jaffee

I don't want to divulge too much. I'll stick to the media mix idea. We're going to be introducing radio. We'll leverage radio in key markets. And anything to incentivize trial, I'm going to leave it at that, is where we want to spend our time and money.

Operator

Your next question comes from the line of Jim Schwartz.

James Allen Schwartz - Harvey Partners, LLC

Sorry, Dan, I got so excited by the gross margin numbers, I disconnected myself. No, great job and you guys -- I mean, I think it's been since 2000 when you had over 28% gross margin. I just, obviously, I don't want to get too excited for a quarter, because you guys are building something special here. I just -- is it a new Oil-Dri, and I don't want to like, it's obviously the business is changing all the time, but you guys are creating higher-margin products from your source material here. And I just -- I want to understand, as I look forward, and I look at that gross margin, what are you guys doing maybe that's more similar to what you did in '94 to 2000? And maybe more dissimilar from what you were doing in the interim? And as we look forward, is that 28% or 26% to 28% gross margin, it's not just a function of natural gas, it's the products are maybe more specialized that you're selling? I want to just understand that a little bit.

Daniel S. Jaffee

Well, first of all, let me help you, so '94 to 2000 is matching apples and oranges, because back then, and I don't know the exact timeframe, but where you're referring to 28% gross margins, that's because the way the accounting rules were back then, there was a lot of spending that was what's called below the line, it was below the gross profit line that they then moved up to above the line and come right off net sales. So what it did was -- it overinflated our margins back then, but the net is the net because it all comes out in the wash. So I know where you're going with a question, but that company was pretty much commodity, cost-based, sell your tons and the profit will follow. So that was pre-2000. Even though it hit 28%, you got to look at the bottom-bottom, because you're mixing apples and oranges. Now what you've got is for the last 10, 12 years, an entire team that's focused on our trying to create value and value is trying to do something unique, trying to do -- specifically answer unmet needs for customers, work with them on the developmental end, so that by the time they're launching products, they're launching it using your clays and that, that lets them do things that they couldn't otherwise do. So that it isn't just about the price and it really isn't, in a sense, I mean, look, everything is open to bid, it doesn't mean you can charge whatever you want. And I don't mean to say that, but they're much more interested in hey, if they can make money using a specifically engineered granule or a product that's doing something very special for them, they're happy, we're happy, the end-user is happy, everybody is happy, versus just being a commodity-based, you're selling water, what's the price of your water and if your water is not cheaper than the other guy's water, I don't want it. So that's been the whole focus of the company. Now having said that, does that mean every quarter and every year is going to keep getting better and better? No, we're going to have ups and downs, especially as a small business. One big hit, like we had a couple of years ago, whereas you know, with our major -- one of our major customers decided they didn't need us anymore, it took us, I'm proud to say, only about 12 to 24 months to regain our footing and get back on track. But in any short period of time, anything can happen. But long term, this is the right tack to take because just trying to double our volume by -- double our sales by doubling our tonnage is not a winning strategy. This is a winning strategy, but there'll be some ups and downs.

James Allen Schwartz - Harvey Partners, LLC

Absolutely. And guys, we look at the higher-margin products that you're selling, and there's kind of a theme of, last call, that you hinted about the gross margin. I mean, that -- we're sort of at a new level now, which all the years of working on these all-in projects, they seem to be starting to happen, without jinxing it.

Daniel S. Jaffee

Absolutely. And it's fun, it's exciting, but it's also -- it keeps us humble in the sense that we've got to take these -- take what we're doing and keep investing and keep growing, and that's why I said, you can't just take the first quarter and multiply it by 4. We're going to take a lot of this and plow it back in and try and keep the snowball rolling.

Good. I think it's 10:30. Let's close the Q&A line. And just, thank you guys. And you can tell from our performance and what we do, we do listen, we do take your thoughts and input into consideration. I hope you appreciated the accelerated dividend. That was just a way of saying we thought the likelihood of tax rates going down was probably not very high and they're probably going to stay the same or go up. So let's just accelerate them into calendar '12 and see what happens. And then we'll take our usual dividend action in the June meeting and it will be on the agenda. Obviously, for the last 9 years, we have raised the dividend. I'd love to see this be the 10th. But that'll be a board decision at the June meeting. So thank you guys, and we'll talk to you again in 3 months. We have our Annual Meeting of Shareholders tomorrow at 9:30.

Ronda Williams

Yes, at the Standard Club.

Daniel S. Jaffee

In Chicago. So if you're here, we'll see you there. Thanks very much. Bye-bye.

Operator

Thank you for participation in today's conference. This concludes the presentation. You may now disconnect. Have a wonderful day.

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