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Oil-Dri Corporation of America (NYSE:ODC)

Q1 2011 Earnings Call

December 9, 2010 11:00 a.m. ET

Executives

Dan Jaffee - President and CEO

Andy Peterson - CFO

Angela Hatseras - Acting General Counsel

Ronda Williams - Head of Investor Relations

Analysts

Ethan Starr - Private Investor

Robert Smith - Center for Performance Investing

Operator

Good day ladies and gentlemen and welcome to the first quarter 2011 Oil-Dri Corporation of America Earnings conference call. My name is (Jennifer) and I’ll be your operator for today. At this time all participants are in listen only mode and later we will conduct a question and answer session. If at any time you require operator assistance please press star followed by 0 and we’ll be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Dan Jaffee, President and CEO. Please proceed.

Dan Jaffee

Thank you Jennifer and welcome everyone to our first quarter teleconference for fiscal 2011, our 71st fiscal year, which is pretty exciting. With me here in Chicago, Andy Peterson, our CFO, Angela Hatseras, our acting general counsel and Ronda Williams, head of all our investor relations. And Ronda, if you would cover the Safe Harbor.

Ronda Williams

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.

Dan Jaffee

Thank you Ronda. It’s my prerogative as CEO before I turn it over to Andy I’m going to steal all his thunder and crow about whether it’s not just been a good quarter but I was working on my presentation for the annual meeting, which is coming up next week and I hope those of you who can make it will make it.

But part of the presentation will be a retrospective sort of looking back because we’re always encouraging our investors to sort of take the same view of our business that we do, which is long-term. So we don’t give quarterly guidance, we don’t even give annual guidance. And many of the decisions we make have a five to ten year horizon on them, some even longer. I mean as you’ll recall in fiscal 2010 we spent nearly $4 million acquiring a large body of reserves in and around our existing facilities when we already had 40 years of reserves in total.

So clearly that was a look way out beyond even my tenure with Oil-Dri. But it’s that long-term focus that really drives our daily decision making process. So we look back ten years and said okay, how has the decade been? And it’s actually been pretty incredible and I don’t want to use up all of what I’m going to cover in the annual meeting next week but a couple of things that jumped out at me was if you had bought 2000 shares of Oil-Dri stock on 7/31/01 so I’m doing ten fiscal years nine years ago, you would have paid $10,280 for that, so roughly $10,000.

And on 7/31/10 that would have been worth almost $44,000 in stock value but you would have also been paid $8,250 of dividends. So your total value would have been just over $52,000 so your return compounded annually for that period of time is 19.7%, which is pretty powerful given the fact that in that period of time we have been in the teeth of the wind of a very negative global economy and probably the worst economy since the Great Depression and we lost a huge chunk of business with our single largest account.

So if you factor all that into it, I wouldn’t have thought we would have even done that well but we did. But then I have some people who like to keep me humble, which is a failing job but they try. And so they say you know what, you look back ten years, that’s a pretty rosy perspective for you because you weren’t doing so well ten years ago and now you’re doing well but pick a different perspective. So I went back five years because by five years ago the ship clearly was heading in the right direction.

The company was doing very well and so if you just look back five years and you say okay, what’s the total return for the past five years and I grabbed some benchmarks. I said okay, let’s see how Warren Buffet has done. So Berkshire Hathaway total returns five years up 34% and I’m using a Web site so don’t hold me to the exact numbers. If they spit out the wrong numbers we’ll blame them. That’s my Schwab stock screener but I put it in there. And so Berkshire/Buffet up 34%, Bill Gates up only 5-1/2% - Microsoft up only 5-1/2% in the five year period total return, not compounded.

Oil-Dri up 78% so I figure any time you’re two times Buffet or 14 times Gates you’ve got to be doing pretty well. So that’ll be enough of me patting ourselves on the back. I think I pulled a shoulder muscle just now reaching around and giving myself an atta boy. But the reality of it is it’s the team and we really have assembled a great team. And when you get 800 people pulling in the same direction as I’ve always said, you can really do a lot in a game of tug of war. And if you get 400 pulling one way and 400 pulling the other way that ribbon doesn’t move very far.

But we have proven that given a clear mission of creating value from sorbent minerals and then really trumpeting the values of the company through our acronym of WECARE that you get 800 people pulling in the same direction and it really is powerful what can be achieved. But you know the real exciting part is now what have you done, it’s what are you going to do. So what will the next decade look like? And that’s anybody’s guess.

But we feel we have a lot of momentum individually and personally our family is continuing to increase our ownership in Oil-Dri. And we’re off to a good start with the first quarter. So that is my segue over to Andy. He can cover the first quarter and let you know on our first little baby step towards the next decade. How did we do?

Andy Peterson

We had sales of 56.3 million in the quarter, up 5% compared with last year’s 53.4 million. We had a gross profit margin in the quarter of 23.5%, up from last year’s 23.1%. Operating expenses were 16.7% of sales, which was down from 16.8% in last year’s first quarter. Our effective tax rate in the quarter was 28%, the same as last year’s first quarter. Net sales was 4.5% of sales, up from last year’s 4.1%.

EPS in the quarter of 35 cents was up 17% compared with 30 cents last year. And looking at balance sheet cash flow, cash used in operations in the quarter of 500,000 compared with 7.6 million provided from operations last year. The 8.1 million negative swing in cash generated was primarily due to increases in accounts receivable and inventory driven by a 5% increase in sales. Last year the opposite occurred when we had a 15% decline in sales compared with the first quarter of fiscal 2008.

Capital expenditures of 1.6 million were down 300,000 compared with last year’s first quarter. Debt payments in the quarter of 1.5 million were up 1.3 million compared with last year. We had purchases of treasury stock of 500,000 compared with no purchases in last year’s first quarter. Dividends paid in the quarter were 1,043,000, up 48,000 or 4.8% compared with last year. Cash and investments at October 31, 2010 was 20 million, down from last year’s 25 million. We had 3.2 million more in cash and investments than debt compared with last year’s 3.7 million.

On November 12 the company sold 18.5 million of senior unsecured notes. The notes have a final maturity of ten years and an interest rate of 3.96%. The proceeds may be used to fund future principle payments of the company’s debt, acquisitions, stock repurchases, capital expenditures and for working capital purposes. Dan.

Dan Jaffee

Great. Thank you. And some additional metrics that I like to focus on that I have talked to you guys about before but we’re selling a non-renewable resource so we very much feel it’s incumbent upon us to get the most for those resources, which is how we ultimately came to that creating value from sorbent minerals. So from a top line standpoint we set a record in the quarter, $256 a ton. This is up 7% over the first quarter of a year ago. And I looked back for the decade, I mean a decade ago our average selling price was 156 so we’re up $100 a ton.

And we have lost a little volume. We were doing a little over a million tons back then. We’re on an annualized rate of right around 880-900,000. So but any time you can increase your per unit price by 65% and only lose 8-10% of your volume it’s a positive trade off. And that starts to show itself first in the gross profit line where we made $60 a ton in the quarter, again this is after making 55 a year ago and only making $28 a ton a decade ago, so more than doubled our GP per ton, which is exciting.

And then you get into the net income line and we made 11.47. We have set a goal internally of $11 in ‘11 meaning we finally broke the $10 barrier in fiscal ’10. We made 10.52 last year and so got a nice ring to it. Let’s make 11 in ’11. And we’re out of the gates well. We’re making 11.47 at the moment. If you look back a decade we were only making 89 cents a ton so it’s - I’m not even going to bother doing the math on that one. So those are some of the key things that we look at as we make sure that we’re heading along the path that we said we were.

At any point in time certain opportunities are going to be doing better than others. Others are going to take longer to materialize and others will even fail. We have failed believe it or not. But net-net I think we have done pretty well. So I’d like to, (Jennifer), open up the call to questions and answers. As always I’d like to encourage each person to ask their most important question first and then go back to the end of the line because we only dedicate 30 minutes to this. And so I want everyone who has a question to have a chance to at least ask their most important question.

Question and Answer Session

Operator

Ladies and gentlemen, if you have a question please press star followed by 1 on your telephone. If your question has been answered or you’d like to withdraw your question press star followed by 2. Questions will be taken in order received. Please press star, 1 to begin. Your first question comes from the line of Ethan Starr. Please proceed.

Ethan Starr

Good morning. Nice quarter.

Dan Jaffee

Hi Ethan. Thank you.

Ethan Starr

With the new product you mentioned last quarter, will that require a lot of cash used in the form of CAPEX or marketing spend?

Dan Jaffee

It will be a significant investment on all fronts, yes. That’s a good question and it will require that.

Ethan Starr

So both fronts?

Dan Jaffee

Yes.

Ethan Starr

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

Dan Jaffee

Okay. Thanks.

Operator

Again ladies and gentlemen to ask a question please press star, 1. Your next question comes from the line of Robert Smith. Please proceed.

Robert Smith

Hi. Good morning.

Dan Jaffee

Hi Bob.

Robert Smith

I haven’t seen you guys for a while.

Dan Jaffee

Yeah.

Robert Smith

So could you give us the quarterly break out of the Calibrin and those things that you have been sharing with us over the last year or two?

Dan Jaffee

Yeah. I thought you were going to ask about the pension though. You told me you were supposed to be my show here.

Robert Smith

Well, you were supposed to get back to me on that.

Dan Jaffee

I was going to do it here. I thought you were going to ask me about the pension and then I would look like a well informed, educated CEO and it all would have played out well.

Robert Smith

I was going to ask that. You said the most important questions first.

Dan Jaffee

All right. I’ll cover both because you did ask that question.

Robert Smith

Okay. Great

Dan Jaffee

We were up a little bit on the Calibrin products from the fourth quarter but again, I think we’re all disappointed with the trajectory of the increase. But I think as I mentioned in Boston and I’ll reiterate here, the core products are doing well but what’s really been slow for us is the introduction of the next generation, what we call clay plus, so taking our basic clay technology, adding something to it to then have a beneficial impact both in the eyes of the nutritionists and then ultimately in performance with the animals.

And the registration process, the testing process - all of the hurdles you have to leap through every time you make any little change to your core product, it requires a complete re-registration. So we’re excited about our next generation products. They’re in the hopper. They’re - I just met with Dr. (Ron Cravens) yesterday. We’re continuing to be very confident about the long-term prospects of the business. Short term it’s taking longer to get off the ground than we would have liked.

Robert Smith

Do you have the number?

Dan Jaffee

I do but I mean it’s so immaterial. Do you really even want it? I mean we’re talking - I’m not even going to bother any more. Until it’s material you just - for your purposes it was relatively flat. It was up but it was relatively flat.

Robert Smith

Well, I wish we would continue the ability to have those numbers.

Dan Jaffee

I know. But it just sort of leaves us spending a lot of time on something that is a small percentage of the business. And I have been encouraged by my advisors to stay away from immaterial numbers. So until it’s material I guess I have a gag order on me.

Robert Smith

Okay. All right.

Dan Jaffee

So it’s relatively flat but it’s immaterial. That’s sort of what you need to know. But then on the pension front, this is a hot topic and it’s a great question because a lot of companies and states in particular are in deep water when it comes to their pensions. I got into this so just to give you an idea, I guess the US average is 80-85% funded of what they project the future liability to be. The State of Illinois is at 38%, which is horrendous.

The Pension Protection Act mandates that by 2014 you have to be at least at 100% funded and the good news is Oil-Dri as of today is at 101. So if we can just stay where we’re at we’re fully funded. We use an annual growth rate assumption of 7-1/2%. That’s unchanged from ’09. And our 15-year average return has been 8.12% so we’re actually picking a number that is more conservative, that is lower than what our actual results have been but there are obviously a lot of reasons in this environment for being conservative.

The discount rate has been dropping. That’s a federally I think mandated number. It’s not that we get to choose but obviously if that number drops your liability goes up. And so even with all that we’re at 101. And we have $18 million in assets, which is good and our annual payout for the fiscal ’11 is just under $750,000. So on that rate we’re 24 years of funding just sitting there. So we’re in good shape with our pension. It’s been managed very well. This is one of the things that my father has continued to be very focused on.

He’s very conservative. He’s got a lot vested in making sure that pension continues to get paid out so it’s all working.

Robert Smith

I’m glad to hear that. I’ll get back in the queue.

Dan Jaffee

Okay. Thanks.

Operator

Your next question is a follow up question from Ethan Starr. Please proceed.

Ethan Starr

Yes. I’m wondering what is Oil-Dri’s potential liability should any litigation arise from the unfortunate accident in Ochlocknee in October?

Dan Jaffee

Angela.

Angela Hatseras

It’s not expected to be material from a financial reporting or SEC standpoint.

Ethan Starr

Okay. Thank you. Also what are the prospects for continuing to restore Cat’s Pride to additional Walmart stores?

Dan Jaffee

Very favorable in the sense that as a company they have I don’t want to say reversed but they recognize that they cut too deep with their project impact and they have been across all categories restoring discontinued SKUs and/or brands. It’s the kind of thing they sort of address every six months so what we have in place now is going to stay what we have in place. We would expect that come March they would look at that again and that we would hope to gain more of the lost stores come March.

Ethan Starr

Okay. In the stores that you have restored in the last few months have you seen increasing turns there on retail on the shelves?

Dan Jaffee

The cat litter category has been a little weaker in general so our movement is good relative to the whole category but the whole category is soft. It’s soft. I mean I think Walmart just reported five consecutive quarters now of same store sales declines in the United States. And so I would say relative to the category we are happy with the turns relative to what we saw maybe in the past. It’s looking a little soft.

Ethan Starr

So okay, compared to before you were discontinued out of Walmart briefly, it’s slower than that?

Dan Jaffee

Correct.

Ethan Starr

Okay. Thanks.

Dan Jaffee

Yeah.

Operator

Your next question is a follow up question from Robert Smith. Please proceed.

Robert Smith

So at our analysts gathering we spoke of the R&D effort and the numbers. So my question centers on the extension of the R&D tax favor and the treatments. So how are you in - how is the statement of the actual R&D figure reflected in the tax benefit? I mean do you have to look at this again how you present the data?

Dan Jaffee

Andy, let me just give you the background and then you can answer. The point I was making at the investor conference was while we reported R&D number, that’s a pure R&D that’s easy to get your arms around. When you then sort of say wait a minute, we’re running in beta mode down at the plants some of our various projects and we don’t really capture those dollars and then send them back up to Vernon Hills for the R&D budget.

So I was saying our true research and development expenditure is greater than what we would expend in Vernon Hills. So that was my point. So then Bob’s point I think is on the tax side of how.

Andy Peterson

Yeah and I mean I think I’m not sure that’s all been sorted out in terms of what the R&D tax credit extension and how that’s going to look. It’s not going to be a significant number in terms of what that’s going to do to our taxes.

Robert Smith

Well, but I mean you want to save every buck you can, right?

Andy Peterson

No. I would agree.

Dan Jaffee

You do but we’re already in the alternative minimum tax. We’re already getting it because of depletion.

Robert Smith

Right.

Dan Jaffee

So the odds of us being able to take advantage of a bunch of additional tax credits…

Robert Smith

Right.

Andy Peterson

Yeah. That was my point, not that we wouldn’t do it, not that we wouldn’t look at doing it but that it’s not going to be a material impact.

Robert Smith

No, I understand that.

Andy Peterson

Yeah.

Robert Smith

And could you just circle back and tell me about the brick product? I mean where is that now?

Dan Jaffee

That was my failure. So when I said we have failed on stuff, there’s one.

Robert Smith

So it just didn’t work?

Dan Jaffee

Yeah. It didn’t work. I mean the product worked but the consumer didn’t want it at the price we needed to charge them.

Robert Smith

Could that be revisited at some point in the future?

Dan Jaffee

Yeah. I would say - you know, look, it goes with the building industry.

Robert Smith

Yeah. Well, that’s what I was thinking about.

Dan Jaffee

Right. So we picked a bad time to launch a product into the building industry because they’re in the tank.

Robert Smith

Yeah.

Dan Jaffee

So the last thing they need is to spend more money on incremental capacity. They’ve got all the capacity they can handle. So yes, if it ever got to where that things heated up again where they were looking for incremental capacity, our product works.

Robert Smith

Okay. Thank you very much.

Dan Jaffee

Yeah.

Operator

And your next question comes from the line of Ethan Starr. Please proceed.

Ethan Starr

Yes. I’m wondering how things are going with the manufacturing verge. Are you getting closer to being higher quality in that and being able to offer I guess the different sizes and different types?

Andy Peterson

Yeah. I think we’re progressing. We’re getting better through put. We’re going to be expanding in terms of the product line at some point. But I think it’s being well received in the marketplace and we’re continuing to refine our processes and it’s a new process for us so it’s going to take some time.

Ethan Starr

Okay. Like you think another year or so or you’re not really clear?

Andy Peterson

I’d hate to put a timeframe on it but I think certainly if you look at the next year we’re going to make a lot of progress.

Ethan Starr

Okay. That sounds good. Any progress on getting into China with Calibrin?

Dan Jaffee

No. We’re still fighting the red tape registration process.

Ethan Starr

Okay. Well, thank you very much and I’ll see you Tuesday.

Dan Jaffee

Great. Thank you.

Operator

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

Robert Smith

Just want to wish you guys a happy holiday season and also thanks for the dividend increases.

Dan Jaffee

Absolutely and Bob, your point on doing it once a year is well taken. I’ve seen the rankings and so forth and as you keep doing it you get yourself into a more and more select group.

Robert Smith

That’s true.

Dan Jaffee

Yes. So given the performance of the company I’m sure the board will look favorably upon that again. I think at the June meeting we tend to take that up.

Robert Smith

Yes. Thanks so much.

Dan Jaffee

Great. Thank you.

Robert Smith

Good luck.

Dan Jaffee

Good. All right. Well, thanks everybody. It’s a very positive quarter where we’ve got a lot going on. We’re confident in both the short, mid and long term and obviously as always, things could happen but you can read from our vibe we’re very enthusiastic about what the future holds for Oil-Dri. (Jennifer), that concludes our call.

Operator

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

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