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Executives

Jeffrey M. Libert - Chief Financial Officer, Vice President and Treasurer

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

Douglas A. Graham - Vice President, General Counsel and Corporate Secretary

Ronda Williams -

Analysts

Unknown Analyst

Robert Smith

Ethan Starr

Oil-Dri of America (ODC) Q1 2012 Earnings Call December 9, 2011 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 (sic) [2012] Oil-Dri Corporation of America Earnings Conference Call. My name is Regina, and I will be your conference operator for today. [Operator Instructions] Today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Dan Jaffee, President and Chief Executive Officer. Please go ahead, sir.

Daniel S. Jaffee

Thank you, Regina. Welcome, everybody, to our teleconference, and as usual, Jeff Libert, Chief Financial Officer; Doug Graham, our Vice President and General Counsel; and Ronda Williams, who heads up our internal -- our investor relations effort is here. And Ronda, you'll cover the Safe Harbor?

Ronda Williams

Yes, I will. 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.

Daniel S. Jaffee

Thank you, and before I turn it over to Jeff, let me just say this was a dynamic quarter to say the least. The B2B group really performed exceedingly well across the board and then on the retail side, we launched what we believe to be a game changing new cat litter, changing litter for good, Cat's Pride Fresh & Light, and so we got a lot going on all fronts. And obviously, when you have that kind of activity in a company our size, ultimately, it's called investment spending, where you're spending more than the profits would cover in those quarters where you're getting the new product off the ground. And so you saw it in our bottom line that our EPS was down significantly in the quarter.

So Jeff, with that little lead in, why don't you take us through some of the details?

Jeffrey M. Libert

Thank you, Dan. I think you left a little bit for me to talk about. Dan, sales were up 6% for the quarter. They were a little under $59.6 million for the quarter. As you mentioned a second ago, EPS was down with $0.15 a share, which is down $0.57 versus a year ago. The story...

Daniel S. Jaffee

57%.

Jeffrey M. Libert

57%, yes. The story this quarter was all about Cat's Pride Fresh & Light launch. The additional sales drove our sales higher, but we spent $3 million in additional advertising and promotional expenses and ultimately, that accounted for our reduced earnings. Our gross margins have increased slightly from 23.5% to 23.8%, reflecting a higher margin product mix. B2B had a very strong quarter. Sales increased 10% and contribution increased 41%. Animal health and bleaching earth sales increased. Agricultural carriers were flat and co-pack litters declined. Our animal health and bleaching earth products continue to find new customers. Our co-pack was down due to the continued shift to scoopable litters.

Retail and Wholesale, where cat litter resides, sales were up 4% for the quarter. I mentioned earlier that the Fresh & Light launch reduced our income during the quarter but drove increased sales. Our ability to predict the timing of distribution gain, the consumer acceptance, is somewhat limited, honestly. So our understanding of how we're going to perform during the year is going be highly variable based on how well the product gets distribution and when it gets distribution. Despite all the encouraging news we received about the product, fiscal '12 will be a year of investment, as Dan mentioned a minute ago, due to the launch, and we now believe our earnings will be somewhat reflective of that investment. Our other scooping litters grew during the quarter, on the positive side, and sales of traditional litters declined. Our industrial and sports field products increased during the quarter.

As for the balance sheet, we continue to be in a very strong position. Our cash and investment balance is now $29.4 million. Our net debt, which is our cash less our outstanding debt, is a little under $2 million. We spent $1.6 million in the quarter on capital, and that's somewhat down from where we've been in past quarters. We've spent a lot of money last year in fiscal '11 launching Fresh & Light, and with that launch now underway, we expect our capital to be a little lower for this year. We remain committed to dividends. Our quarter dividend of $0.17 per share represents a 3.4% yield at the quarter's closing price.

That pretty much summarizes the quarter, financially.

Daniel S. Jaffee

Great. And rather than me trying to guess what's first and foremost on our investors' minds, Regina, what I'd like to do is open it up for Q&A and please encourage everyone prioritize your questions, ask your most important question first and then get back to the end of the queue to allow others to ask their questions before we run out of time.

Question-and-Answer Session

Operator

[Operator Instructions] And gentlemen, your first question today comes from the line of Ethan Starr.

Ethan Starr

It looks like Calibrin did well in the first quarter. Could you please provide us some color on how Calibrin did as well as some numbers?

Daniel S. Jaffee

As I anticipated this question and my second answer first, no, I'm not going to provide any numbers. I was stymied by our Vice President and General Counsel and he said I can make him the bad cop. So I'm making him the bad cop. So let me stick with the color. And you're right, we had a great quarter in B2B, in general, so -- and Amlin, animal health resides in there. And really, at the end of the day, it's not in anyone's best interest, meaning the investors or ours, to get into too much detail because all we would do is then let everyone else know where they should go and attack our business. So just so you know, that's why we do it. We were not trying to hide anything. We're not trying to not be transparent. We're merely, at the end of day, trying to protect all of our investments. So if I answered your question in detail, you would be satisfied for the next hour, but long-term, it would really hurt your investment. I know you don't want that and I don't want that. So anyway, it was a good quarter on the animal health side and really across the board in B2B, and I think that's probably as much as we want to get into.

Ethan Starr

Do you see this trend improving?

Daniel S. Jaffee

I would love that trend to continue. It was a really good quarter. So we see a lot of momentum on the B2B side. A lot of good things happened in the quarter. So the second quarter may or may not look exactly the same, but we are expecting good things for the year.

Operator

[Operator Instructions] And your next question is from the line of Robert Smith.

Robert Smith

Our Calibrin sales are at a new high. And could you give us some color as to what's driving it?

Daniel S. Jaffee

I think I can answer well, but I can give them relative, right? I mean, okay, good. Because I went back and I just looked at the past 5 years, because that's really when we "went all in" on animal health. And yes, the sales in the quarter basically were up 50%, 5-0, from the past year's trend. So that gives you an idea that we did really have a good quarter, which was obvious from the results. So does that help answer your question?

Robert Smith

So it is at a new high.

Daniel S. Jaffee

Yes, absolutely.

Robert Smith

Yes, and can you give us the -- what's driving it, the elements of it?

Daniel S. Jaffee

I'll give you the product performance attributes, which is what it is. I mean...

Robert Smith

No, I mean, so it's new territory or what's happening?

Daniel S. Jaffee

Yes, I'm not going to get into that, Bob, for all the reasons I just said.

Robert Smith

All right. Okay.

Daniel S. Jaffee

Yes, but I will tell you that what it is, is a wider market acceptance of our mineral, which is really unique and does a great job of binding a wide array of mycotoxins, aflatoxins, zearalanone and we've even been approved now on wider or broad range. So it's really validation of the product's performance.

Operator

And you do have a follow-up question from the line Ethan Starr.

Ethan Starr

Yes, I'm just wondering how the Cat's Pride Fresh & Light launch is going at retail. I mean, is it good sell-through? And also, will it be carried by either CVS or Walgreens?

Daniel S. Jaffee

I'm not going to get into detail distribution at the moment, but obviously, we're presenting it to all classes of trade: drug, food, mass, and so wholesale clubs. So you will see it over time everywhere. It is doing very well as -- it's out there in wide distribution now in many more accounts than just down in Bentonville. But obviously, they were the earliest to put it out on their shelves, and so we are starting to get some real market data and we can see strong repeat and continued build. So it's very positive.

Ethan Starr

Is the strong repeat and continued build true of non-Wal-Mart accounts?

Daniel S. Jaffee

Too soon there. So I mean, we're seeing reorders and so forth. So that's a good sign, but it hasn't shown up yet really in IRI, which is the market data that's available to us for most accounts. So it's just starting to show up because it's always on a lag.

Operator

And you have a follow-up question from the line of Robert Smith.

Robert Smith

So in -- so specifically to Wal-Mart, is -- in the data that you're seeing, is there much cannibalization of the product?

Daniel S. Jaffee

Good question. No. What we are seeing and what we are being told is that what they are seeing is it's helping "drive" the growth of their category. So they are seeing it as incremental, and that's very good news. And from our perspective, they didn't discontinue any brand to put Fresh & Light in there. They just probably squeezed some facings of various brands to create room on their shelf, so then for them to see that those brands are still moving and doing what they were doing. And now they're bringing incremental customers into their stores to buy Fresh & Light, they're very happy with that.

Robert Smith

Do you have all the time buys under your belt? I mean, how is that going to play out during the year?

Daniel S. Jaffee

The time buys?

Robert Smith

In advertising and promotions?

Daniel S. Jaffee

Oh, well, that's really going be back-end loaded. I mean, we did obviously some in the first quarter, but a lot of what you saw in that $3 million were onetime expenses related to new distribution and other marketing activity. The real TV is going to start slowly in February then build March, April, May and then tail off in June. So that's when we're running them.

Robert Smith

And that will be dependent upon performance as well?

Daniel S. Jaffee

Absolutely. Yes, absolutely.

Operator

And you have a follow-up question from the line of Ethan Starr.

Ethan Starr

Dan, I'm wondering what is your long-term strategy regarding Oil-Dri's factories in Canada and the U.K.?

Daniel S. Jaffee

Good question. And I would say, historically, the last 12 to 24 months have not been good for those units. We believe that there are positive strategic opportunities there. I don't really want to get into too much detail, but we're optimistic about the mid to long term. The short run, nothing gets turned around quickly. We do have new management in place, very excited about that, and working closely with them to turn things around.

Ethan Starr

Is that new management in Chicago or at the plants?

Daniel S. Jaffee

At -- in those locations, so primarily in Canada.

Operator

And you have a follow-up question from the line of Robert Smith.

Robert Smith

It looks like I'm flying on Ethan's coattails there. So again, for the foreign subs, when you're saying increased competition, can you give us a little more detail as to what's happening there?

Daniel S. Jaffee

I said increased competition? I don't think I did, Bob.

Robert Smith

In the foreign subs, really, I thought I caught that?

Daniel S. Jaffee

We may have put it somewhere -- oh, in the news release? Okay, got you. I thought you said I just said it. Right. Got you. Canada in particular, our reason to be historically was that we had a patented process that allowed us to have a cost advantage over the local competition so we could provide a local blended granule that was very efficacious but also cost-efficient. Over time, that position has eroded, where the process that we have really isn't giving us much of an advantage. And in fact, it's not giving us any advantage at all. So what it's allowed is other local players to pop up and compete on price. Whereas in the past, we had an advantage, now we really don't. So now what we need to do is change our model and rather than try and be the low cost price guy, we got to do what we've done here in the States and outside with all our other businesses, which is create value from sorbent minerals, and value is in the eyes of the customer. And therefore, they're happy to pay you more if they're receiving that value. So it's going to be a tough transition, but we believe there are really positive opportunities out there where we can do it. We just have to put the management focus in place to get it done.

Robert Smith

Okay. Just let me ask 2 more questions quickly and Ethan will have plenty of time to get back on. So are you looking to add to supplies of calcium bentonite at this moment?

Daniel S. Jaffee

You mean, raw material?

Robert Smith

Yes.

Daniel S. Jaffee

We always are, yes. So our...

Robert Smith

Are you looking more diligently? I mean...

Daniel S. Jaffee

No. I mean, we're always being diligent. So it's hard to look -- it's hard to be looking more diligent. I mean...

Robert Smith

All right, okay. And I just want to make sure that my feelings about the dividend. So...

Daniel S. Jaffee

You want me to cut it, right, Bob?

Robert Smith

No, I'm more interested again in the very gradual incremental increase in the dividend. I just want to make sure that you guys feel comfortable in looking at that as a probability again this fiscal year.

Daniel S. Jaffee

We always sort of take that up at our June meeting. That tends to be one that gets to be on the agenda to look at it. And look, I mean, here is what's exciting, even though we did all the investing we did and the earnings weren't what anyone would love it to be, although they were certainly sort of what we expected them to be, we finished the quarter with almost $30 million in cash. So we're still doing a great job at cash generation. And ultimately, your ability to pay a dividend is on your cash, not your earnings. So now, the 2 have to coincide over time, but in any given period that you're much better off, as I've always said, earnings or an opinion, cash is a fact. So your points are well taken, but we feel very good about our business from a cash generation standpoint.

Robert Smith

Sure. And the general market is up today. The stock is down somewhat. So as the Street takes the numbers, the actual numbers in a certain way, I mean the stock, just say if the stock comes off further, will you be back -- come back into the market to buy additional shares?

Daniel S. Jaffee

We're always looking at the best use for our cash. And so yes, we have an authorization where we can be opportunistic and go after it. Certainly, if all of us, you and me and everybody, would see the stock price as something that, "Hey, that's the best use of that cash. So let's do it."

Robert Smith

Okay. Well, you haven't done it for a while and I just want to make sure that it's still in your thoughts.

Daniel S. Jaffee

Well, we didn't do it because we're in the midst of a huge launch.

Operator

And you do have a follow-up question from the line of Ethan Starr.

Ethan Starr

Following up on Bob's question regarding cash flow. Do you expect cash flow generation to improve throughout the year?

Jeffrey M. Libert

I expect cash flow to be positive this year, Ethan. In terms of improving, I mean, that's going be all dependent on our earnings. And as you know, we don't give guidance on that, but we expect to have good cash flow.

Ethan Starr

Okay. Will CapEx be lower than depreciation this year, you think?

Jeffrey M. Libert

I don't know. It will be closer than it's been in the last couple years. I don't know that it'll be lower.

Ethan Starr

Okay. Well, anything will help. Even that will help cash flow. I would echo Bob's call for another dividend increase. Hopefully, your cash flow should be quite good this year and you can do it out of cash flow.

Daniel S. Jaffee

You've been talking to my mother and my sisters, haven't you?

Ethan Starr

No, haven't talked to them.

Daniel S. Jaffee

It's a combined effort there, okay.

Ethan Starr

Well, you know I like to reinvest in dividends.

Daniel S. Jaffee

No, absolutely.

Operator

Your next question is from the line of Steven Purdy [ph].

Unknown Analyst

Yes, I was wondering just how massive of a advertising program do you have that would cut so much from your earnings.

Daniel S. Jaffee

Doug, how much can I answer?

Douglas A. Graham

I think, the number speaks for itself with the increase of the last.

Daniel S. Jaffee

Yes, I mean, you can probably extrapolate. You'd see what we spent in the quarter and we're going to keep divulging it sort of in a retrospective, historic basis. So we're not really going to prospectively talk too much about it. But look, for those who are current investors in the company, here's the bet. The bet is that this category needs to lighten up. The consumer wants a lighter product. So you got to ask yourself, do I think consumers want a heavier -- if performance and price are the same, do I think a consumer wants a heavier product, a same weight or a lighter product? I think, if you talk to most cat litters and tell them, "I can get you a cat litter with the same performance as you're currently getting at the same prices you're currently paying and I can lighten it up," they're going to be ecstatic but you got to come to your own conclusion. Then you've got to talk about the trade. Does the trade want to do anything from an environmental standpoint. Right now, we're waiting out on trucks. So that means we're shipping a lot of air with every truckload because we hit that 44,750 pounds. So by having 25% lighter product, we can actually put 22% more units on every truckload, which ultimately, if the whole category were to switch, would result in a 22%-ish reduction in greenhouse gas emissions and carbon footprint impact from cat litter. So our bet is that the trade is interested. Lo and behold, they've been very interested in our story and they understand we're the calcium bentonite guys. We got to get the dominoes flipping. But hopefully, the whole category switches. So it took Lever and P&G $110 million to communicate the change in liquid detergent, and our goal is not to spend anywhere near as much as they spent but to ride on that equity that they've really educated a lot of consumers about the benefits that something smaller and lighter could actually be equal to or better than something that they used to be getting. And that transition has been universal in liquid detergent. And really, we're riding in their wake. And when we did the in-home use test and the focus groups and the segmentation study, it was clear that consumers got it now that they had already made the switch in liquid detergent. But prior to that, I can tell you, I spent the first 20 years in my career trying to sell our light density, and it was so confounding and frustrating because the consumer had been conditioned to believe price per pound, the cheaper I pay per pound, the better my value. So you could ultimately put lead shavings in the cat litter and give them a jug that was the size of a thimble and obviously, at that extreme nature, they would figure out they're getting ripped off. But the Department of Weights and Measures is basically telling manufacturers densify, go heavier because we're telling you it's better to have a cheaper price per pound in the eyes of the consumer than it is to give them a better product at a lower price per use or price per load like liquid detergents. So Steven [ph], I know, I've probably digressed off the original question, but I think it's important for investors if they're assessing, "Okay, well what's in it for Oil-Dri? Do they need a 25 share for this thing to succeed?" And the answer is we really don't. What we need to make this a huge success is to have the dominoes start falling. So that then a Wal-Mart would say, "I don't just want a brand, I also want my Special Kitty to be light. Can you guys do that for me?" And of course, we would love to do it. That's been our proposition all along. We do brand. We do private label. We do co-pack. We would love to manufacture for other of our competitors to the extent they would want to buy our light density mineral, which has been proven 50 years as the cat litter mineral of choice, and it's only drawback was it didn't clump, hence sodium bentonite, which does clump. But you put the 2 together in the right ratios and the right blend, and you really get the best cat litter. So I know I sound like a cat litter commercial, but that's really why my family and I and the rest of the company are putting so much behind this.

Unknown Analyst

Yes, I agree totally with you on the whole idea and concept. Are any other companies -- have you noticed any competition in that line?

Daniel S. Jaffee

Not yet. I mean, it will take time for the big guys to respond because rightfully so, they're not just going to knee-jerk react. They're going to wait and see how does the market receive this. And on the private label front, we have been deflecting any inquiries at the moment because we need to pay back our launch. And they get it, I mean look, P&G and Lever wouldn't have just launched this in liquid detergent to immediately give it off to private labels. So we need some time to build our brand, recoup our investment and then follow on with the private label offering right when the market will be ready and looking for it. So far, everything's been pretty positive.

Unknown Analyst

And what percentage of your cat litter sales are this light product?

Douglas A. Graham

Do you want me to disclose it?

Daniel S. Jaffee

No, we're not getting into that level of detail on this call.

Unknown Analyst

Okay. Is it growing or...

Daniel S. Jaffee

Absolutely.

Unknown Analyst

And you're also not exposing what other retailers have it besides the Wal-Mart?

Daniel S. Jaffee

No, but it's getting pretty universal. It's -- we're getting a lot of acceptance, no rejection, just timing, meaning accounts set up their planograms. They do their shelves not when we show up with a new product but on their own basis. So they rotate categories. Otherwise, it would be total chaos. So we are in queue to get into numerous accounts when they reset their shelves in the spring and even early summer. So we're waiting for that. I can tell you, I mean, because I gave you general numbers and again, I ran 5-year numbers on our -- let's just say our total scoopable litter business and if you've been following Oil-Dri, you'd know about 2 years ago, we took a major step back with Wal-Mart. They have now reembraced our brand, put our historic line back in and have been an unbelievable partner on the Fresh & Light launch. But so, if you just go back 5 years, which then predates that whole project impact down in Bentonville, which got us drastically reduced, our scoopable business in this quarter was up nearly almost 50%, 45% from that sort of high watermark 5 years ago. So that's good news.

Unknown Analyst

Okay. And the stock is trading above that. I also love the dividend growing, I expect to see another penny shortly.

Daniel S. Jaffee

Like I said, my family is right there with you.

Operator

And gentlemen, there are no further questions in the queue at this time.

Daniel S. Jaffee

And we're a couple minutes from the closing bell here. So well, thank you. I mean, hopefully, you can sense our enthusiasm and it isn't just on the Retail and Wholesale side. I want to make sure I thank and give kudos to the B2B teammates who helped underwrite some of this launch. Obviously, we outspent even what they were able to contribute, but we're going to keep rolling this out. I would say from an expectation standpoint, second quarter is going to be a lot continued spending as we get distribution but not a huge ramp up in sales. It will be somewhat, but competing with the Thanksgiving and now Christmas holiday season, retailers are not cutting in a lot of product in this time period when it comes to cat litter. So it's really going to be after the first that they start cutting in our product in earnest and then you start getting the pipeline fill and then hopefully the repurchase movement. So it's really come -- and which is why we're timing the media that way. It's really come the early spring that we're going to start seeing significant momentum with Fresh & Light. So thank you for your support, and we look forward to talking to you all in 90 days-ish. So thanks.

Operator

Ladies and gentlemen, thank you so much for your participation in today's presentation. You may now disconnect. Have a wonderful weekend.

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