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Executives

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

Ronda Williams -

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

Analysts

Robert Smith - Center for Performance Investing

Oil-Dri of America (ODC) Q2 2012 Earnings Call March 12, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Oil-Dri Corporation Of America Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn it over it to Mr. Dan Jaffee, President and Chief Executive Officer. Please proceed.

Daniel S. Jaffee

Thank you, Derek, and welcome everyone to our second quarter and 6-month teleconference. As usual, Jeff Libert, CFO, is here; Doug Graham, our VP and General Counsel; and Ronda Williams, who heads up all of our Investor Relations, is here. And Ronda here is going to go through the Safe Harbor.

Ronda Williams

Sure. Thank you. 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

Thanks, Ronda. And when the news is bad, I always throw Jeff a bone and let him go first and take the beating. But when the news is good, I'll take one from the team and make -- take one for the team and make a few gratuitous comments, and then turn it over to Jeff for the play-by-play. But I keep a spreadsheet of all the quarters going back to when I first became President, which is back in 1995, so now I have 17 columns on this crazy spreadsheet. So I can't go back any further than that. But in terms of our net income of $3.2 million, this was an all-time record quarter, for any quarter. And we had never broken $3 million before, frankly, never even really close to $3 million before. And I looked and actually it was better than 4 consecutive entire fiscal years of earnings back around the new millennium. So that was very exciting.

And then from a sales perspective, it was an all-time record for a second quarter, and it was the second highest we've ever had. Back in '09, we had a huge first quarter that eclipsed it. So it was our second-highest sales quarter ever and our highest net income quarter ever.

The other metric that I like to communicate to you guys is help depict how we're doing in our mission of creating value from sorbent minerals, is the whole idea of net sales or gross profit per ton. And again, at an all-time record, we finished the last year at $260 a ton. We finished this quarter at $285, which was due primarily to mix, just selling more of the high-priced goods. And then, from a gross profit standpoint, again, last year, we made $57 on every ton we sold from a GP standpoint, and we made almost $69 in this quarter. So very -- some very positive metrics. And with that, if I stole all of Jeff's thunder, I'll turn it over to Jeff for some more of the details.

Jeffrey M. Libert

Well, I can tell more about the good news for the quarter. Sales were up 5% for the quarter and 6% for the year. Sales were $60.2 million for the quarter and $119.8 million for the year. For the quarter, EPS was $0.45 per share, which is up 80% versus a year ago. For the year, EPS was $0.50 a share, which is even with a year ago.

The story for the quarter was the marketing spend. It was a story for the first quarter, and it's a story for the second quarter. As well in the first quarter, we were spending behind our Cat's Pride Fresh & Light launch. And this quarter, we spent very little on the marketing for the launch, not because we are not committed to the launch, but we took a hiatus as we continue to get distribution. We're going to see more spending in the back half of the year.

We saw strong performance in our core business, and that's why the EPS was so strong. Our earnings was so strong because the earning power of our business is still very good. We especially saw a good earning power in our Business to Business area. We also saw lower natural gas prices, which is a pretty heavy component of our manufacturing costs. In combination with a more profitable product mix, our gross profit margins increased from 21.8% for the quarter a year ago to 24.2% for this quarter.

Going through our business areas, first, our Business to Business area, we had a very strong quarter. Sales increased 18%, and contribution increased 42% for the quarter. Animal health, bleaching earth and agricultural carriers also increased in sales, both volumes and average selling price increased. Co-packaged litters were down.

In our retail and wholesale area, sales were down 1% for the quarter. Sales increased due to Fresh & Light and other scooping litter products, but traditional coarse litters were down, especially private label. Group income was up 18% for the quarter. Advertising was slightly lower than a year ago. During the quarter, marketing spend was lower, as we said a second ago, as we pause for Fresh & Light advertising as we gain more distribution. Nevertheless, increased advertising and promotion will resume in the second half, and that will cause a decrease in our earnings versus a year ago in the short term while we invest in this very important product launch.

On the balance sheet. Our balance sheet remains extremely strong. Our cash and investments balance is now $36.3 million. Our net debt is now negative, and that's for those of you new to the call, net debt is what we call our cash balance versus our short and long-term debt. Our cash -- our net debt is now $5.1 million negative, meaning we have more cash on our balance sheet than we do debt. We spent $3.5 million on capital for the year so far with the completion of our capital related to Fresh & Light. Our capital spending should be somewhat reduced this year versus a year ago. And as always, we remain committed to dividends. Our quarter dividend of $0.17 per common share represents a yield of 3.2% at the quarter's closing price.

That should cover the financials.

Daniel S. Jaffee

Great. And Derek, we're going to open up to Q&A. And as always, we encourage everyone to prioritize your questions. Ask your most important question first and then get back into the queue to allow other people to ask questions because we are sticking to our 30-minute timeframe. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question will be coming from the line of Robert Smith from the Center for Performance Investing.

Robert Smith - Center for Performance Investing

So just a question, so -- just to clarify a point. So as you go into this advertising and promotion for Fresh & Light, you have a certain amount of expenses that you've -- that are in there right now due to the buys in media. So as the sales progress and dependent upon what you see in the marketplace, let me ask you, are you going to somehow -- if you see sales really clicking, are you going to essentially spend -- look to spend additional incremental dollars in this quarter to promote or not?

Daniel S. Jaffee

Yes. I mean, a lot of the promotions are variably driven where you give a cents off on a per case, and the more cases you sell, the more it's going to go. So there's no doubt about that. On the media side, you're right, we've already had to commit now. We've been holding back. But as you get closer and closer to the launch, which is what's happening now, we started hitting TV heavy in February. Hopefully, some of you have seen the Good Morning America, it's running this week, last week and then we have a couple more weeks coming up. We're pretty committed on the media buy. So yes, look, Jeff has pointed out that our balance sheet is in incredible shape. And to the extent we see an opportunity and continue to see it, we're in position to take advantage of it.

Robert Smith - Center for Performance Investing

Yes. Say B2B continues its strength, are you going to spend those increased incremental dollars in promoting Fresh & Light?

Jeffrey M. Libert

Well, I don't know if you could say one for one, but certainly they are helping to underwrite the launch, no doubt about it.

Robert Smith - Center for Performance Investing

For sure?

Daniel S. Jaffee

Yes.

Operator

Your next question is coming from the line of Ethan Starr, a private investor.

Ethan Starr - Private Investor

My question is, how is Cat's Pride Fresh & Light selling thus far in the grocery segment? Are you seeing repeat buyers? And to what extent does Fresh & Light cannibalizing sales of other Cat's Pride products?

Daniel S. Jaffee

Okay, so 2 questions, but I'll answer them both because they're related and they're good questions. I think I'll take your second one first. We are not seeing a lot of cannibalization, certainly, to our brand but really even to the category, which is interesting. I mean, you can't imagine that you're bringing new users into the category, but what we're getting fed back from retailers is they're seeing -- you can see nationally Cat Litter is growing at 2%. They're seeing strong double-digit growth in their categories, and they're attributing it to Fresh & Light. So they're seeing incremental growth. So those retailers that jumped on early are seeing -- are very happy with the movement. Having said that, as I was telling these guys internally, long term, when the whole thing settles out, you got a new product launch. You're going to get all sorts of opportunities to incentivize trial and find repeat. Long term, when the category starts to settle out, you can imagine retailer A. And if retailer A is carrying 36 SKUs, you're the safest if you're in the top third, which will be the top 12. That's a rarefied air and hard to get into. The middle third is where we like to make sure our SKUs are all living so that they are safely north of the bottom third, which is what tends to get churned as new items come out because the retailer, obviously, is going to make the best decision they can and trying to take out those items that are moving the slowest to put in some new items and free up that shelf space. So the goal really in this first 12 months is to get out of the bottom third and into the middle third with Fresh & Light, and that's everything we're doing. Having said that, it's very expensive to try and do 2 things at once, which is incentivize trial, that tends to be a price thing, but also communicate a brand and develop a brand and brand awareness. And that's a lot of the media. And so we're having to do both at once because Fresh & Light was a brand that didn't exist, it now exists as a line extension. So consumers are having to be educated first, what is Fresh & Light? And then, you got to try and incentivize them to go to the shelf and buy it. So it's expensive. So as euphoric as we are with the second quarter and we don't give guidance really in terms of actual numbers, we've told you all along we're expecting this year to be down in terms of earnings, and it's because we are going to be serving both masters, both the media side and the incentive side. So I think you asked on repeat. So far, we're seeing great signals on repeat. A lot of -- if we get consumers to try it, we're seeing that they're coming back to buy it.

Operator

Your next question is coming from the line of Robert Smith.

Robert Smith - Center for Performance Investing

So parenthetically, I didn't understand it, Dan, that you said earnings were going to be down. What I understood you saying was that you're going to spend in the Fresh & Light essentially what you had to spend. But I didn't understand that before because the strength in B2B would seem to mitigate that possibility.

Daniel S. Jaffee

All right, well, now you do. So now we're clear.

Robert Smith - Center for Performance Investing

Okay. So essentially, you're saying that you're -- whatever you see in B2B, you're going be spending that incremental dollar into Fresh & Light?

Daniel S. Jaffee

Yes. Well, I mean, you are correlating the 2 and that's fine, you can do that. I would just step up maybe 10,000 feet and just say, "Earnings will be down."

Robert Smith - Center for Performance Investing

Okay, good. So let me ask you this. Fiscal 2013, that's setting up for the possibility of a perfect storm for you with the Business to Business and new product and natural gas.

Daniel S. Jaffee

Well, the perfect positive storm I know is what you're referring to...

Robert Smith - Center for Performance Investing

Yes.

Daniel S. Jaffee

Absolutely. But as you and I both know, and all it seems whenever something great happens, that's good. But then, something we're not foreseeing is -- the business is doing great, that's the good news. And again, we're generating cash. I can't agree or disagree with you because we're not going to give guidance other than to say that maybe some of the incremental spending will go away and that type of stuff.

Robert Smith - Center for Performance Investing

Sure. So B2B, could you some color on what's happening, break it out more for me? And you said something about units and price, how did that differentiate?

Daniel S. Jaffee

Well, I mean, look, the mission statement of the company's creating value from sorbent minerals, and we have been very committed to doing a lot of research and development and tech service to help our customers, either better understand what their needs are so we could find out how our minerals might be able to serve those needs, or in many cases, our minerals were already serving needs, we just weren't doing a good job of communicating to them what the value we're delivering. It's that old adage, you don't know what you have until you lose it. And so then they started to realize, "Oh my god, Oil-Dri was actually doing a lot more for us than we even knew." So it took us to communicate that value before they were going to appreciate it in the form of buying these higher performance materials. So I mean you nailed it on the B2B side, the Verge granules and even some of our traditional carriers on the ag side are highly valued by our key partners. The animal and animal health, we've said all along, I mean, those are products that are pharmaceutical in nature. They're not, but I mean they're doing something to promote the health and well being of production animals of poultry, dairy and swine. And so that's a highly specialized thing, that you can't just throw floor absorbent at them, and hope something good is going to happen to the animal. And there's a lot of research, a lot of science, a lot of selective mining processing and everything that goes on with that. And then, on the bleaching earth side, both the edible and nonedible oils, same deal. I mean, we're still scratching the surface on understanding exactly what our minerals do and how best they interact with our customer's oils. And as we better understand that, we're able to find those applications where they see great value in buying from us. And so the B2B side is clicking, no doubt about it.

Robert Smith - Center for Performance Investing

So could you break out the units and price increases for me?

Daniel S. Jaffee

No. There's no benefit. So sorry, Bob, I'm not going to do it because...

Robert Smith - Center for Performance Investing

Okay, okay, stop. Any China business?

Daniel S. Jaffee

Good news on the China front. We were, finally -- if you recall, maybe 1.5 years ago, we got our Calibrin-A, which is our aflatoxin binder registered, but we got caught in the red tape on Z. Z was registered during the quarter. So Calibrin-Z is now registered in China. That's our zearalanone binder. And obviously, that's a huge market for us in terms of potential.

Operator

At this time, I'm showing no further questions in the queue, I would like to turn the call back over to Mr. Dan Jaffee for any closing remarks.

Daniel S. Jaffee

Well, let's wait and see. I mean...

Operator

Okay, certainly. We do have Mr. Ethan Starr on the line.

Ethan Starr - Private Investor

Dan, I'm wondering, how -- following up on the Calibrin-Z approved in China, how are Calibrin and Verge doing?

Daniel S. Jaffee

Doing very well. I think we've talked about this in the past on Verge. We built that plant in a modular fashion. And thankfully, we did, meaning we can expand the capacity very quickly. But because this was a new-to-the-world process, better to learn sort of take it from the pilot plant to sort of a -- it's full-scale production, but it was a quarter of what we thought we'd ultimately end up with, just so we could prove out the process. And the team has done a phenomenal job. So we are now processing in spec and really close to our initial projections from a throughput and cost standpoint, which is very exciting. At the same time, we've been able to better understand the market and find those value-added applications where the consumers are willing to pay for a highly granular, highly spherical, highly uniform, no-dust material. And so we're in a nice position right now of where demand exceeds supply, really. I mean, so we're, as a team, hunkering down, looking at Phase 2 of our capacity, and that'll be a very positive signal when I come back to you guys and say we're spending capital on Phase 2 of Verge because it means we've sold out Phase 1 and now we're growing.

Ethan Starr - Private Investor

So Phase 2 being second line for the production line?

Daniel S. Jaffee

Yes, yes.

Ethan Starr - Private Investor

Okay. Can you give us more color on Calibrin?

Daniel S. Jaffee

I mean, in terms of what?

Ethan Starr - Private Investor

Well, I guess you aren't going to give us any numbers, are you?

Daniel S. Jaffee

No.

Ethan Starr - Private Investor

How's it doing in Brazil?

Daniel S. Jaffee

I don't -- I'll put you on mute for a second, hang on. Okay. Yes. I just want to make sure we had put out a news release about this, but we got a strategic alliance with Elanco in several major markets, Brazil being one of them. And you know, Elanco, in my understanding, is a wholly-owned subsidiary of Eli Lilly. It's their animal health. They do a couple of billion dollars a year in sales. And they identified our technology in granule as the way they wanted to approach the animal health toxin-binding market. So it's been very successful. So that's one of the key markets and it's going very well.

Ethan Starr - Private Investor

Okay. Is there anything new coming out of the -- out of R&D at the innovation center?

Daniel S. Jaffee

There's plenty, but nothing that we should be talking about from a competitive standpoint at the moment.

Operator

And your next question is coming from the line of Robert Smith.

Robert Smith - Center for Performance Investing

So did you do much, if any, promotion of Fresh & Light in the comparable quarter a year ago?

Daniel S. Jaffee

Comparable quarter a year ago, we did none. There was no Fresh & Light.

Robert Smith - Center for Performance Investing

Yes, so -- right, so your comment about promotion and advertising was down...

Daniel S. Jaffee

Yes, well, that was brand to brand. We had our Cat's Pride brand a year ago.

Robert Smith - Center for Performance Investing

Yes, well, sure. I mean, that -- so that was the reference, I mean?

Daniel S. Jaffee

That was the reference.

Robert Smith - Center for Performance Investing

Okay. Did you buy back any stock at all?

Daniel S. Jaffee

Not during the quarter, no.

Robert Smith - Center for Performance Investing

Okay. But as -- you would be looking to buy stock on stock weakness due to lower earnings, if that happens?

Daniel S. Jaffee

I mean, I would just call it -- again, not trying to correlate why it would happen, just being opportunistic, yes, we would always be opportunistic with our cash.

Operator

And our next question is coming from Mr. Smith.

Robert Smith - Center for Performance Investing

Okay, so let me ask you this about 2013. So basically, you're going to let this run if it happens in 2013? I mean, what is your philosophy essentially?

Daniel S. Jaffee

Well, Bob, you say let this run, can you be more specific?

Robert Smith - Center for Performance Investing

Well, with the dollars that are going to Fresh & Light.

Daniel S. Jaffee

Well, I mean, you say, what is our philosophy?

Robert Smith - Center for Performance Investing

Well, I mean, would you let the bottom line run basically rather than spending incremental -- continue to spend big incremental dollars in seeding the Fresh & Light?

Daniel S. Jaffee

Well, I think a broader question would be, and as a long-time investor, you already know this answer. But if there are new people listening, would we sacrifice short-term earnings for a long-term win? And the answer is, yes. So that's one of the beauties of Oil-Dri. Look...

Robert Smith - Center for Performance Investing

Okay, but you got to remember, Dan, I mean, I've been around for a long time, like 15 years. So more so essentially, I would -- I'd really like to get this idea of the positive perfect storm happening in a way and much depends not on the top line, but the bottom line.

Daniel S. Jaffee

Yes. And Bob, look, it's all -- yes, you're right, it's all -- I don't know what your total return has or hasn't been, if you dollar averaged in, you've done extremely well.

Robert Smith - Center for Performance Investing

I'm very satisfied.

Daniel S. Jaffee

Okay, yes, if all you did was buy stock 15 years ago, you might not be so happy. But I was just looking back. I mean, we do this all the time. But yes, our total return for the last decade with dividends has been almost 19% a year compounded. So yes, hard to beat. So anyway, I stand by what I said. At any moment, we -- it's sort of -- the beauty, I think, of the Oil-Dri deal is we're not a slave to quarterly earnings and I feel fortunate. I wouldn't -- I'd have trouble saying I'm going to sacrifice the future just to make some short-term goals. So we're not going to do that.

Robert Smith - Center for Performance Investing

Okay. And when might you to be able to say something about new R&D initiatives? Next quarter, the quarter after that?

Daniel S. Jaffee

I mean, you know us, we're going to be very slow to ever try and tip everybody off on where we're going. If it's not good for your investment, it's not good for ours and we still own a lot of shares.

Robert Smith - Center for Performance Investing

Well, I mean, you say things are perking in the lab. Okay, whatever. But can you give me some kind of feel as to when you'll be able to say something?

Daniel S. Jaffee

No. I'm honest at least.

Robert Smith - Center for Performance Investing

Well, I wouldn't ask anything else.

Daniel S. Jaffee

Okay. And Derek, I think we'll close the Q&A. I'll just say, look, the next 2 quarters are going be very dynamic, to say the least, and continuing to get a lot of distribution and putting our new distribution, and are very excited about the reception from the trade. At the end of the day, you have to say, it's the concept, a winning concept and the concept is, you have a cat litter that, frankly, is better than anything out there. But let's just say it's hard to prove better. So you say it's as good as anything out there and it weighs less when your target audience is women 25 to 54. The thing we keep hearing over and over again is like wheels on luggage, and you guys ought to assess for yourself whether or not your current luggage has wheels on it or if you're still stuck with the old non-wheeled luggage. But as I get into the airport, all I see are wheels. Yet it took years and years for that thing to catch on. So this may not be made in the quarter, but the concept is absolutely winning. And just to show you that there's a two-pronged win in this, it's not just for the consumer, it's also for the retailer. As we've said, this product weighs out a truck. You can only put 44,000 pounds-ish on a truck in the U.S. And so Cat Litter being heavy density, by making it 25% lighter with the pallets taken into consideration, we're able to put 22% more units on every truckload. If you buy one truckload, not a big deal. You buy thousands of truckloads, it's a huge deal. And so just this past week, at Wal-Mart year beginning meetings, they have, I think, close to 10,000 people that are vendors from their supplier community. And amongst maybe 10 to 20 award winners, but in a particular category around sustainability, they singled out Oil-Dri and gave us an award. It was the first time we had ever won an award from Wal-Mart. We'll be putting out a news release on that specifically. But it was all about sustainability. It was all about how Oil-Dri developed this concept, saw what went on in liquid detergent, partnered up with Wal-Mart, took trucks off the road, saved diesel, carbon monoxide or emissions and so forth. And they loved it and rewarded us for it, which was very exciting. So we'll be at you again in 3 months, and look for this news release, but we're very excited to win that award. Thanks very much.

Operator

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

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