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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

Oil-Dri of America (ODC) Q3 2012 Earnings Call June 7, 2012 11:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Oil-Dri Corporation of America Earnings Conference Call. My name is Carissa, and I will be your operator for today. [Operator Instructions] 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's call, Mr. Daniel Jaffee, President and CEO. Please proceed

Daniel S. Jaffee

Thank you, Carissa. Welcome, everyone, to our third quarter teleconference. Joining me here in Chicago, Dan Smith, our CFO; Doug Graham, our chief -- our General Counsel and Vice President and Legal; and Ronda Williams, who heads up Investor Relations efforts. And Ronda, you're going to start us with the Safe Harbor.

Ronda Williams

Yes, 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 highlighted 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 investments in Oil-Dri stock. Thank you for joining.

Daniel S. Jaffee

Thanks, Ronda. And Dan, I would like to turn it over to you for a quarterly play-by-play.

Daniel T. Smith

Thanks, Dan, and good morning to all. I’m going to start from a total company perspective. Sales were up about 8% for the quarter and 6% for the year, roughly totaling $60 million for the quarter and $180 million for the year. Earnings per share were $0.26 for the quarter and $0.86 year-to-date. Those numbers are equal to the numbers we reported in similar periods last year.

The story. The past quarter has seen continued heavy spending on marketing and promotional expense for our Cat's Pride Fresh & Light launch. However, we've also seen strong performance in our B2B group, lower natural gas prices, a very profitable product mix, which have helped drive our gross profit up to 24.6% from 21.4%. B2B, as I mentioned, had a very strong quarter, sales were up 19% and contribution was up 46%. Animal health, especially agricultural carriers, all reported sales increases. Our co-packed litters were down a bit.

In our Retail and Wholesale group, sales were up 2% for the quarter due to the increase in branded cat litter sales, especially our Cat's Pride Fresh & Light scooping litter. Traditional coarse cat litter products were down. Group contribution was down 81% during the quarter due mostly to spending on advertising and promotion for our Fresh & Light product launch, and we plan on spending heavily on advertising and promotional expenses in the fourth quarter for that same product launch.

From a balance sheet perspective, our balance sheet remains very strong. Cash investments were almost $35 million, which exceed our net debt, so we have more cash investments than debt. We spent about $5.5 million in capital, which is $1.5 million less than our year-to-date depreciation. And with the completion of our capital project related to our Fresh & Light business, we expect our capital spending to be less than last year.

We remain committed to our dividends. Our quarterly dividend was $0.17 per common share, which represents a yield of a little bit more than 3% compared to our closing share price. Additionally, during the quarter, we spent $2.5 million on stock repurchases. And then, shortly after the end of the quarter, we spent an additional $3.4 million.

From a forward-looking perspective, as I already indicated, we're planning on spending heavily on promotion and advertising expenses for Fresh & Light in the fourth quarter. And then on May 30, we announced the relocation of our cat litter and floor absorbent business from our Mounds, Illinois plant to our Mississippi plants. We expect this to impact about 40 jobs in Mounds. And we expect a pretax charge of about $1.7 million, most of which will impact the fourth quarter.

Dan, I'm going to turn it back over to you.

Daniel S. Jaffee

Great. I'm not going to say a lot because I always like to respond to specific questions from our investors participating in the call. But suffice it to say, it was a great quarter on -- from many standpoints: quantitatively, when you take into account all the incremental advertising that we did in the quarter; qualitatively, a lot of good things were set in place to help us strategically grow going forward.

And clearly, our commitment to creating value from absorbent minerals is paying off because even though tonnage continues to slide, our sales, both on a per ton basis and in total, continue to grow, as does our gross margin. And ultimately, when we lap this onetime spending associated with launch of Fresh & Light, we're hopeful we'll start to see the bottom line do the exact same thing.

So Carissa, I'd like to open it up to questions. [Operator Instructions]

Question-and-Answer Session

Operator

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

Unknown Analyst

I'm wondering how are retail sales for the new Fresh & Light litter products doing. And are you still adding new distribution?

Daniel S. Jaffee

Doing very well. And yes, we are still adding distribution. So I've printed out some IRI information. And just to put it in context, this is food, drug and mass but x Wal-Mart. Wal-Mart is though, now going to start providing top line information. And so in September, we'll actually get to roll that in, which as you know, we've always been -- that's always been our biggest customer. So it will help our numbers when that starts to get rolled in. But to give you a macro look, let's start on a 52-week basis. So this gives you an annual snapshot, and some of this will help you understand what's going on in Mounds as well. So on a 52-week basis, food, drug and mass, x Walmart, the category is showing sales of $827 million at retail, okay? These are retail sales. Of that scoopable, is $600 million; coarse grind is $155 million; and then, alternatives is about $74 million. So if you look at coarse grind, which 21 years ago represented 100% of the category, it now represents 19% of the dollars and 35% of the units. So obviously, it's a lower ring item. The value and growth has come on the scoopable side. So that just gives you a macro look. Category is about flat over a year ago, but scoopable is up 2%; coarse grind, up 7% from a year ago; and alternative is relatively flat, which is interesting in and of itself. So now total Cat's Pride scoopable, remember the category, scoopable category, is up 2%, Cat's Pride is up 7.2%. And just to give you some other things, so total Tidy Cat scoop, which is Nestle Purina, they're up 7%, 7.8%. Fresh Step scoopable is up 5%, and Arm & Hammer scoopable is down 3.7%. So you can see we're performing right towards the top end of the branded players. Fresh & Light is continuing to build volume and build share. In the quarter, we got distribution in Safeway, SUPERVALU, Schnucks in St. Louis, Giant Eagle. And you'll recall SUPERVALU is like Jewel, Safeway and Shaw's and Kobin [ph] and accounts like that, ACME in Philadelphia, Safeway, Dominex here in Chicago. And so it's -- we'll continue to put on distribution. We're continuing to see what's called our ACV, our all commodity volume, grow on Fresh & Light. And we're continuing to see the velocity grow. So that's -- on a 52-week basis, I gave you the snapshot. Let's just look at -- I like to then zero in on 24 and even 12. And you can kind of see is you momentum building or is it slowing. So recall, we were up 7% on total Cat's Pride scoopable for the 52-week period. For the 24-week period, total Cat's Pride is showing up 14.7%. So clearly, faster in the most recent 24 weeks than in the most recent 52 weeks. The other guys, Tidy Cat scoop, up 3%; Fresh Step, scoop up 1%; Arm & Hammer scoop, down 7.7%. So on a 24-week basis, the Cat's Pride scoopables are the fastest-growing in the United States. And that's very important because I'm counting Fresh & Light, obviously, which is coming off a 0 base. But there was always the concern how much cannibalization will we experience, and so this is rolling in, cat's Pride scoopable and Cat's Pride Complete and Cat's Pride natural, our other scoopable entrees that were on the market prior to the Fresh & Light launch. So it's a 24-week look. And then a 12-week -- let me just give you 12-week, and our scoopables, total Cat's Pride scoop is up 23% for the 12 weeks. And the other guys: Tidy scoop for the 12 weeks, down 3.9%; Fresh Step scoop, up 4.9%; and Arm & Hammer scoop, down 9.3%. So you kind of see-- you get that feel the momentum is building. So we were up 7%, we were -- at the 52-week. We're up 14% when you go back 24 weeks. We're up 23-ish percent when you go back 12 weeks. So clearly, you can see the momentum is continuing to build. And if you want a 4-week snapshot, I got that. We're up 31% on the 4-week. So Ethan, you can see that clearly the snowball is continuing to roll and continuing to gain momentum. Does that help?

Unknown Analyst

Absolutely. But given such a long answer, I hope you'll consider extending the conference call.

Daniel S. Jaffee

I was assuming this was going to be top of mind of almost all the investors, so I was willing to spend a little more time and I have more data if we need it.

Operator

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

Robert Smith

So I can't help but see your supermarket promotions and couponing for Fresh & Light, so you're really out there. I find the packaging rather uninspiring. I think it's -- can you guys do a little pizzazz into the packaging? At least that's my suggestion. Also, I guess I -- you guys didn't buy into my advertising suggestion, perhaps you go to the west [ph] and invented it in-house, but anyway, I hope you take that into consideration again. For the -- can we go into Calibrin and Verge, what you're seeing there?

Daniel S. Jaffee

Sure. And on the packaging, we agree with you. There's a lot of basic elements that we like. We already have some things in the works. We got to work through some existing packaging, but I think you will be impressed with the second generation of the Fresh & Light packaging. And so we agree with you, and we're excited about the future. And it's going to be 8 weeks traveling before that starts to work its way through, maybe even longer. Calibrin and Verge, I mean look you can see in the B2B, we don't break out too much specifically. But you can see how well the B2B group is going. Amlin is continuing to do very, very well, continuing to validate our investment in both research and -- so we can validate our product's efficacy from a scientific standpoint and in the people. We have a great team, a bunch of DVMs, very sophisticated sales people who are able to communicate to their customers, who are making these decisions to buy a pretty much an animal pharmaceutical product, and it's going very well. So Amlin, you never can declare success. But the progress that has been made since the launch of that product line has been fantastic. Verge, it's still a work in process, but it's moving absolutely in the right direction. We have the process under control, and we're very thankful that we made the decision to do this in a stepped process where we knew step one was not going to be very profitable from a fully loaded standpoint, but it was almost like a glorified pilot plant, where we were able to learn a lot of things because this was not a off-the-shelf process. You couldn't just say, "Hey, we want to make an engineered granule and just plug something in and start producing." This is really new to the world, and so we've learned a lot. We've -- the process is stable now. We're able to make the quantity and quality material we want. And so now it's on to Phase 2 and hopefully, doubling our volume and starting to show a fully loaded gross margin. But on a year-to-year basis, it's been a major improvement from a year ago.

Robert Smith

Do you see anything from the Chinese registration?

Daniel S. Jaffee

Seeing anything from what?

Robert Smith

The Chinese registration. I mean, is there any...

Daniel S. Jaffee

Well, right. So we were registered in Calibrin-Z from China during the past quarter, I think is when that came in. And we are, obviously, now dedicating more resources, both human and financial, towards leveraging our products in China. And that's the biggest market. So that's where you want to be, and now we can start going after it. So all the benefit we've seen thus far really has been without that market kicking in. So we're still pretty bullish on the future.

Robert Smith

And you had a comment about transportation costs. I find it difficult to follow, the decline in oil prices. Kind of tell me about that.

Daniel S. Jaffee

All right, but now you're out of question, so you have to go back in the queue, but I will answer the question, I mean that's a question. I mean, first of all, diesel has not been our friend. And additionally, there's -- I'm not a logistics expert, I just get the reports from our guys who are. But the general trend in the United States is they're having trouble finding drivers. And it's a supply and demand scenario, and everybody is experiencing the same thing. And so the cost of hauling our products from point A to point B this year is much higher than it was a year ago. And we've heard rumors that there's going to be some switch to natural gas for over-the-road trucking, and all that will be great, if it happens. But until it happens, the dynamics are what they are. And now it's up to us to go out there and try and recapture that through price increases. And as you'll see, we put out a news release just yesterday for recovering the consumer division, but all our divisions are participating, they have to. They're all experiencing an increase in cost on that and a number of other fronts. And so we're raising prices.

Operator

[Operator Instructions] And you have a follow-up question from the line of Ethan Starr [ph] .

Unknown Analyst

Now that Calibrin-A, Calibrin-Z and ConditionAde 2.5 have been approved in Texas, do you expect to sell them there or market them there?

Daniel S. Jaffee

It's a good question. I think that the benefit of the registration goes far beyond Texas. Although before that, there were no toxin binders really registered or recognized in the United States. Now at least Texas have done so. So I think the hope is that other states will follow soon, and/or other states will say, "Okay, we see this product is registered in Texas" and even though it isn't in our particular state they would understand the benefits of aflatoxin binding. So we do see, in general, our hope is it will help us throughout the United States growing our business in that area.

Unknown Analyst

Okay. But are you making any active efforts to sell it there in Texas?

Daniel S. Jaffee

No more than historically. We've always been trying, I mean.

Unknown Analyst

Sure. Have you added any additional production lines for Verge yet?

Daniel S. Jaffee

No.

Unknown Analyst

Okay. Could you please discuss the trend away from private label cat litter products briefly?

Daniel S. Jaffee

That's an interesting one because you would think with the economy and everything, you would be seeing private labels going up. And I can -- I got this data in front of me, let's just look like 52-week. And private label in total represents $105 million of sales. And so you're talking of a $13 share of the U.S. market. And while the total category is flat, private label is down 7%. And then, if you told me a year ago, here's where the economy is going to be, I think I would have guessed that private label would be up not down. It hasn't been the case. And interestingly enough, on a 24-week basis, it's down 5.4%. So you kind of get a feel, okay, maybe it's still down though, I mean. And so sort of confounding. What it does validate is that the consumer is willing to pay for performance, and the innovation, starting with Fresh & Light, I mean, is common in the branded side. We've done more consumer testing. And the lightweight concept has really validity, and it just makes sense. I mean, it's -- I always ask people, how many people do you see in the airport now with luggage that don't have wheels on it? Someone laughs actually. "What are you talking about? None. I mean, who would buy a bag any more without wheels?" Well, 10 to 15 years ago, there wasn't a wheel to be found. And so it's just -- that was a latent consumer need that went unmet for thousands of years until somebody finally married up the wheel with the bag. Well, it's the same thing with cat litter. If you can provide them the performance -- and frankly, we are providing them better performance. You have equal to or better odor control but better dust control and superior clumping and have it weigh less, -- so they can get the same fills, the same number of loads if you want to use laundry detergent at a lighter weight. I mean, it's just a matter of time. So we've done a trial and repeat analytics. And the trial and repeat numbers are fabulous. The problem -- the repeat. The problem with us is trial. We got to get this in front of more customers. Now maybe part of it is what Bob alluded to, that the packaging hasn't been as dynamic as the product is. And so we're certainly working on that. But it's also finding the right vehicles to incentivize trial because we have the analytics and the confidence internally to know that when a consumer tries it, we get them. We get loyalty now because this is really the best product out there.

Unknown Analyst

Okay. I'd like to urge the board to both increase the buyback authorization and increase the dividend again.

Daniel S. Jaffee

Okay, and you stole Bob's thunder. I bet he was going to say the same thing.

Unknown Analyst

Well, hopefully he will, too. I can't imagine he would disagree with me on that. Okay. One last question here. How much will the shift from Mounds to Mississippi save annually? And also, will there still be manufacturing at Mounds or only mining?

Daniel T. Smith

There still will be manufacturing at Mounds and mining. There'll still be a group of people still working there. We're not in a position to disclose the annual savings for the shift.

Operator

And you have a follow-up question from the line of Robert Smith of Center for Performance Investing.

Robert Smith

Well, of course, I favor the increase. I mean, hopefully we'll see -- what, 9 or 10 years running now, I guess. We're almost there. Could you tell me where the block of [ph] stock came from?

Daniel S. Jaffee

I don't think -- no.

Unknown Analyst

Was it an institution or...

Daniel S. Jaffee

I don't even know that we -- no, I mean we just had an authorization out there through our 10b5-1 -- corporate 10b5-1 plan and a trigger. So I don't even know that we would know. I mean, we could try to figure it out when you look at the next filings of who owns what. But we wouldn't know. I mean, we're not married up. It's not like us transacting with an individual.

Robert Smith

Okay. And I guess you're setting up for really gang bust this '13. I mean, here is the possibility anyway.

Daniel S. Jaffee

Yes. You made that comment last time, and I made the same comment I made, which was -- yes, if our goal were to close business 7/31 of '13, we could certainly deliver any kind of earnings you would actually imagine. That isn't our goal, so we're going to certainly take the advantage of investing heavily in other opportunities to guarantee that '14 '15, '16 and '17 look equally good. So if you're expectation is that '13 will be better than '12, you and I are on the same page, but we'll not be looking to squeeze every drop out of the…

Robert Smith

And by the way, I haven't heard this in a long time, but is Ken Turner [ph] still alive?

Daniel S. Jaffee

Very much, though. Ken Turner [ph] is still cranking along.

Robert Smith

Anything new?

Daniel S. Jaffee

Nothing. I mean, Dan, do you...

Daniel T. Smith

Yes I was going to say we received another small distribution, $20,000, $30,000 or something of that nature. Yes, totally immaterial.

Operator

And you have no further questions at the moment.

Daniel S. Jaffee

Perfect. Okay. Well, thanks, Carissa, and perfect timing. You can sense our enthusiasm, and we got a great team in place on the consumer side. And without overusing this term, they're really playing money ball. They're really trying to get into details and make sure that in fiscal '13, we maximize the bang we get for our promotional book. We have ideas about what works the best and how we can best incentivize trial. And now we need to execute those ideas. And so we look forward to talking to you again in 3 months.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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