OIL-DRI CORPORATION OF AMERICA
May 31, 2001, 10:30 a.m., CST
Moderator: Daniel Jaffee
Operator
Good morning, ladies and gentlemen, and welcome to the Oil-Dry third quarter conference call.
At this time all participants are in a listen only mode. Later we will conduct a question and
answer session and instructions will follow at that time. If anyone should require assistance
during the call, please press the star followed by the zero on your touchtone phone.
I would now like to introduce your host for today's conference call, Mr. Jaffee, President and
Chief Executive Officer. Please go ahead, sir.
D. Jaffee
Thank you, Michelle, and thanks everyone for participating in our third quarter investor
teleconference. Consistent with our most recent calls, I would like to reserve most of our time
today to answer questions as you might have them. So rather than just go through the news
release, I'm going to add some highlights to things that I think deserve special emphasis.
First and foremost, the biggest piece of news in the quarter, which came out as an interim news
release, was the signing of a new agreement with The Clorox Company on Fresh Step and also
adding the Johnny Cat East business to our co-packing responsibilities for them. As many of
you know, I was asked a number of times over the past 12-24 months what was the single
largest threat facing Oil-Dri. And that was the expiration of the old Fresh Step contract. That
contract was due to expire on January 12, 2005. We have been working with Clorox for about
17 years, since they really went national under the old agreement, so we're very excited about
the finalization of new long term agreements with the Clorox company that expand our
relationship with them, so much so that they felt enough confidence and trust in us to close their
Georgia operating facility and move all of their Eastern requirements into our plant. So we will
be doing basically 100% of their Fresh Step and Jonny Cat business east of the Rockies. This
was a great validation of both our manufacturing ability and the quality and quantity of our
reserves in Georgia - light density, white clay - that has meant so much to their marketing of the
Fresh Step brand. So that was a huge qualitative short term development and quantitatively a
long-term victory for the company.
As I mentioned in the news release from a reported earnings standpoint it was a very
disappointing quarter and nine months to say the least. Brutal is probably a better adjective.
Trying to find a positive in an otherwise disappointing quarter, our cash generation has been
very strong ever since we changed strategic directions basically at the end of the second quarter
a year ago, January 31st of '00 when we took a restructuring charge and really put a new
management team in place and a whole new focus on driving costs out of our system,
streamlining our SKUs, working out our inventories and trying to become the absolute lowest
cost player in the businesses in which we compete. Since that time we have been able to,
despite a lack of earnings, pay off $7 million in long and short term debt and pay over $2
million in dividends.
If you look at the first nine months of this fiscal year against the first nine months of last fiscal
year we had a net use of cash a year ago of $1.9 million. We actually spent more cash than we
generated to the tune of $1.9 million. This year we've actually generated $4.4 million more cash
than we've used. That's because our net cash from operations has been about $8.2 million and
our capital expenditures have been only $3.8 million. So we've been able to generate free cash
to the tune of $4.4 million. Our inventories are down more than $1 million. Our accruals are
actually up and those are non-cash charges, so our balance sheet is in a very strong position at
the moment. And our depreciation and amortization during that period was just under $7
million and again we spent $3.8.
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To allay any concerns that we're cutting to the bone in terms of cap ex, any health or safety
related projects automatically have gotten a pass and we've done all those projects. What we've
really been scrutinizing are the ones that are ROI driven projects that are done in the name of a
return on investment and those projects. Jeff Libert, our CFO, and his team have really worked
with Tom Cofsky, our VP of Manufacturing, to make sure that only the best and the brightest of
those projects make it to the top of the list. So the monies we are spending are getting a much
better return and we're really walking away from marginal projects that probably in the past
would have fallen under the radar screen and been paid for. The plants are in good shape. I was
just down in the Mississippi region a couple weeks ago. Morale at the plants was good and our
spending is down, so that's all good news.
Going division by division; in the consumer business, as commented on in the press release, we
had very disappointing sales driven in large part by the continued deterioration of our paper
litter business. We had held high hopes for these products. They went through consumer
testing, got incredibly positive scores. We got them into the hands of the consumer, we gained
great distribution throughout the country. We created a lot of awareness and incentivized trial
and got that trial, but we just didn't get the repeat sale, which is a negative for paper litters. But,
it's certainly a positive for clay cat litter that every time we try and replace the old tried and true
clay cat litter, there has yet to have been found a better absorbent and odor controlling cat litter
than the historic clay that we have been mining and processing for 50 years now. In the quarter
we sold only $400,000 of paper litters against $1.3 million a year ago, so our sales were down
67% in the quarter and are continuing to head south.
Additionally, many of you have heard about the new crystal cat litters that are coming out.
Those jumped on to the scene three to six months ago. They took about 5% dollar share of the
category and are holding flat. So unlike scoopables that we saw enter in 1991 and continued to
increase share period after period, the crystals are leveling off and even starting to decline a
little bit. So who knows where it will settle out, but it looks like that entre is finding itself a
niche and long term niche products have a tough time holding shelf space because you don't get
the velocity that you need to justify taking up space on a retailer's shelf. So we'll see, they
represent about 5.5% of the category at the moment.
As I mentioned, we do have the manufacturing of Johnny Cat for the East coming on line.
We're targeting for the beginning of the first quarter of F '02, so that's good news for fiscal
2002. Additionally, the new Wal*Mart Planogram goes into place July 15th and orders to fill
that planogram will start rolling in. In the planogram, we lost the paper litters (as of February) ,
but we did replace those with the Cat's Pride Scoopable Multi-Cat Formula. It will be in a jug
which we feel good about and we feel real good about our prospects on that item. We believe
with the movement projections that we and the buyer have put together for the new Cat's Pride
Scoopable MC, we'll be able to far eclipse the sales that we had on those paper items at
Wal*Mart. So we have a couple of good positive that are going to hit our cat litter business in
fiscal 2002 right at the beginning of the year.
Our industrial business continues to perform well. Sales were up 5% in the quarter and this is
really big, big positive news in the face of the manufacturing economy's downturn and our
consistent price increases. We've been taking annual price increases. We moved that up to semiannual and in the face of the gas crunch and our business continues to grow. And so we're
maintaining or growing our margins in that business and that's good news.
In the Ag business our acquisition of Pros Choice Sport Field products continues to be a big,
winner for us. Sales in the quarter were up 53% to $1.6 million. Year-to-date our sales are up
43% in the sports field products, up to $2.4 million and this is good margin business. So while
it's not huge, it's growing at such a fast rate and we anticipate maintaining good double digit
growth on that business that this is going to continue to be a good driver and a good winner for
us.
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The specialty business which is our line of fluids purification products was soft in the quarter,
but our animal health and nutrition business outside the United States, the micotoxin binder,
was up 67% in the quarter and was up 29% year-to-date. Again, not huge volume, but very
good margins for us.
I'd like to talk a little bit about expectations for the fourth quarter and maybe add a little bit
more to F '02 comments. Before I do, I have to give the usual disclaimer that these are
obviously forward looking statements and are subject to a lot of uncertainties and therefore
there are no guarantees that they will happen or not happen, it's our best estimate at this time.
We're expecting in the fourth quarter that our sales will be flat to down, maybe down 5% and
our hope is to break even in the quarter and as you know we did not do that in this quarter.
When you back out the one time hits, both positive and negative, we lost money on an
operating basis in the third quarter, we are hoping to return to break even in the fourth quarter.
Moving into next fiscal year, as I mentioned with Johnny Cat being integrated, the new
distribution at Wal*Mart, we expect to return to profitability in the first quarter of F '02. Not
putting any numbers around that at the moment, but just trend line, is break even in the fourth
quarter, make money in the first quarter.
We are pretty much finished with our forward purchasing of our natural gas for F '02. As many
of you know we have a forward buying strategy. Our commitment is to lock in 50% of our
upcoming year's requirements. We did this last year and the entity with which we locked in on
oil declared bankruptcy and left us holding the bag. We're in litigation with them, but there's not
a lot of money to go after there. This year we did a much better job of trying to lock in not
necessarily what we'd need, I mean we use used oil so that's what we tried to lock in a year ago.
The fact is the only real guarantee hedges and forward purchasing you can do on a large scale
basis is with natural gas. And so we're locking in on natural gas and the good news is it will
take about half the volatility out of our purchases. The bad news is we're locking in at a price
that's consistent with what we paid in F '01 and as you all know those prices were dramatically
higher than the previous year. So while we're not going to see things get worse in F '02, we're
not anticipating a big windfall either. I'd love to hear from anyone on the call that has a better
perspective than I do. But from everyone I talked to nobody's really predicting that natural gas
is going to return to its lower levels of two, three, four years ago. It may play down, it's been
playing down recently into better levels than in the past 12 months, but we're not looking at a
major victory there and so we're working very hard on optimizing alternative fuel usage. We're
looking to expand our usage of coal and used oil to minimize the amount of natural gas we have
to use.
At this time, I'd like to open it up to questions and as always I'd like to encourage everybody to
ask a question and then get back to the end of the queue, which allows everybody to participate.
Operator
Thank you. Ladies and gentlemen, at this time if you have a question you will need to press the
one on your touchtone phone. You will hear a tone acknowledging your request. Your
questions will be taken in the order that they are received. If your question has already been
answered, you may remove yourself from queue by pressing the pound key. If you are using a
speakerphone, please pick up your handset before pressing the buttons. One moment.
Ellen Baras, please state your company name followed by your question.
E. Baras
William Blair. Good morning. I have a couple questions, I'll try and be real brief. First, could
you go over what the termination of the supply arrangement was and how you got that nice fee
from them, or from whom?
D. Jaffee
No. Next question.
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E. Baras
Was it in the consumer business?
D. Jaffee
Really everything that we could disclose we did in the news release and everything else is
confidential. I'd encourage you to also look at our 10Q which will be filed in the next two
weeks. But a lot of it was confidential and redacted, so I don't want to stick my foot in my
mouth on that one.
E. Baras
Okay. How long is the new Clorox contract for?
D. Jaffee
It's long term, again the absolute length and termination is confidential as well.
E. Baras
Okay. I'll try one more. On the consumer side, can you talk about how Cat's Pride did, perhaps
give us the market share and how it's ranked against the others in the category.
D. Jaffee
That's highly confidential ... no, that one absolutely I can answer. As always I like to look the
combined market, and by the way, this is probably going to be the last period these numbers are
going to be relevant anymore because Wal*Mart is no longer going to be allowing their data to
be submitted to IRI or Nielsen. They're such a huge player that the omission of their
information is likely to make the rest of it meaningless. But they're in these numbers and so it's
still relevant, but boy once you pull them out, these numbers are not going to be all that
reflective of anything any more.
The category grew at 8% during the 12 week period. Scoopable was up 3.7 and coarse grind
was up 14%, but if you back out the crystals, coarse litter was up 1%, so most of the growth in
that segment was due to the crystals. Oil-Dri cat litter sales were down 13% in the period, our
share settled in right at 6%. On some of this, I wouldn't say all of it, the loss is attributable to
paper. The rest of it is our strategy to maximize the amount of value we create for our
shareholders and make as much money as we can make, and gaining share for share's sake was
good for our share, but not good for our bottom line.
We are focusing on our top accounts, 20-25 of them, and getting our core SKUs into
distribution with them and really putting our marketing and trade spending money behind them.
So I think next year you should see our share flat, the decline should end as we're cleaning out a
lot of the distribution that really wasn't profitable for us. You can't maintain distribution at
accounts where you have one SKU with them and you're shipping less than truckload, you can
never make money. And so it's been a strategic decision as part of this whole redirection to go
to core SKUs, core accounts and drive the profitability. So next year we should see a much
better scenario in terms of share because you'll see it leveling out. You won't see a lot of share
growth, but then we should see a nice kick back in the profitability in the consumer division,
that's the goal.
Clorox in the period was up 5.7% and so they lost a little share because again the category grew
at 8%. They settled in at 29.8%. Ralston was up 11.9% so they picked up a little bit and they're
now the largest player there at 31.3%. The big winner from a large standpoint was Church &
Dwight, they were up 18% in the 12 week period, their share has climbed almost 10%. The
product we make for them, Super Stop Coarse, was up 86% in the quarter and while that looks
real good, their distribution is still only 63% and they only have a 1.3% share of the category. I
have not heard this from them, but my speculation is that if they can't get to a four or a five,
how are they going to really support this on a national basis? So while it's growing nicely,
they've still got a way to go before they reach what I would call critical mass to be able to make
that a real winner for them.
The other piece of interesting news is that private label continues to grow. It was up 8.5% in the
12 week period which slightly outpaced the category growth and it represents 17.4% of the
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category. So 17% of the category is in private label and as you know we are the largest private
label supplier, so that always bodes well. And I would say as the economy continues to do what
it's doing, people are trading down and we'll probably see that move even more.
E. Baras
Thanks, Dan, and since I've been striking out, I'm going to sneak another one in here. On your
price increases, you mentioned that industrial they're holding and you've been successful there.
Is that true also in consumer and your other businesses?
D. Jaffee
Yes, it is and actually there's that old adage if you're not losing business then you didn't raise
your prices enough and we're going for a whole other round of price increases August 1st
because actually we're going through our whole budgeting cycle and we're over sold in a
number of facilities and we know we're bringing in the Johnny Cat business so we've got a lot
of wind at our sails to raise prices. And so we're going for a whole other round of increases and
even if we lose some business net/net our supply/demand will be a better balance and we'll
make more money.
E. Baras
Great, thank you. Good luck.
D. Jaffee
Thanks.
Operator
Joe Wikler, please state your company name followed by your question.
J. Wikler
Joe Wikler with MBI. Good morning. There's been a lot of talk on prior conference calls about
rationalizing your business, defining your core competencies, getting more profitable and a lot
of that had to do with waiting to see what was going to happen with the Clorox business. Now
that that's behind you, what sort of plans do you have now that you might want to share with us
about what you might want to do with your consumer business and anything else that would
allow the company to concentrate on what they can do best?
D. Jaffee
I think you hit the nail on the head. What we are ready to share at this time is really nothing. I
mean we're very happy about the Clorox agreement and now that it is behind us that clearly
allows us to continue to focus, like we always do, on our strategies in each of our businesses. So
that is what we're doing and we have a Board meeting coming up week after next and that will
be a hot topic of discussion.
J. Wikler
Is if fair to say that most of the losses have taken place in the consumer business?
D. Jaffee
Yes, that's probably fair to say.
J. Wikler
Okay, so certainly from a point of view of your shareholders who are trying to determine
whether management is making the right strategic efforts we should be looking for some
finalization of how that's going to resolve itself within calendar '01?
D. Jaffee
Again, I really can't answer that question, Joe, I'm sorry.
J. Wikler
This question has been asked many, many times and certainly the shareholders have been
suffering with very, very sub-par returns and so it's only fair that the shareholders get some
thought of when the bleeding is going to end.
D. Jaffee
Absolutely true.
J. Wikler
Okay, I'll pass it on to the next question.
Operator
Robert Smith, please state your company name followed by your question.
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R. Smith
Center for Performance Investing. Good morning. Could you break out the $700,000 covering
developmental costs and several capital asset programs and tell us what they were?
J. Libert
Yes. Hi this is Jeff Libert, Chief Financial Officer at Oil-Dri. The $700,000 is really four
smaller items, none of which are really material individually, but in their aggregate make up a
significant amount which we felt was important to communicate to the shareholders. Basically
we have a couple technology issues that we were spending money on and we have elected not
to pursue in its current form and so we thought the right thing was to expense them at the
current time.
R. Smith
Can you tell us what they were?
J. Libert
There was a technology in Canada for the granulation of product we use, filler material. We've
been researching an alternative technology to make this granular material at a lower price. The
bad news is we're writing this off. The good news is we are still very much able to pursue the
project because we are now going to have the developer of the material supply us with the
material, so we will still be able to, once successful, enjoy the benefits of lower cost.
R. Smith
Okay.
J. Libert
The second technology relates to our bleaching business and a technology to make the product
a little more efficacious. This is really development work that happened during the first part of
the year which we are writing off because it's [inaudible] and therefore not capitalized. But it's
not recurring so therefore we thought it was important to highlight.
R. Smith
Okay.
J. Libert
Third item relates to our investment in the Kamterter Technologies. We had an agreement with
Kamterter which we've ended during the quarter, which was going to increase our stake. But
because we weren't able to come to agreement with the other ownership of Kamterter, we
decided we needed to write this off. That doesn't mean that we're still not involved with
Kamterter and that we don't view this as a good future product development for us to sell, but
we restructured our relationship and therefore this write off was necessary.
The fourth item was related to some system development work which was something that we
viewed as a system enhancement. And it's something that we spent, but really we're not going
to go in the direction that we initially anticipated so we needed to write that off. In total
$700,000.
R. Smith
Okay. Is the Kamterter interest now captive to 31% or whatever it is?
J. Libert
I think we're at 24%.
R. Smith
And you have to stay there now?
J. Liebert
Well, we've elected to. We think it's in the shareholders' best interest to stay at the current rate
of ownership and we'll continue to participate, but not increase our ownership stake.
R. Smith
What's happening there?
D. Jaffee
My dad actually just had a good conversation with some of the powers that be at Kamterter just
to get an update on the canola trials and they're still in the midst of them and they're still looking
positive. But generally the feedback we get is “we're going to know more in a few weeks”. So
hopefully we'll know more in a few weeks. The good news is they're still going on.
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R. Smith
Well, it seems the flavor of this is that they didn't want to surrender control of the business. Is
that right?
D. Jaffee
It's speculation on my part, but John Easton has built it, it's his baby and I think when it finally
came down to it he didn't really want to step down. I think that's probably a good assessment.
R. Smith
Well, I mean there's two ways to look at this. I mean he may not have wanted to step down
because he thinks he's got his arms around something awfully big and then your minority
interest could develop into something really meaningful. Right?
D. Jaffee
Absolutely.
R. Smith
Okay.
D. Jaffee
I wouldn't bet against John, that's for sure. He has been very successful using his tortoise and
the hare strategy. He just keeps going at it.
R. Smith
Okay. This question about realization of shareholder value. You've been at the helm for I guess
a while, is this what you really want to do? If you had your druthers to wake up in the morning
... you've had some time with this and you've encountered some problems and difficulties and
the question is where you might go from here?
D. Jaffee
I enjoy it, I mean maybe I'm a masochist, but you're talking to a guy who since I started at OilDri 14 years ago, I haven't missed one day of work. I have not had one sick day in 14 years and
that usually is an indication of whether someone likes their work or not. I love it. Do I love the
results? Do I love those numbers? No. Who would? But I've talked to a lot of successful people
who all say the same thing, they all went through rough periods and points in their careers
trying to figure out exactly which way things were supposed to go and the quitters quit and the
successes struggled through it and moved on. And I'm not a quitter so if you're ever looking for
me to quit it is never going to happen.
R. Smith
No, it's not a question of quitting, it's a question of realizing your own life's value and potential
and where you are.
D. Jaffee
I love it, I really do. This is a great business, we have a lot of pieces of value. Do I love what
we're going through? No. I mean frankly if you want to say if I were in your position I would
want to know that the person who led me through the crap that we just went through at least
learned from it in some way, shape or form and I learned some valuable lessons going through
this. When I took over five years ago the strategy all the way up through the Board, and it was a
sound strategy was, okay you've got a young, inexperienced CEO, inexperienced in some ways,
very experienced in the clay business obviously, so let's surround him with experienced senior
executives from elsewhere to support him.
So we brought in some very senior people, spent a lot of money, they all had tremendous
pedigrees, but they didn't know our business. And I was too young, if you want to call it, to
recognize that, I don't want to say I was right and they were wrong, that makes it sound too
black and white and too smug on my part. It was more I knew things weren't going well. I knew
that they were not getting into the details of the business and that they were ... ivory tower
management is what I would call it, big business management, they were from big companies
and they were expecting all sorts of other people to do all sorts of other things and in our
business everybody's got to get dirty. Everybody has to roll up their sleeves and grab a shovel if
that's what it takes and help load rail cars and try and make money.
I finally realized that it wasn't going to work with these guys and so we had to get them out of
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there. And we put new guys in there who grew up from within. We’re very blessed to have
people like Jeff, he's a CPA from Illinois, an MBA from Kellogg. Wade Bradley is running our
consumer business, an MBA from Harvard. I mean these guys are talented people who have
been here for 10+ years and know our business. So that when we're in the meeting and we're
talking SKU reduction it isn't oh, let's cut 10% of our SKUs. That was the old approach and it
led to nothing and it led to massive inventory build up and all sorts of cost creep.
Instead it's let's get into the details, we don't need this 6/10 pound configuration of Cat's Pride
Scoopable with a coupon when we can go to across to board everybody getting the same 3/10s.
We currently make about I want to say when you do count configurations and coupons and all
that kind of stuff, we probably make 100 different kinds of 10 pound Cat's Pride premium. And
you know that Fresh Step who sells more than we sell of Cat's Pride, sells seven different SKUs
of Fresh Step and that's it. We sell probably 500 total SKUs of Cat's Pride branded. We're
getting down to 10 ultimately. It's going to take a while to get there, but when you ask our
plants to manufacture the stuff, package it, palletize it, inventory it, we're not the lowest cost
player and that's ridiculous. And then we look right in our own backyard at what Fresh Step has
always done which is keep it simple. They will not add an SKU for their life, I mean they know
how costly that is.
And so these kinds of things are what's happening right now and that's why you're starting to
see inventories come down and we've just scratched the surface. I would say on a continuum
Wade is maybe 10% of the way there, he's got another 90% to go on SKU reduction. And so
anyway it's a long winded, maybe rambling answer, but I can tell you we are approaching this
business differently. You're starting to see it terms of cash generation and you will see it in
terms of earnings. There's no doubt in my mind, it is going to happen. But the unfortunate thing
is right when we were paying for pass sins that we created ourselves, gas prices went through
the roof and that's going to cost us $3 million this year. And had one or the other not happened
we'd be having a lousy year, but we'd be making good money, some money, I don't want to call
it good money because that makes it sound like it's a good return and it isn't, we'd be making
some money. Instead we got hit with the double whammy and that's brutal.
R. Smith
I have other questions, but I want to get back in the queue.
D. Jaffee
Okay, thank you.
Operator
Ethan Starr, please state your company name followed by your question.
E. Starr
I'm an individual. A question on the Pro's Choice products. Do they have any possible
application for residential lawns or could it be marketed for residential lawns?
D. Jaffee
You know that is a good question. One of our competitors tried that and they have been I think
mildly successful. You get into the same mess of the consumer business which is you start
getting into deductions and all these charges for all sorts of things. So unless your margins are
very high or the volumes are very high, it's hard to get a product to a consumer cost efficiently.
I would say we have no plans to reach the consumer at the moment, but it should be a good
market, it's just a very tough game to play for a company our size.
E. Starr
Thank you.
Operator
Larry Lytton, please state your company name followed by your question.
L. Lytton
Second Line Capital. Dan, I think you alluded to Church & Dwight and where they stand in the
industry and some of the pain they may be suffering and strategic thought process. Can you
kind of review some of the other players and is everybody suffering equally? I suppose,
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different people have different variables and how are other people thinking about their position
in this industry in your view?
D. Jaffee
The only pain I referenced on Church & Dwight was the potential that they had to reach critical
mass on the coarse, so I just want to reemphasize that. They're doing very well on scoop and
they are the single largest grower of the major players, they were up like 16% in the period. So I
think overall they're probably pretty happy with their cat litter business. But to try and answer
your question, the key is the retail trade is all going national, they're consolidating like crazy so
whereas 10 years ago you could be a regional supplier of cat litter, 10 years from now I just
don't believe that's going to be the case. Your ability to just supply on a regional basis when
your customer is national on a product where the freight is the single largest component of the
cost of goods just isn't going to play out. And that's why we are so focused on building this
Reno plant and things are going very well on that front, I might add. We need to be able to
supply coast to coast. Those that don't, and there are still some regional players out there that
are either going to get gobbled up or are going to go by the wayside because they're just not
going to have anybody to sell to. So I would say the key is you have to be national because the
grocery chains and mass merchandisers are all national players now, they're no longer regional.
L. Lytton
You're saying there's some regional brands that have 10% of the category or something like that
in total?
D. Jaffee
No, not 10%, there are some regional brands that have 1% of the category.
L. Lytton
No, I mean in aggregate.
D. Jaffee
In aggregate ...
K. McGrail
It would be all other manufacturers in that group.
D. Jaffee
All other groups it's probably ... 2.6% is the all other. It's more on the private label standpoint.
These regional guys are supplying private label cat litter to regional chains right now like a
Publix, a regional chain in the Southeast. But in 10 years will they be able to stay independent?
Who knows? They may get acquired by Kroger or Safeway and become a national brand and
then they're going to want to put in their national private label supplier. Definitely the direction
is more towards national and less towards regional.
L. Lytton
Okay. Just to cap that off, so maybe half of that private label is also then supplied by regional
players?
D. Jaffee
Of all the private label I would say 20% of it is supplied by the all other category, 80% of it is
still supplied by us and Ralston.
L. Lytton
Okay. And secondly, a separate issue. In terms of the new Clorox agreement I think you
suggested aside from the fact that the original one was a very long term old agreement. Is the
new agreement dramatically different in its structure? Is it more just filling in the blanks in
terms of price and time and that sort of thing? And most importantly is the new agreement one
that allows you to make more money, make less money, have greater revenues, but have lower
margins? How do you characterize it?
D. Jaffee
Good question. In general terms what they wanted to do was try and gain better economics
through lower pricing for their Fresh Step. What we wanted was a longer guarantee of supply.
The contract was expiring in less than four years so it was a trade off between the two. Let it
suffice to say that my hope is, and we won't know this until we get everything integrated, but all
of our financial pro formas are showing that when you combine Fresh Step with Johnny Cat,
because they gave us the new business and that was a key piece of the equation. We were able
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to trade a little bit better economics with them on Fresh Step because they then slid over to the
table to us Johnny Cat. So when you add all that together my hope is that year one, which is
next fiscal year, if we really start Johnny Cat August 1st which is what we're shooting for, that
we will see sales up a little bit, not materially, couple million dollars, thereabout, and earnings
be about flat, that's our goal. So you'll see that the business ... and it's a very profitable business,
it's always been, we've always said that. So profits will be about the same and sales will be up a
little bit, but we'll have then gained a long extension on the agreement and that's a big victory
for us.
The reason it's a good deal for both sides is that they're going to see better economics
potentially on both brands. Because they've been running a plant that, I don't know, I'll just
guess, at 20%-25% of capacity and you can't make money in this business at that level. So their
cost of Johnny Cat had to be through the roof . So by giving it to us they could actually lower
their costs, they've lowered their cost on Fresh Step so they're going to see their costs go down,
their profitability go up. We're going to see our profitability stay roughly flat, maybe up a little
bit, and our sales up a little bit. But we gained a lot of time on the back end, so we all got what
we wanted, it was really a great deal for both sides.
L. Lytton
So are there analogous situations, are there people other than Clorox they have plants running at
very low rates where you can come in and make the same type of offer or this is fairly unique?
D. Jaffee
Well, interesting enough the acquisition we made of the American Colloid business Mounds
plant in Illinois was similar in that they had three under-performing plants. We moved it all into
one. We acquired the one and they shut the other two. Now we did the same thing with Clorox,
we “acquired” this business and they shut a plant. Ralston closed a plant in the Midwest.
Net/net we keep seeing plants close and so we're confident that as that happens our leverage
goes up and our ability to make money should also go up. So, I think it would be a reasonable
expectation that we're going to continue to try and find other deals like this.
Certainly there's nothing of this magnitude out there. Fresh Step is the plum of the whole
category. It's the single largest selling, single SKU in the category. If you lump all Tidy Cat
together they beat you, but they've got so many different flavors and SKUs that it gets blurry. If
you just look at Fresh Step coarse it's the single largest piece of the entire category and it's a real
plum. So there's nothing out there like that, but there are other little pieces of business that we're
working on that as we reel them in we'll be certain to let you know about it.
L. Lytton
Can one look at it in terms of clay sold into cat litter from a wholesale business and what's our
share on that basis?
D. Jaffee
We make about a third of all the cat litter sold in the United States and if you segment it farther
and do scoop versus coarse we have a much larger share of the coarse which is the nonclumping than we do the scoopable.
L. Lytton
And this coarse agreement, does that take the third up dramatically or it's not that big a change?
D. Jaffee
The incremental volume on Johnny Cat certainly helps. I'd have to go through the math and try
and figure out what that would mean, but it would be a few extra points.
L. Lytton
Okay, thank you.
Operator
Ellen Baras from William Blair, please state your follow up question.
E. Baras
Dan, what's your consumer mix now between branded and private label litter and how has that
changed from a year ago?
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D. Jaffee
A year ago the total businesses together in the quarter it was about 55% branded and 45%
private label. It's about 52% and 48% now.
K. McGrail
Branded?
D. Jaffee
Yes, and that's in dollars obviously. Pounds are going to be more on the private label because
we sell it for a lot less.
E. Baras
Okay, thanks.
Operator
Robert Smith, please state your follow up question.
R. Smith
Yeah, I have a couple. How's the poultry product doing?
D. Jaffee
Actually, it's doing very well.
R. Smith
Can you elaborate a little?
D. Jaffee
Do any of you guys know?
K. McGrail
Well, as per Dan's reference to the business units and the increase in sales for animal health and
nutrition products, Poultry Guard ... it's not the lion's share, but it may be half of that increase.
They have ended the big season for this fiscal year and it will fire up again in the fall of the
coming year. So in the first quarter, beginning of second quarter next fiscal year.
D. Jaffee
And it's had some international implications so we're starting to spread it out to our rep base
throughout South America and Europe because we're getting a lot of interest in it.
R. Smith
Okay. But still in prior conversations you said the really big market is still something that you
have a shot at, but it's probably not probable, right?
D. Jaffee
Well, so far we're achieving our goals. I mean the business was up significantly this year. It
needs to basically double again next year to really drive incremental profits next year and every
indication we have is it's got a real chance of doing that if we can supply it and we're hoping
that our toll manufacturer will be able to keep up with us and it looks like they will.
R. Smith
But it was explained to me that it's the use of the product that there's a very big potential market
that could be achieved.
D. Jaffee
Absolutely.
K. McGrail
And that is still the case, Bob. There is both growing use by new customers and then there's the
opportunity to take some business away from some competitors among those growers that have
been using some kind of litter amendment.
D. Jaffee
And actually the fuel crunch that's going on is good for the Poultry Guard business because
what happens is you can control ammonia in a house two ways, either through ventilation or by
adding litter amendment.
The chickens need to be warm and so if you ventilate and it's cold, you have to really crank
your heaters up which costs a lot in fuel and what happens is as the cost of fuel goes up the
equation tilts way into the favor of using a litter amendment versus ventilation. And so that's
what we saw actually, we saw the penetration of the product go deeper this year into the market
because people who historically would have ventilated decided they needed a litter amendment
to offset paying the gas companies all this money to run these heaters for these chickens.
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R. Smith
So am I supposed to hope for higher gas prices or lower gas prices?
D. Jaffee
Lower gas prices. Unfortunately ...
K. McGrail
The net gain on the lower prices would be better.
R. Smith
I'm sure at this point. Has the change in the fuel equation done anything to the plans for the
Nevada plant?
D. Jaffee
Only in that we're going to be permitted to utilize several fuel options and be able to burn
multiple fuel from the start up.
J. Libert
And one other thing I would add is that as fuel prices increase that makes freight more
expensive and so it makes the return and benefit of having a plant out West even greater.
R. Smith
Okay and then just back to the Clorox agreement for a moment. You said that you're essentially
buying a longer term contract with lower pricing. But how does that really work? I understand
where Clorox is, but I'm not sure where you are with this. What is the meaning for this for the
bottom line going forward?
D. Jaffee
I'm hoping, as I mentioned to Ellen, that on a combined basis our co-pack business will be ... if
volume is the same, the profitability will be about equal.
R. Smith
So you're going to benefit from top line increase?
D. Jaffee
A little top line and a lot of longevity and to the extent that they continue to grow which they've
been able to do and as always there's always a price increase mechanism in this thing and a year
from now we'll be assessing the prices with them and hopefully they'll be raising their prices in
the marketplace and we'll be able to raise our price to them.
R. Smith
Is there any reason that you can suggest why the term of the contract would not be public
information if the prior one was?
D. Jaffee
Yeah, it's their desire.
R. Smith
Why do you ... what would you suggest is the reason for that?
D. Jaffee
I really don't know, so I'm not even going to speculate. It was their desire and our SEC counsel
said that if a customer requests confidentiality for business reasons, it's confidential.
R. Smith
Is there anything in the contract with respect to changing control of Oil-Dri?
D. Jaffee
The document has already been filed so I would encourage you to ...
R. Smith
It will be in the Q?
K. McGrail
The contract was filed as an 8K, Bob, and anything that was confidential was redacted. So you
can go through that and anything that's there is public information. Anything that's not, we can't
comment on.
R. Smith
Okay.
D. Jaffee
Did we make that available, is it on our website, are there any links to that?
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K. McGrail
If you go to the website there is a link to Edgar filings and you can print off a copy of the 8K
and of course you can go to the Edgar website.
R. Smith
Okay. And just finally can you again explore what the next 12-18 months might hold for
Kamterter from what you understand?
D. Jaffee
I really don't know more than what I've already said.
R. Smith
So the canola trial is still going on?
D. Jaffee
Right.
R. Smith
Expected to be concluded when?
D. Jaffee
I really don't know. I encourage you to talk to my father. I know you have been in conversation
with him about this and he's a lot closer to this than I am. As soon as anything material hits I'll
be certain to let all the investors know, but with your particular interest in it, touch base with my
dad.
R. Smith
Okay, good luck.
D. Jaffee
Okay, thank you.
Operator
Ethan Starr, please state your follow up question.
E. Starr
I've read in one place that the Clorox's Georgia plant produced about $16 million of litter each
year. I'm wondering if that's about the amount the Johnny Cat deal will add to Oil-Dri's top
line?
D. Jaffee
I can't at all comment on what they were doing, I don't even know and I can not comment on
our incremental sales. I can give you the IRI numbers of what Johnny Cat does on a national
basis and you can make your own guesstimate as to how much of that is east of the Rockies
versus west of the Rockies and all that kind of stuff, but it's no where near $16 million. In the
52 week number for Clorox, Johnny Cat, and we're only talking the coarse grind. On a 52 week
basis at retail they're going to do $21 million in sales, so you can roughly say they're doing $15
million at wholesale on Johnny Cat coarse nationally.
E. Starr
Okay, thank you. Another question about the deal with Clorox. I understand from reading the
8K that you're going to perhaps get some of the equipment from their plant. Can you comment
on that?
D. Jaffee
You're absolutely right, that was part of the deal was they're closing the plant and they made
available to us equipment. They were heavily focused on automation so it's very worthwhile
equipment to us. We are anticipating being able to integrate the Johnny Cat volume and actually
use two less people in the entire Georgia facility due to the automated equipment and being able
to streamline lines and this whole SKU rationalization where we're going to a common bale
with Johnny Cat on our Cat's Pride so that they'll all be able to come across the same lines. This
is all this SKU rationalization focus and again we've always very much admired a lot of the
teachings of Demming in terms of quality and one of them is you never want to have people
fear for their jobs due to automation. So we've always made it an avowed fact that we will not
lay people off due to automation, but the reality is we've always used temp employees so we've
always had our full time employees and where there aren't temps, we have a lot of turnover at
the bottom. Those are the worst jobs, the jobs we're automating are the people who are standing
and throwing 40 to 50 to 60 pound bales all day long they're not the people who like to stay
with us for long periods of time. So through attrition and temps we're always able to get there. I
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just want to again confirm that we will be using two less people at the Georgia plant to package
an additional significant volume of business so the profitability is going to go up on that for all
lines.
E. Starr
That's nice, I'm glad to hear that. Did Oil-Dri pay for any of the equipment or is it just part of
the deal, you get it as part of the deal?
D. Jaffee
It was all part of the deal, so we "paid for it" in terms of the economic terms of the deal.
E. Starr
Okay, thank you.
D. Jaffee
Thanks.
Operator
Larry Lytton, please state your follow up question.
L. Lytton
With respect to the Reno facility which is largely still on the drawing board, is the design of that
plant other than the fact that it uses multiple fuels substantially different than existing design
such that it's much more energy efficient or materially energy efficient?
D. Jaffee
The design is not much different from our other facilities. Clearly we tried to streamline it.
When you start from scratch you have the benefit of putting things exactly where you want
them rather than when you grow and you're going to do a new product you start to add things in
a hodgepodge manner. So the flow of it will be more efficient. What we found in going through
some various facilities of late was that our plants are very fuel efficient, that we do a real good
job on BTUs per finished ton and that our technology of rotary kiln driers is as good as there is
out there when you add in all the costs of maintenance and electricity and all the other
components of drying clay. So it will be a similar facility to our others, but we've obviously
tried to share best practices and take the best ideas from all of our facilities and consolidate
them into Reno.
L. Lytton
Good. The fact that it's located in the desert there was no way to take advantage of a natural
drying process?
D. Jaffee
No, actually that will help. I mean there's no doubt that for a significant part of the year we'll get
a good benefit from air drying so it's really the mining that will take advantage of that. You strip
the clay and you do your stripping in such a way that you allow for the maximum amount of
time of exposure to the sun and wind so that by the time you actually send the product to the
plant instead of being 40% moisture, maybe it's 30% moisture.
L. Lytton
Okay. And lastly, just in terms of philosophy, was there a lot of thought given to the hedging of
50% of the natural gas going forward? Why 50%, why not hedge it all? I guess that's the main
question. Given that the market's changed so dramatically, I know you don't want to be a
speculator in energy prices, but whether you hedge or don't hedge you're speculating anyway.
D. Jaffee
Right and that's why we kind of took the midpoint. We said basically we want to take out half
the volatility, plug that into our standard cost for the upcoming budget so then when we come to
you and say here's what we're going to make, at least we've taken out a lot of the variability of
fuel, but we are allowing for the use of alternative fuels. IF we locked in 100% natural gas our
cost on a weighted average basis would be around $5 a MMBTU. We know we can burn coal
at $2 in MMBTU and we can burn used oil, I want to say at around $3.50-$3.75 per MMBTU,
so we don't want to preclude ourselves from using those alternative fuels. This allows us the
flexibility we need to try and get the lowest blended price, but also get the security of locking in
half our needs.
L. Lytton
Okay, thank you.
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D. Jaffee
Thanks.
Operator
Ethan Starr, please state your follow up question.
E. Starr
You mentioned earlier that the new Wal*Mart planogram goes into effect July 15th or so. I'm
wondering if there's any possibility that you got the dog treats in there and how are the dog
treats doing generally?
D. Jaffee
No, we didn't get the dog treats into Wal*Mart, it really wasn't something we pushed for this go
around. We were really pushing on this MC Scoop and we got it. The treats are actually doing
well. Mostly on a private label and co-pack basis, although ... do you have Dollar Generals in
your area?
E. Starr
Don't know.
D. Jaffee
Okay. Take a look around, they're a big chain. They're Wal*Mart's single largest competitor,
that's who Wal*Mart looks at when they compete because they're competing for the same
demographic of shopper and so Wal*Mart targets Dollar General. Two of our SKUs are in
Dollar General. We've already started to ship. I don't think they've hit the shelves yet, but we
just started to ship and it's not a material number. We may do $700,000 of treats with them next
year, but the fact of the matter is if we succeed with them, and we're relatively hopeful that we
will, that could lead to distribution at a Wal*Mart and a KMart and so forth and so on. So the
Dollar General business is exciting. Bill Thompson, who's running that business for us has just
submitted his plan for the year and again I can disclose this because it's immaterial to our
business, but it gives you a directional nature. Basically, we broke even this year on dog treats
which was good. It was the first year we broke even. We're expecting to make $400,000 next
year on dog treats because we've already locked in enough business. That doesn't even include
much of the Dollar General business. We put it in at one-third of the initial estimates just to be
conservative. So the good news is it's starting to take on momentum and as we find new
accounts this could be a real business for us.
E. Starr
That's very encouraging. Now when you say co-pack and private label, does it mean that Dollar
General's label is appearing on the dog treats there?
D. Jaffee
Not with Dollar General, that's our brand, that's Smart Snacks. But for instance, I don't know if
you've ever seen the catalog company Drs. Foster & Smith, but we make pet treats for them and
we're coming out with a whole new pet treat for them which is with glucosamine which is the
latest rage in pet care. It helps retard arthritis and it helps joint lubrication. It will be marketed
under their brand name, our name will be nowhere on it, but it will be like a private label we're
doing for them.
E. Starr
Okay, great. Thank you.
Operator
Ladies and gentlemen, at this time if there are any questions, please press one at this time.
Robert Smith, please state your follow up question.
R. Smith
What might it cost to exit completely the paper litter business?
D. Jaffee
I don't know that off hand. Clearly we're running down inventories in those sorts of supplies.
Jeff, do you want to comment on that?
J. Liebert
I don't think there's a cost to exit the business specifically. However, as volume decreases we
have to be very careful so that we don't end up with excess inventory and we're very conscious
of that so we're hoping to make any write down amount insignificant and that's our hope and
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that's
R. Smith
And finally, is there anything about the R&D effort that you can share with us that's interesting?
D. Jaffee
The most exciting thing I've seen, which is still preliminary, is we use a technology for
scoopable that is unlike everybody else's. Our competitors take a naturally swelling sodium
bentonite and all you’ve got to do is put it in a box and the cat pees on it and it clumps and off
you go. Our product does not naturally clump so we have to add a powdered cellulose additive
that acts like a glue. And the problem with adding a powder is twofold, one is it's dusty and two
is it can segregate. So if it's there it works, but if it's segregated to a different part of the litter
box you could potentially get an unsatisfactory clump.
Out in R&D we have found a way of solving those problems, let me just leave it at that. So it's a
twofold benefit - you increase the clump strength and you reduce the amount of dust and ours is
the only flushable cat litter on the market because of our technology. So our hope is to perfect
this new technology and then my goal would be not only to try and put it into the Cat's Pride
brand which is already out there, but to go to some of our co-pack partners and see if they
wouldn't be interested in coming out with a flushable, scoopable that was low dust and high
clump. In the past they've been interested in flushable, but they didn't like the dust or the clump
strength so if we can overcome those hurdles, and we've been able to so far out at R&D, we
may have a very good licensable technology that could add some life for us.
R. Smith
Anything away from the litter business in R&D?
D. Jaffee
We mentioned earlier how we're writing off some of technology. It isn't because we're
abandoning it, it's because it needed to be expensed, that's a better way of putting it. We're still
working on it. It's a process we call WB and it's to be a next generation bleaching clay which
we believe would have higher activity, lower cost than its peers and that's how we've been able
to build the value of business that we have.
R. Smith
Thanks very much.
Operator
Sir, there are no further questions at this time.
D. Jaffee
Great. I just want to thank everybody. I appreciate the lively discussion on Q&A. No one's
more frustrated than I am at the reported earnings, that's for darn sure, although I welcome any
input on why a stock that is generating free cash, that's paying a 4%-4.5% dividend is trading at
55% of its book value, that one always perplexes me. So I kind of feel like as we return the
company to some solid state of earnings, as we continue to generate cash, we continue to pay
our dividend, the naive person that I am thinks that our stock ought to trade at least at book
value so it should trade at $13 a share. So from $8 to $13 would be a hell of a run up just to get
us back to where it needs to be. So again if any of you have a perspective on that, feel free to
call me because I'd love to hear it because I have trouble understanding why a 61 year old
company with solid cash flows would trade at 55% of book. Anyway, thank you. Thank you for
your patience and support and we'll be back again in 90 days.
Operator
Ladies and gentlemen, that does conclude the conference for today.
participating and you may all disconnect now.
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Thank you for
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