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Conference Call Transcript

ODC - Q1 2010 Oil-Dri Corporation of America Earnings Conference Call

Event Date/Time: Dec. 09. 2009 / 11:00AM ET

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Dec. 09. 2009 / 11:00AM ET, ODC - Q1 2010 Oil-Dri Corporation of America Earnings Conference Call

C O R P O R A T E P A R T I C I P A N T S

Dan Jaffe

Oil-Dri Corporation of America - President & CEO

Ronda Williams

Oil-Dri Corporation of America - IR

Andy Peterson

Oil-Dri Corporation of America - CFO

Charlie Brissman

Oil-Dri Corporation of America - General Counsel

C O N F E R E N C E C A L L P A R T I C I P A N T S

Robert Smith

Center for Performance Investing - Analyst

Brad Evans

Heartland Advisors - Analyst

James Schwartz

Harvey Partners - Analyst

Ethan [Star]

Analyst

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen, and welcome to the first quarter Oil-Dri Corporation of America conference call. I will be your coordinator. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Dan Jaffe, President and CEO. Please proceed, sir.

Dan Jaffe - Oil-Dri Corporation of America - President & CEO

Thank you, Noelia, and welcome everyone to the first quarter investor teleconference. Joining me in Chicago are Andy Peterson, CFO. Charlie

Brissman, our Vice President and General Counsel, and Ronda Williams, who heads up our Investor Relations and will take us through the Safe

Harbor provisions.

Ronda Williams - Oil-Dri Corporation of America - IR

Thank you, Dan and welcome everyone. 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 urge you to review and consider those factors in evaluating the Company's comments and in evaluating any investment in Oil-Dri stock. Thank you, Dan, back to you.


Andy will start out with details, then I will give some over view comments.

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Andy Peterson - Oil-Dri Corporation of America - CFO

We had sales of $53.4 million in the quarter, down 15% compared with last year's $63.1 million. Most of this decrease was due to lower volume.

We had a gross profit margin in the quarter of 23.1%, up from last year's 19.6%. A favorable sales mix of our higher value products, combined with lower cost for freight, packaging and fuel used to dry our clay-based products offset the impact of the lower volumes sold.

Operating expenses were 16.8% of sales, which was up compared with 13.8% in last year's first quarter. The higher percentage this year was primarily due to lower sales. Our effective tax rate in the quarter was 28% of pretax income, up from 27% last year. Net income was 4.1% of sales, up from 3.6% in last year's first quarter. EPS in the quarter was $0.30, down 3% compared to $0.31 last year.

Cash provided from operations in the quarter of $7.6 million was $10.2 million higher than last year when we used cash in operations. This was primarily due to lower accounts receivable and inventories because of the reduced sales. Capital expenditures of $1.3 million were down $2.2 million compared with last year's first quarter. Debt payments in the quarter of $200,000 were down $3.9 million compared wit h last year. We had no purchases of treasury stock, which was down $600,000 compared with last year's first quarter. Dividends paid in the quarter of $1.0 million were up $76,000 for 8% compared with last year. Cash and investments at October 31, 2009 was $25.0 million, up $8.3 million compared with last year's first quarter. We had $3.7 million more in cash and investments than we had debt at the end of the quarter. Dan?


Fantastic. Thank you, Andy. And before We open it up to Q and A, just to make sure we cover the most important issues on your guys' radar screens, let me say as a large investor and senior manager here, I was very happy with the quarter. This is the first quarter of the new reality since

Wal-Mart implemented their new planogram that we announced a little ways back, which dramatically reduced the store count for Cat's Pride branded products. We still supply the same special kitty items that we always did and enjoy that relationship, and what we saw was -- can be termed as nothing else other than a market explosion outside of the Wal-Mart stores with all of our other retail partners.

The category was relatively flat, and depending upon which period you want to look at and which SKU you want to look at, Cat's Pride scoopable itself was up over 60% in the most recent IRI period for a four-week snapshot, then I think what we put in the news release was more of an 8week or a 10-week snapshot. So you can see that the momentum is actually gaining. So, time will say I think we said 44% unit growth in the news release, and that was over a longer time period. So, time will tell what will happen long term. I continue to be bullish both about our consumer business, and also our relationship with Wal-Mart. I mean, if you think about it from a macro, macro sense, they're the world's largest retailer of sorbent mineral product, which take the form is cat litter. And we're the world's largest manufacturer of sorbent mineral products with a geographic dispersion of our plants that makes our business model a low cost provider -- or the low cost provider. When you put those two together and you look at their momentum going forward and our years and years of reserves that we have on the books, we are going to be in relationship. What form that relationship takes will change over time, and so -- but I continue to be very proud of our relationship with

Bentonville and look forward to seeing that take different forms going forward.

Noelia, I would like to open it up to Q and A.

Q U E S T I O N A N D A N S W E R

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Ethan [Star].

Ethan [Star] Analyst

Good morning and congratulations on a very nice quarter, all things considered.


Hi, Ethan, thank you.

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Could you please give us an idea of what earnings would have been if input prices would have been the same as for last year's first quarter?


No. I mean, only because I don't have that information. We don't look at that it way. Clearly, yes, you can tell that costs were favorable to us, and that helped us expand the margin. So despite the fact that we had a $10 million in sales shortfall, I think the G P was less than $50,000 off of last year. Yes, $53,000. So clearly margin expansion helped almost completely offset that sale shortfall.


Okay, thanks. I'll get back in the queue.


Okay, thanks.

Operator

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


Hi, Bob.

Robert Smith - Center for Performance Investing - Analyst

I also want to congratulate you on a good quarter. Can you give us some numbers as you have in the past?


I'm ready for you. I will remind you of the historic, then I'll give you the new quarter. So Q1 of '09, $88,000 in sales. That was our first quarter rolling it out. Q2, $204,000. Q3, $325,000. Q4, $452,000. And if anyone had a drum set here, I'd be asking for the drum roll, but the Q1 FY'10 was $921,000. So as you can see, a nice progression. I think as we talked last time we said we were hoping that the percentage may increase or decrease but the dollar roll will be bigger, and actually we got both this time. Q1 was actually double the prior quarter from 450ish to 920ish. So we were happy with that progression.


Well, that's starting to get some good traction here for sure, so the question is, what about that delta?


Well, you will have to tune in again in 90 days. But, again, we're continuing to receive positive feedback from the marketplace, and the products work, the and one of the great things we discussed at the annual meeting yesterday that we are able to bring to the market that really no other marketer of toxic binders can, is the concept of traceability, of knowing from literally the moment it leaves the ground, to the moment the end user gets it, we are the only ones who handle our product. Everybody else is buying, selling, mixing, matching, and so they really can't vouch for

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Dec. 09. 2009 / 11:00AM ET, ODC - Q1 2010 Oil-Dri Corporation of America Earnings Conference Call the traceability firsthand. We can. And that kind of confidence means a lot to the nutritionists and the farmers out in the field. Will next quarter be better than this quarter? I sure hope. So but again, it's a long-term trend. But we love the long-term prospect of the brand.


Is what you just said applicable also to the amcol product?


You mean traceability?


Yes, that's what you sort of highlighted here.


And when you say -- be specific. Do you mean their entree interest animal health?


Yes.


I can't speak to that specifically. I'm not sure how they end up getting into the end market. To the extent they market it directly, then I'm sure they have their own traceability claims to make. We certainly keep ours from cradle to grave.


Is it all a function of the field people? I mean, the amount of sales presence in the marketplace? Are you expanding your sales force? How are these numbers being developed?


Well, absolutely. We have put more, quote unquote, feet on the street, and we have more market penetration but we use distribution in all the various countries. So our direct sales people call on their distributors. They work the end users, and that's how you ultimately get it to the end user. So clearly it's giving us the confidence to continue to, as the business grows, pay as you go and continue to put more and more presence out there, because it seems to be a great pay back.


Okay. Do you actually have numbers when the Wal-Mart sales -- the percentage of the business?


You mean what percent they represented of us this past quarter?

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Yes.


Did we disclose that in the Q?


No.


I have to wait for an annual number?

Charlie Brissman - Oil-Dri Corporation of America - General Counsel

Yes, Bob, it's Charlie Brissman. Historically we've only given sales percentages on two customers, Wal-Mart and Clorox, because that's effectively what the SEC requires. And beyond that, in sort of keeping with our approach to these issues, we've never tried to break it down or benchmark it between periods.


Okay. And.


Let's go back in the queue, Bob, just in case somebody else has a question, then you can come back around.


Sure.


Thanks.

Operator

your next question comes from the line of Brad Evans with Heartland.

Brad Evans - Heartland Advisors - Analyst

Yes, good morning.


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Hi, Brad.


Nice quarter under the circumstances. My hat's off to you. The one thing that did surprise me in the quarter, Dan, was just the SG&A run rate in light of the sales decline I was expecting there to be more favorability in terms absolute dollar levels first quarter. Anything unusual happen? It doesn't speak to the in the Q, but anything you could bring out or comment on that would be helpful.


I think it just -- in terms of our SG&A, doesn't vary greatly with our sales levels, and so you get pretty much fixed expenses and a reduction in sales, and so you're going to end up with a higher percent.


Can I ask you, in terms of the -- the lack of action to take costs out of the SG&A line does that reflect your view or high degree of confidence that you will be able to replace the lost Wal-Mart volumes in a reasonable time frame?


You say lack of action. I think we took a lot of action. You and I talked about this a quarter ago. I will assume you're specifically referencing a reduction in --


I didn't mean lack of action, I meant just looking at that time absolute dollars, $9 million, versus $8.7 million in the prior year's quarter on a 15% decline in sales. So that is where my comment was based.


I feel the same way as I did three months ago. I'm glad we took the approach we did, which, as we said three months ago, nobody took a merit increase this year, and at the same time, we did not have any layoffs due to the lost Wal-Mart business. Seeing this quarter, I'm glad, because again, we could have laid people off and maybe made an extra few pennies a share, but where would this leave us going forward? You've crippled the business, and there's no ability to grow. So I'm happy with the approach. I'm happy with our SG&A, and I'm happy with the quarter.

So that's all I can tell you.


Let me just ask one tangential question to that. Did you open any new large accounts, any new accounts on the Cat's Pride side in the quarter that you can comment on?


The answer is, no new accounts. What we did was, we reached out to our existing accounts, and we used this as a proactive way to get closer to them and say, look, for years you've been losing business to Bentonville to Wal-Mart. Let's partner up. Let's pile high. You are going to have shoppers coming to your stores looking for Cat's Pride. I mean our items are unique. Cat's Pride flushable is the only product that's certified safe to flush. And Cat Kit is the number one disposable disposable liners. We've got a lot of brand appeal with what are called brand aspirational

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Dec. 09. 2009 / 11:00AM ET, ODC - Q1 2010 Oil-Dri Corporation of America Earnings Conference Call buyers. So our hotline was ringing off the hook as the new planogram went into effect, and we would find out where they lived and turn them over to stores that carried our product. So that explosion that occurred, if you multiply a market basket, I mean, Wal-Mart would be the first one to educate us and anyone else on the concept that when someone comes in to buy Cat's Pride, for instance, they don't just come in to buy one jug of Cat's Pride and leave the store. They buy a suite of product, and they'll spend, on average, a certain amount of money. On average with Cat's

Pride that tends to be about $120. So when you look at the unit lift outside, it's a non Wal-Mart account and the grocery account and the dollar stores, in the pet specialty, the lift that went on in the past quarters, since they put in the new planogram, multiply that unit lift on an annual basis, then multiply it by $120 a share, it's $200 million at retail. It's huge. So our non Wal-Mart accounts are very happy with Cat's Pride. It's been a way of reversing would has been a 20-year trend of losing business.


Okay. Again, nice quarter. Thank you.


Thank you.

Operator

Your next question comes from the line of James Schwartz with Harvey Partners.

James Schwartz - Harvey Partners - Analyst

Hey, Dan, how are you?


Good, Jim, how are you?


Good thanks. Question. On the B2B business, granted, it was a pretty tough comp from the October '08 level, but I guess I'm curious, can you go through, because that was down roughly 15% year-over-year, and as fiscal 10 progresses, the comps get relatively easier. Maybe just go through a little bit of what happened in B2B and maybe looking forward, I know you hate looking forward, but maybe near term what we have to look forward to in the B2B segment.


I love looking forward. I just don't like to tell you guys, because then I'm held accountable.


Right.


I mean, Andy Peterson heads up our B2B business so I'll let him start with comments, then could I certainly add some color to that.


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Okay. Yes, I mean, I think that the quarter I think as you look across all of the B2B businesses, I think it's a reflection of the economy. I think it's a reflection of that our customers are not growing their business and their businesses have declined, and I think that's true in pretty much every one of those segments. So I think the expectation is that demand is going to return more like it has been in the past, and we expect to see that occur. We haven't, as Dan commented, we haven't done anything from a short-sided standpoint to pull back, to reduce what we're doing, to reduce our R&D to reduce our sales organizations. We're staying the course, and these are all good businesses, and value added products, and they will get better as time goes on.


And, Andy, could you go into detail about the co-packaged cat litter business and what happened there?


I think that my comments fit with co-packaged cat litter. It's kind of the same thing that we're talking about here.


Yes, the only thing way add, and I agree with you, everything is right, when you look at co-pack cat litter or the other B2B businesses, one delta this year versus last was one, either the price, being lower, because it's a contractually determined price, but obviously, as you can see from the margins, costs dropped more than the price, so it was a favorable swap. We would take this swap versus what went on a year ago. And if you look at the international freight scene, I know freight in B2B was down significant in the quarter, and there we don't tend to make margin on freight, so we're just handling dollars. So while the sales were down, you've got to get to the bottom line, especially in a business like ours where after you non renewable resource.

Frankly, I'm happy with this year's quarter than a year ago's given a couple of big dynamics. We did ship less tons, so we used up our non renewable resource at a slower rate, even though we after hundred years reserve doesn't mean we should just fritter them away. So our profit per ton went up. Then when you add to that little analysis, the fact that we did dramatically less business with Wal-Mart, our single largest account, that's both a negative, but from an ownership or diversification account, it's a positive. Bob asked the question what percent of the business, of our business, do they represent. While we're not going to get into the details we know they used to represent nearly 30%ish, 20-some-odd percent.

We lost nearly half of it, maybe less than half, so you can do the math, that they now represent maybe only 15% of our business or something like that, give and take. So, we're that much stronger in the accepts that going forward you can't lose it again.


And I guess last question Dan, the nature of the cat being as finicky as it is, are they seeing customers gravitate toward a Target or a Publix to get that Cat's Pride? You've got a pretty big user base of Cat's Pride.


Very much so.


Did Wal-Mart, did they not anticipate the reaction of cats, I guess?


I am not sure what their anticipation was. I mean, all I can say is that we are continuing to be of a very open and communicative relationship with them, and that's a positive sign. And, so like I said, long term, I love our chances with them for all the macro dynamic reasons I've pointed

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Dec. 09. 2009 / 11:00AM ET, ODC - Q1 2010 Oil-Dri Corporation of America Earnings Conference Call out at the beginning. Short term, anything can make sense. And so if the seems to make sense for them in the short term, then we just to have support that. It's our job to convince them that, we need to get back to the way things work.


Thanks, guys, nice job.


And it's in their best interest.

Operator

Your next question is a follow-up question from the line of Robert Smith with the Center for Performance.


Hi. Before I go into pie question, I want to beg you guys to expand the time that you're giving us, because it's just not enough. That's my opinion, and I hope you can consider it. So on with the question. So what can you tell us about the natural gas element and profile going forward for the rest of the year?


Nobody has a crystal ball, but what we're learning, maybe painfully, is -- both painfully and beneficially, is we're in a pretty rational market. I mean, when gas prices went up, the prices of our -- to our end users went up, and when gas prices go down, we're going to have to get more competitive with our pricing. But it doesn't seem like a long-term hedging strategy makes a whole lot of sense. And so we're not going to.


Are you 20% hedged?


Yes, but we got ourselves where we would go out a whole year, and we still have some hedges out there, but we're trying to stay a little bit shorter focused, where maybe we'll have a few more hedges, because it does take time. You do want to take some of the volatility, maybe buffer, but we don't want to be predict wring gas is going in 2011, 12, and 13. When we get there we're pretty confident the price of cat litter will accurately reflect whatever that input. That's clearly a favorable delta. Very favorable.


Can you tell us what the R&D pipeline might look like now and how you're working on other development?


Not really. There's nothing -- as you know, I rarely talk about anything until we're in the end zone and the points are on the board. So I can just tell you, as Andy said -- we are spending at a higher level of R&D than we have historically, and that's because we continue to see a lot of opportunities to extract more and more value out of our unique minerals. So not time to talk about those things, but those guys are not sitting idle, waiting for the phone to ring, that's for sure.

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What do you think R&D expenses will be this year versus last year?


I wouldn't want to make a prediction.


So you're not beefing that up in any way, so to speak?


No.


Okay. It is Kim Turner still alive?


Kim Turner is still alive.


And you still have your interest?


We still have our interest. It's on the books at zero, though, so whatever happens, we win.


In the line item, other than long-term abilities, what's in that?


They promised me no math.


That's I think the biggest reason for the increase there is the -- is our pension liability.


Can you tell me something about that?


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Probably the biggest thing swinging the pension liability is the discount rate used, and with the FED kind of sitting on interest rates, it's a lower number than it has been.


What are you using?


6%.


Share buyback program. Is that still authorized?


Yes.


Yes, we still have shares authorized, but we have not been active.


How much is left?


I think it's 250,000 kind of number.


What can you tell us about the rest of the year? What are the pluses and minuses going forward?


And I'll hit that, and then I think we're done. So, okay, and, listen, we hear you on the length of time, but honestly, Bob, it's just going to -- I know it would be beneficial to you, but I'm not sure ultimately it would be beneficial to your investment, because we just -- we just end up giving away secrets that we don't need to give away. Not that we're secretive, but you know what I'm saying. Competitive advantages. So I think we've covered the highlights.


Are we going to have another analyst meeting in New York at some point?

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At some point, yes, I can agree with that. When, I don't know. We did just have one in Boston. He we had our annual meeting in Chicago yesterday. And Ethan made both of them and Jim made the one in Boston.


I didn't know about the one in Boston.


We hid it from you. No, I didn't hide it from you. Eric, I don't know if you are still in contact with Eric, but he coordinates those. So let's leave it at that. I mean, the balance of the year, look, we're in a very dynamic situation with -- any time you get a major change with your single largest account, and you come out of that first quarter the way we did, you know, we're all happy around here in Oil-Driville. We're all happy around here in Oil-Driville. Wars are not won in retreat, as Churchill pointed out in Dunkirk. We feel comfortable with our long-term prospects. In fact, frankly, after this first quarter, we feel better about fiscal '10 than maybe we did when we first heard the news down in Bentonville. So let's leave it at. That let's all have a happy and healthy holiday season. Let's deliver our second quarter, and we'll be talking to you then. Thanks very much, everybody.

Operator

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.

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ODC - Q1 2010 Oil-Dri Corporation of America Earnings Conference Call

Event Date/Time: Dec. 09. 2009 / 11:00AM ET

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