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EDITED TRANSCRIPT
ODC - Oil-Dri Corporation of America Q2 2014 Earnings
Conference Call
EVENT DATE/TIME: MARCH 12, 2014 / 03:00PM GMT
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
CORPORATE PARTICIPANTS
Daniel Jaffee Oil-Dri Corporation of America - President, CEO
Reagan Culbertson Oil-Dri Corporation of America - IR Manager
Daniel Smith Oil-Dri Corporation of America - CFO
Ron Cravens Oil-Dri Corporation of America - President - Amlan International
CONFERENCE CALL PARTICIPANTS
Ethan StarrPrivate Investor
Robert Smith Center for Performance Investing - Analyst
PRESENTATION
Operator
Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America Q2 2014 earnings conference call. My name is [Tracey], and I will be your
operator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference.
(Operator Instructions)
As a reminder, this call is being recorded for replay purposes.
I would like to turn the call over to Mr. Dan Jaffee, President and CEO. Please go ahead, sir.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Thank you, operator. Welcome everybody to the second quarter and six months of fiscal 2014 investor teleconference. Joining me on the call today is Dan Smith, our
CFO, Doug Graham, our general counsel, Reagan Culbertson, investor relations; and a special guest today, Dr. Ron Cravens, who runs our Global Animal Health
Business will be here to field any and all questions regarding that particular area of Oil-Dri.
Before we move on, Reagan, will you cover the Safe Harbor provision?
Reagan Culbertson - Oil-Dri Corporation of America - IR Manager
Sure. Everyone, welcome. On today's call, comments may contain forward-looking statements regarding the company's performance in future periods. Actual results in
these periods may materially differ.
On our press release and our SEC filings, we highlight a number of important risk factors, trends and uncertainties that may affect our future performance. We ask that
you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock. Thank you for joining us.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Great, thanks, Reagan. And, Dan, as always walk us through the quarter and the six months.
Daniel Smith - Oil-Dri Corporation of America - CFO
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Okay, thanks, and good morning to everyone. Oil-Dri has announced record sales for the second quarter and first six months of fiscal 2014. Earnings also improved in
the second quarter.
Sales of $69.3 million for the quarter and $132.9 million for the first six months were both up significantly from the same period last year. Our earnings per share of
$0.60 per diluted share for the quarter which was up about 94% as compared to fiscal 2013's value of $0.31. The quarter results drove our year-to-date EPS to $1.1
versus $0.94 for the first six months of fiscal 2013.
Our retail and wholesale team reported improved sales and increased income for the quarter. We saw 50% volume increase driven by the increased private label cat
litter sales associated with our acquisition of the assets of MFM Industries, Inc., a private-label cat litter manufacturer.
In addition to the private label increase, our sales of the Cat's Pride Fresh & Light product line grew by about 60% for the quarter as compared to the second quarter of
fiscal 2013.
Our advertising and promotional spending was down for the quarter, and slightly down for the first six months as compared to the same periods in fiscal 2013.
However, we continue to expect that our advertising and promotional spending for fiscal 2014 will be greater than fiscal 2013.
Our B2B group had a significant sales and income growth for the quarter and for the first six months. The improved results were thanks to the strong performance by
our fluids purification, animal health and agricultural products. Our gross profit percentage for the quarter was down to around 24% from 27% reported in the second
quarter of fiscal 2013. Our gross profit percentage for the first six months was about 25% as compared to 27% last year.
We have experienced increased materials, packaging, freight cost throughout fiscal 2014. The cost of natural gas using our manufacturing processes increased 28% for
the quarter and 33% for the first six months as compared to same periods in fiscal 2013.
We remain strong from a balance sheet perspective. Our and investment balances at the end of the quarter were about $20 million, which was down about $16 million
from the second quarter of fiscal 2013. The decrease was driven by the acquisition of MFM, our regularly scheduled debt payments, capital expenditures and working
capital changes.
On November 1, 2013 we invested about $13 million to acquire certain assets of the cat litter manufacturer MFM Industries, Inc. We're still working through the asset
valuation process, but you will note that we increased our other assets and values to reflect initial valuation of goodwill and intangible assets.
Finally, we continue our strong dividend payments to our stockholders with approximately 1.2 million paid out during the quarter.
Thanks. I'll turn the meeting back over to Dan Jaffee.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Thanks, Dan. And I won't even elaborate, I mean in your comments I'll see where the investors want to take the call. So, Tracey, let's open it up to Q&A.
But as always, I'd like to encourage everyone to ask your most important question first, and then go back to the end of the queue so, we make sure everyone who wants
to ask a question gets a chance, because as always, we will have a hard stop at 10:30 Central Time.
QUESTION AND ANSWER
Operator
Thank you.
(Operator Instructions)
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
The first question comes from the line of [Ethan Starr], individual investor.
Please go ahead.
Ethan Starr Private Investor
Good morning. Nice quarter.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Hi, Ethan, thank you.
Ethan Starr Private Investor
I'm wondering why did you pay so much for the MFM assets, and how is the integration of that business going, and how has it benefited your branded distribution?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Okay, good question.
I mean, first of all, the market price of any asset is determined by what someone out there is willing to pay for it. It was an auction process. And we were the high
bidder, but it wasn't like it was a sealed thing, it was an open auction. And it went back and forth and back and forth, and fortunately for us, we have enough synergies
to more than justify the valuations. S o that's how the price gets determined. It's not -- you can't look at up on eBay or anything ...
Ethan Starr Private Investor
Okay. Yeah, I didn't know it was an auction, okay.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Yeah. It was a bankruptcy auction, which we participated in. Frankly, we are very happy we won the bid. So far it's going ver y well. The integration of all of those
[tons] into our existing facility, so it's been a real challenge on our supply chain, you drop in that much business to really overnight, and our operations and logistics and
procurement teams have done a heroic job just trying to absorb it all.
I sort of analogized it's a real Lucille Ball show, which is, you know, an item is just flying off the line. That's sort of what it looked for a couple of weeks.
And we settled down and our [fill weights] are back up to where they need to be. And our scorecards are getting to where they need to be. But I've already met with a
number of the customers who we're already doing business with in a large way, but now it's really moved to the top of their supplier chart.
And they're very happy that it ended up in our hands. They embraced not only our ability to supply them private label goods, but also they loved that our brand are so
successful.
And so it's really going to be helpful on all fronts. It's going to make us more important when we sit at the table with these major retailers, and it's going to help us be
more efficient in some more of our brands. So, it's really a win-win for us.
Ethan Starr Private Investor
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Great. So, you added branded distribution where you didn't have any previously?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
You know, they don't move that fast. They go on planograms. I would just say I'm going to stick with my comments.
Ethan Starr Private Investor
Okay. I will move back and get back in the queue.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Okay, thanks.
Operator
Your next question comes from the line of Robert Smith, Center for Performance Investing. Thank you. Please go ahead.
Robert Smith - Center for Performance Investing - Analyst
Hi, good morning. Can we bring Ron in on this? This question is directed to Ron.
So, Ron, welcome to the call. It's wonderful to have you on board. I'd like to see you available on some future calls as well. So, my question for you, Ron, is, can you
give us some idea of the opportunity that you're going to be addressing in the next several years. You must have an internal three or five-year business plan. It seems
very exciting and I'm wondering what color you can give to us.
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
Thanks, Robert. I can give us some general comments on the three to five-year view from our particular business segment. I think as you're aware, we have modified or
evolved the business from what it historically was to more of a medical look particularly as we look at the application of our materials in managing gut-related diseases.
It's a very hot area both on the human side as well as the animal side. And we continue to do research, which has led to some good advances. And we will continue to
do that. And then, the other arm of that, I guess, if you will, is improving our distribution and reach to the market, so that we can take advantage of our R&D.
And we have seen some real progress, some real nice results out of our R&D efforts, and they are starting to move into the market.
Robert Smith - Center for Performance Investing - Analyst
Could you give me some idea of the market opportunity size-wise and in animal health in the gut area?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
That's a very open question -- term in there. I guess you would have to try to guess what particular thing you are trying to look at. I believe animal health itself is an
$18 billion market space. Gut-related issues are going to be several billion dollars. How we can participate in that will be dependent on the regulatory environment and
what sort of regulatory claims we can gain.
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Our intended space really is focused on the maintenance of a healthy gastrointestinal environment, which will lead to high productivity. Historically, those markets are
probably in the $2 billion to $3 billion area.
Robert Smith - Center for Performance Investing - Analyst
And then, what are the steps that you essentially have to take going forward from where you are now?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
I think the main things we are doing are continuing to refine and support our products through research, and then select the markets where we have the best
opportunities, given the modernization and consolidation of the livestock production systems, as well as the regulatory environment that allows us to take advantage of
the performance of our products.
Largely, those are outside of the US with Latin America, Southeast Asia, North Asia, China certainly, North Africa, those areas where you are seeing the development
of the agricultural industry, particularly the animal protein business as the population growth increases in its individual wellbeing or financial earnings increase, you see
an increased consumption of animal protein. S o, those are the areas where we are really focusing.
Robert Smith - Center for Performance Investing - Analyst
Okay, thank you. I'll get back in the queue.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Thanks, Ron. Excellent.
Operator
Your next question comes from Ethan Starr again, individual investor. Please go ahead.
Ethan Starr Private Investor
Yes. What is the market potential for your new MD09 product? And I'm wondering if there are any competitors.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Ron, this is for you again.
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
Okay. Thanks, Ethan.
MD09 is a product which has applications in a number of places, but we are currently pursuing the use of the product in poultry for control of essentially poultry
diarrhea, which is called wet droppings in that segment. This is a very common issue. The size of the market is difficult to say just because of the nature of it. There are
many competitors in the market.
Based on our experience, we have a product that competes very, very well with anything on the market. But again, this is a price sensitive market. So, I think
development in the size are going to be substantial, but I can't give you specifics on it today.
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Ethan Starr Private Investor
Okay. If you can do it for chickens, what can't you do it for humans?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
You could in fact ...
Ethan Starr Private Investor
There is already Kaopectate.
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
Yeah, there is Kaopectate. There is also a direct material that's sold out of the company in France. It has a montmorillonite clay with a grape flavoring that you can mix
in a cup of water and consume for non-specific diarrhea. I know it's sold in China, because I had the occasion to use it.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
And Ethan, next time you get an upset stomach, certainly, we will send you a waiver and a bottle and you will let us know how it works.
Ethan Starr Private Investor
Okay. I'll get back in the queue. Thanks.
Operator
Your next question comes from Robert Smith, Center for Performance Investing.
Robert Smith - Center for Performance Investing - Analyst
Yeah, to Ron again. So, Ron, the Chinese -- our office is going to open. What are your expectations of the next 12 months?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
Our expectations are to get to all of the start-up challenges, learning how to operate in China. Our expectation is that the business will grow substantially over the next
few years. The next 12 months will be in that rollout phase, if you will. So, I think our particularly turns out and ad investment, we will start to increase as we hit
towards the end of next year.
Robert Smith - Center for Performance Investing - Analyst
And just circling back to Ethan's question about MD09, could you give me an idea of the market opportunity and the size of that particular effort in poultry diarrhea,
dropping?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Yeah. I think I can't give you hard dollars, I can give you some, maybe general guidelines that it's in the several hundred million dollar market as far as things that are
used out there today, but there are many, many competitors.
We just believe our product has a unique capability, and we are going to find out for sure how much return we can get on it.
Robert Smith - Center for Performance Investing - Analyst
Well, what do you think the uniqueness is?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
The uniqueness is that you will part the performance of the product, and part the fact that it's a very natural, 100% safe product whereby, when we have done field
studies with the product, we can see improvements in the animal's fecal consistency within 24 to 48 hours.
This is something that producers, of course, like, and it's a differential that we believe is at least on the forefront of the products for efficacy in this area.
Robert Smith - Center for Performance Investing - Analyst
What is the computation offer? You offered 24 to 48, where are they?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
I'd say they are going to be something a little more protracted than that. But our job is not to define what they do; our job is to define what we can do.
Robert Smith - Center for Performance Investing - Analyst
So, you are telling me -- are you telling me that if you had 10% penetration, you will be seeking a $20 million, $30 million in volume just from that one product?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
No. I am not going to make any projections on size.
Robert Smith - Center for Performance Investing - Analyst
No, no.
Well, you said that particular area was around a couple of hundred million dollar market. So, I am just thinking, 10% of that maybe speaking of $20 million, $30
million. Is that -- am I wrong?
Ron Cravens - Oil-Dri Corporation of America - President - Amlan International
Dan, can you comment ...
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Yeah. We are not giving any forward guidance. You are allowed to do ...
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Robert Smith - Center for Performance Investing - Analyst
No. I am not looking to ...
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
That's fine. You just render our models. And so, we are not answering. So, you can keep asking, but we are not going to answer.
Robert Smith - Center for Performance Investing - Analyst
No, no. It's an inaccurate statement a couple of hundred million dollars or several million dollars, hundred million dollars. And that's accurate. So I can do my own
10%. Is that correct?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
I believe it's fair that you can make your own assessments of what that may be to try to define precisely these markets which have no real tracking. You are just making
guesses. And you are competing against everything from antibiotics to soluble fibers.
Robert Smith - Center for Performance Investing - Analyst
Okay, thanks a lot. I won't belabor that. I'll get back in the queue.
Operator
Your next question comes from Ethan Starr, individual investor. Please go ahead.
Ethan Starr Private Investor
Let's talk about Cat's Pride Fresh & Light a little bit. Sales went up quite a bit. It sounds like it's doing well. And how much of the sales is new distribution versus you
know, more repeat business. And what's this marketing spend you will be doing in the second half of the year, can you tell us a little more about that, please?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Yeah. And I am going to talk generally because what we reported in the news release with an increase of 60%, which is absolutely accurate. But IRI doesn't put its
periods exactly with the beginning and end of our quarter. So if you can't line the two up, so I am going to spouting numbers that aren't necessarily going to line up,
even the dates don't line up.
And they are not capturing 100% of the market. When we report a 60% increase, that's on shipments from us, our -- shipments (inaudible) from us.
So, its apples and oranges, but it should directionally give you what you need to know.
So we are very excited that in the most recent IRI period, okay, for what's known as all of MDRs, which is mass, drug and grocery, okay? So, it really captures probably
65% to 70%.
You are missing, as I have said in the past, the club stores, pet specialty like Petco and Pet Smart, Pet Supplies Plus. But you are capturing a big enough sample size and
it will, directionally, will give you a real good indication of how well it's doing, and what you are trying to get at, which is velocity.
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
So, our distribution in that area went up 5%, but our sales were up 36%. So, you get an idea that the velocity is growing significantly. I mean we have had products, and
obviously many consumer companies have had products that are the opposite is happening, what you suffer from is churn, we keep putting on new real estate, but its
two steps up and three steps back.
And so, your distribution will go up 30%-40% and your sales will only go up 10% and 20%, and so you are actually seeing a decline in velocity off the shelves at a
time.
So, we are seeing a major uptick in velocity. So, that again validates what I said on earlier teleconferences, which is this product, as far as we know, and as far as we
can see from IRI, has achieved the best repeat purchase rate of any product in the category at each milestone, a certain amount of time after launch.
And it's because the product is the best product. It truly is. It's a fantastic calendar, everyone I gave it to raved, I get all sorts of positive feedback, obviously I can't give
it to enough people to move the needle, but, you know, the IRI data speaks for itself.
So, given that, you know, we have always told you and you are a major investor that we run this thing for the long haul. We don't run it for short-term or anything, and
if we see a winner, we're going to go after it. We see a major winner here. We see the category is starting to shift and I don't know if you've ever read Malcolm
Gladwell's tipping point and we're not at the tipping point yet.
But we are moving the needle, where lightweight litter is no longer just us out there alone. I am sure you have seen Nestle has launched one. Our information tells us
[Freshcat] is about the launch one. Major retailers now are very interested in having conversations around lightweight private label.
So it's becoming the real segments of the category, and we have the best products in that segment. We believe it will be the category. As you know, we pattern this after
the liquid detergent launch. And if you go to the liquid detergent aisle now and try and find the old format which was highly dilutive, and in the big jugs everything is in
a concentrated format now. When it was launched, it was a segment of the category, but it was such an important consumer benefit, i.e. they could get the same number
of loads and take home less ...
Ethan Starr Private Investor
Yeah, I know all this, Dan.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Okay, good. It's important. You're not the only one that's on the call, Ethan. If this is boring you, I will stop, so I'll stop.
Ethan Starr Private Investor
Well, we there is only limited time of the call, that's the issue. If you want to have an hour to talk about how it is like detergent, go ahead, but we don't have an hour.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Okay.
Ethan Starr Private Investor
Okay?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
So, I've answered the question.
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Ethan Starr Private Investor
Thank you. Quickly if I can squeeze one more in, what's up with Calibrin versus Varium, when is Varium coming out?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Varium is going to be moving into the market towards the second half of this year depending on the registrations. As you know, we operate in a highly regulated
environment. And we have to wait until we get approvals.
Varium will be an extension of the overall product line, the whole portfolio, all of these products find utility in the area of managing health of the gastrointestinal threat.
Ethan Starr Private Investor
Okay. Is that calendar year or fiscal year, second half?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
Second half of the calendar year.
Ethan Starr Private Investor
Okay. I'll go back in the queue. Thank you.
Operator
Your next question comes from the line of Robert Smith, Center for Performance Investing. Please go ahead.
Robert Smith - Center for Performance Investing - Analyst
Yeah, hi. Dan, you know I'm a long-term investor. But in the looking-forward section of your release, there is a paragraph that's a little akin to Alan Greenspan's you
know, Federal Reserve speak, where you say the impact on earnings in the second half, but seeing that you're very optimistic going forward in the second half, it will be
a busy and exciting period.
What are you telling us? Are you telling us that essentially the numbers are going to be affected in a certain way, but still the developments away from the numbers are
what's busy and exciting or are the busy and exciting development from the second half going to be a positive to the bottom-line as well?
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
I guess it's the combination of the two.
I think that the purpose of that paragraph was really out of respect to our long-term holders. And so, but you didn't just take the first six months double them or say
okay, they're up this much at the milestone, we'll assume they are going to be up that much in the back half of the year and come out with your own projections.
We don't really -- we're not going to give you any kind of guidance, you are going to have to run your own models. But we can see enough that when, you know, you
factor in the items that we put out there, the incremental spending, the natural gas, and tax rates returning more to their normal historic levels, what we're telling is, don't
you take the mid-year number and double it and put some number on it. That's what we're telling you.
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MARCH 12, 2014 / 03:00PM GMT, ODC - Oil-Dri Corporation of America Q2 2014 Earnings Conference
Call
Robert Smith - Center for Performance Investing - Analyst
Okay, thank you.
Daniel Jaffee - Oil-Dri Corporation of America - President, CEO
All right, good.
Well, Tracey, I think we're out of time, and so let's close the Q&A line. And I just want to thank you guys. I would encourage you other investors who are on the call, if
you have questions to ask then, because Robert and Ethan are doing a great job of following the company. And they're very gracious to ask question after question. But
that's why we end in 30 minutes, because it really -- nobody else seems to ask a question. And so as long as that's the case, we're going to keep it to 30 minutes.
If we have multiple questioners and we can't get to everyone's question within the 30 minute time period, we will absolutely look forward or consider extending the
time.
But as long as it just seems to be the same two people asking question over question; we're going to stick to our 30 minutes.
So, thank you. We appreciate your participation and your loyal support. And we will talk to you again in 90 days-ish. Thanks a lot.
Operator
Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. And have a good day. Thank you.
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