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Edited Transcript of ODC earnings conference call or presentation 10-Jun-19 3:00pm GMT

Q3 2019 Oil-Dri Corporation of America Earnings Call

CHICAGO Jul 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Oil-Dri Corporation of America earnings conference call or presentation Monday, June 10, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel S. Jaffee

Oil-Dri Corporation of America - Chairman, CEO & President

* Leslie A. Garber

Oil-Dri Corporation of America - IR Manager

* Michael Andrew McPherson

Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B

* Susan Marie Kreh

Oil-Dri Corporation of America - CFO

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Conference Call Participants

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* John H. Bair

Ascend Wealth Advisors, LLC - President

* Robert Smith

* Ethan Starr

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America Q3 2019 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to turn the conference over to Mr. Dan Jaffee, President and Chief Executive Officer. Sir, you may begin.

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [2]

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All right, thank you, and welcome everyone to our third quarter and 9 months teleconference. With me in the conference room here in Chicago, Mike McPherson, our Chief Development Officer; Susan Kreh, CFO; Tony Parker, Assistant General Counsel; and Leslie Garber, who heads up our Investor Relations, and you're going to walk us through the safe harbor.

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Leslie A. Garber, Oil-Dri Corporation of America - IR Manager [3]

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Thank you, Dan. Welcome everyone. On today's call, comments may contain forward-looking statements regarding the company's performance in future periods. Actual results on those periods may materially differ. In our press release and our SEC filings, we highlight a number of important risk factors, trends and uncertainties that may affect our future performance. We ask that you review and consider those factors in evaluating the company's comments and in evaluating any investment in Oil-Dri stock. Thank you for joining us.

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [4]

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Great. Thanks, Leslie. And as always, I'm going to turn it over to Susan to walk us through the details of the quarter, and then I'll add any color to her play-by-play.

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Susan Marie Kreh, Oil-Dri Corporation of America - CFO [5]

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Perfect. And I'm pleased to be able to share our third quarter results. We experienced some momentum during the quarter, with sales strengthening at a time when some of the year-over-year cost increases we have been experiencing are finally beginning to subside.

We reported sales of $70.9 million for the third quarter of fiscal '19, which was a 9% increase over the third quarter of fiscal '18. Sales in our Retail and Wholesale Products Group were up 12% in the quarter driven by a very strong 15% year-over-year growth in cat litter. In the quarter, we experienced strong demand for our Cat's Pride Scoopable branded litter, and we continued to experience strong demand in our lightweight private label products.

During the third quarter, our unit share of the overall cat litter segment continued to grow, finding the 15.3% from 13.3% in the same quarter of last year.

Our Business to Business Products Group grew 5% over the same quarter of last year, reversing the trend in the previous 2 quarters where sales have been below prior year levels. We experienced 13% growth in Fluid Purification products primarily in our North and Latin American markets, where sales to edible oil producers were impacted favorably by the characteristics of recent crops. We also saw strength in sales of our engineered granules in our Agricultural sector. Conversely, sales in our Animal Health business continued to be below last year's levels as our Amlan business in Asia continues to experience decreases driven by the widespread impact of the African Swine Flu. As a reminder, last quarter, we said that while we don't expect an immediate turnaround in the swine industry in Asia, we do project some recovery in our Amlan business as we continue to work with our customers on trials and adoption of products and other geographies as well as other channels such as for poultry.

Year-to-date, we reported sales of $206.9 million for fiscal '19, which was 3% above the same period in the prior year. Again, our Retail and Wholesale Products Group reported sales that were up 7% over the prior year driven by strong performance in cat litter. Our Business to Business Products Group reported year-to-date sales that were down 2% as the third quarter year-over-year growth in the segment was not enough to offset year-over-year decreases that we experienced in the first 2 quarters of the year.

Our third quarter net income attributable to Oil-Dri was $5.6 million compared to $3.6 million in the third quarter a year ago. For purposes of comparability, I will point out that during the third quarter of fiscal '18, we incurred a onetime tax benefit of $1.1 million that resulted from making a $12 million tax deductible contribution to fund our pension plan. In fiscal '19, we also had a favorable onetime item in the form of a confidential legal settlement that was booked in other income in our financial statement.

Our third quarter diluted earnings per share were $0.74 per share compared to $0.48 per diluted share in the third quarter of fiscal '18. During our third quarter, gross profit margin was 23.7%, up sequentially from 22% in the second quarter of this year as sales strengthened and as we started to see some easing in freight and natural gas costs. This compares to a 28.5% gross profit margin in the same quarter last year. The gross margin percent was adversely impacted on a year-over-year basis by increased freight, manufacturing and packaging costs. As we stated in our investor call last quarter, in an effort to partially offset some of these increased costs, we increased the prices of cat litter effective May 1, and we expect to begin seeing the benefit of that price increase during our fiscal fourth quarter.

Now let's talk a bit about our operating segment. First, Retail & Wholesale. As I mentioned earlier, sales for the Retail & Wholesale team were up 12% in the quarter and were up 7% for the first 9 months of fiscal '19 as compared to fiscal '18. Profit for the segment in the third quarter was up $1.9 million over the same quarter in the prior year. The third quarter of fiscal '19 was impacted by advertising being down $2 million in the quarter compared to the third quarter of last year as we experienced the benefit of our Litter for Good program allowing us to lower advertising levels where we continue to capture share.

Now let's take a look at our B2B segment.

Profit for the quarter was down compared to the same quarter last year despite the stronger sales due to the higher cost impacts of manufacturing, freight, natural gas and packaging. Income for the first 9 months was down for the B2B segment as compared to the same period in fiscal '18 based both on lower sales and the increased costs that I just mentioned.

And to round out our discussion, I'll make a few brief comments on the progress we're making on reducing our trade working capital.

During the first 9 months of fiscal 2019, our trade working capital was impacted by our ERP implementation as we went live on our new system at the start of our fiscal year on August 1. Cash was used during fiscal '19 to fund a build on inventory receivables where we learned to leverage the new capabilities as well as work out the kinks in our ERP system.

Inventory increased $4.2 million from the beginning of the fiscal year primarily in finished goods and packaging. Some of this inventory increases is the impact of the increased cost discussed earlier, and some has been driven by the build of incremental safety stock resulting from launching our new ERP platform. During the third quarter, we made progress in reducing our inventory levels as inventory dropped $1.4 million from the second quarter of fiscal '19. This occurred primarily in finished goods as safety stock moved towards more normal levels.

We've also seen an increase in fiscal '19 in receivables of $2.3 million from the beginning of the year. This is primarily driven by stronger sales in the month of April compared to July of 2018. During the third quarter, our receivables improved by $2.4 million over the second quarter of fiscal '19 as we worked through the backlog of aged receivables and other invoicing-related issues resulting from our ERP implementation that we discussed with you previously in our second quarter investor call.

So with those few highlights and that brief summary, Dan, I'll turn it back over to you.

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [6]

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All right, thank you. And really, you covered everything very well there. What I want to highlight is the $70.9 million was the first time we have ever broken $70 million in the quarter from the record, not only for a third quarter, but for any quarter in the history of Oil-Dri, so that was fun.

Let's open up the line. And as always, ask your most important question first, and then go to the end of the queue that will allow everybody the opportunity to ask at least one question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of John Bair with Ascend Wealth Advisors.

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John H. Bair, Ascend Wealth Advisors, LLC - President [2]

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Got a question for you with regards to operations with this swine flu issue. What are you all doing to kind of lay the groundwork for recovery over there when that situation kind of gets under control and the swine market starts to try to reestablish the breeding or whatever it is? What are you all doing to try to get ready for that?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [3]

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I'm going to let Mike McPherson to handle it, but I have some comments as well.

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Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [4]

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Yes. Coincidental to the spread of the African Swine Flu, the business already was focusing more heavily on the promotion of Varium and Calibrin-Z for the swine market -- I'm sorry, for the poultry market. That was an area that historically due to the overabundance of swine in China, the China team initially focused on penetrating the market when we entered there and maybe was overly reliant on swine to fuel the growth, and thus to the extent on poultry. But Flemming Mahs, who's taken over as President of Amlan since August has redirected the lot of the effort more towards poultry, the layers, breeders and broilers, so we have a lot of active trials that are going on now, and that's the most turn into sales that'll help to offset the continued spread of the swine flu.

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [5]

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Yes. I mean we had a comment that, that's exactly the right move. I mean people -- just because swine production is down 40% or 50%, it doesn't mean people have cut down their caloric intake in China by 40% or 50%. They're still eating, they're just switching to other meats. And we need to participate in all meats and then we win either way. So that's our strategy.

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Operator [6]

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And our next question will come from the line of Robert Smith with Center For Performance.

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Robert Smith, [7]

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Could you give us some ideas to your ability to implement price increases sufficient to offset the increased cost?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [8]

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Yes. The good news is that we did take increases [8 1]. Then the cost went up. We jumped in. Got some extra rounds of increases. And then actually, freight rates are starting to come down a bit. So I think Susan mentioned the sequential increase in margins. I look at it per ton more than percentages, but both of them were moving in the right direction from the second quarter to the third quarter. I think you'll continue to see that into the fourth quarter, and then you'll continue to see it into fiscal '20. So yes, I think -- we're in good shape from that standpoint.

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Operator [9]

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(Operator Instructions) Our next question will come from Ethan Starr, private investor.

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Ethan Starr, [10]

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Oil-Dri's last 2 press releases both included the phrase growth strategies. And could you please discuss Oil-Dri's growth strategies? And if such strategies include acquisitions, what are your key criteria in considering an acquisition?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [11]

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Sure. So our growth strategy was, first of all, to get the foundation strong. You don't want -- using a house analogy, you don't want to build a new house on a weak foundation. And that came with the multi-multimillion dollar investment in our ERP system.

Second part of the growth strategy was making sure we had the right people in place in order to leverage the infrastructure that we've invested in, and you've seen a lot of new names and faces at the highest level of the company: Susan and Molly who's our new Chief Operating Officer; we promoted [Jessica Moskowitz] to take over our consumer products division; and promoted Laura Scheland to be our General Counsel. So we had some good changes at the top of the company. And then Mike, you got promoted. You were -- I don't know remember what your old title was, but Chief Development Officer. And then what happens when you do that is those people then raise the bar with the people reporting to them. And so that's all happened. And so you've got the old and experienced are sort of -- you have them skipping their step, myself included. And then you've got the new folks who are bringing world-class skills into the company.

And then finally, you got to have 2 other things in order to grow. One is you got to have the financial firepower to get it done without almost no long-term debt. I think we're just down to $3 million of current maturities of long-term debt. So we're down to almost nothing on the debt side. So we have a highly under-leveraged balance sheet. And as we announced, we have a untapped revolver of $45 million. So that's the first part of the equation, do you have gunpowder? And then the second part of it is, do you have something to shoot? And the answer is, yes. I mean I'm not going to get into too much specifics because I think that would just -- again, yelling to the other side what play you're going to run doesn't tend to lead to more yardage in football, and we're not going to do it here either. So just suffice it to say, the infrastructure's there. The team is in place. We've got firepower, and we're going to start hitting the accelerator.

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Operator [12]

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And we have a follow-up question coming from the line of John Bair with Ascend Wealth Advisors.

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John H. Bair, Ascend Wealth Advisors, LLC - President [13]

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Quick follow-up on that, on my previous question, and that is I know you do these trial studies and so forth. When might you see some positive results on that where it might actually turn from the trial studies to actual revenues sales, that kind of thing?

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Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [14]

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We should start to see growth from that in the fourth quarter.

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John H. Bair, Ascend Wealth Advisors, LLC - President [15]

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Okay, very good. And a follow-up here on that, the other one if possible. Cat litter sales increased. Is that due to new merchants being added to the mix? Or just the overall increase in demand from existing customers?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [16]

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All of the above. I mean our velocities of existing talent is increasing dramatically, as you guys know, because we announced it. We lost our third or fourth largest account a year ago. We lapped them in this quarter, which was colder. But we're still year-to-date up 7% losing our third or fourth largest account which kind of tells you how much we would have been up had we not lost it. And again, we didn't lose it for real. I mean we didn't lose them through the lack of performance. Our products were moving in the top third of their product line. It was for whatever strategic reasons that we didn't understand. But having said that, so our existing account business is doing very well. And then we have put on new business certainly with the private label lightweight, and also been putting on some course traditional business. So it's all of the above on that. So we are proud of the results of what's going on in the grocery division. And as Susan mentioned, we're now up to almost a 16-unit share in the category. Certainly, if you add in the product that we make for Clorox, we're well over that. And so we're probably in 1 out of every shop -- 1 out of every 5 shopping carts in America, there's an Oil-Dri product in there. And so we clearly have critical mass in this category.

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Operator [17]

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And we have follow-up questions coming from the line of Robert Smith with Center for Performane.

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Robert Smith, [18]

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Could you give some color on the R&D effort, where it's focused at the moment?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [19]

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I mean again, I don't like to get too specific as this is just going to tip the competition where we're going. I would just say we're continuing to spend at the equal to or greater rates of what we've done historically, and we continue to be very bullish about where that spending is going. So I don't think I'm going to get into any specifics.

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Robert Smith, [20]

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Okay. And how about advertising expense in the fourth quarter?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [21]

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In the fourth quarter? I don't know if we give forward guidance like that. I mean historically, Susan made a great point, I just want to give you a little trend because I think it's very important. Our sales are up 7% year-to-date, 12% in the quarter, despite losing Kroger in -- for half of this year. We lost them for half of last year and half of this year. And yet our total advertising is down significantly, and that is the power of Litter for Good. That's the whole grassroots program where we have engaged over a 1,000 shelters coast-to-coast to actively solicit their donor base to not only join the Cat's Pride Club, but to then to go out and buy and tell all their friends to buy the green jug because every time they do, we donate a pound of litter to shelters. So if you look back at all, our total advertising back in half '16 was $17 million. Year-to-date, it's at $5 million. So we've been able to dramatically cut national TV advertising and yet deliver increased sales. That means profit per working dollar spent is going up in the consumer division.

So we don't believe we can outspend the big boys, and we don't believe we should. And so we have to be a little more nimble and a little smarter. And so far, it's working.

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Operator [22]

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And our next question will come from the line of Ethan Starr, private investor.

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Ethan Starr, [23]

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Yes. Did the settlement received in the patent litigation exceed Oil-Dri's total expenses in litigation?

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Susan Marie Kreh, Oil-Dri Corporation of America - CFO [24]

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Yes, it did.

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Ethan Starr, [25]

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Okay. That's good to know. And also you mentioned in the Q, there was mention of several new private label customers added. Do you still have more room to grow in private label with new customers?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [26]

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Certainly, with new customer -- and we have a large share, and so the biggest growth is going to come as we continue to execute getting price parity, and even in some cases now, because freight costs coming out of the northwest in rail has hit the sodium bentonite industry pretty hard. So we're actually seeing some accounts where the lightweight is now priced under the heavy. And the more that can continue to happen, the more product we're going to sell. So I'd say increased velocity with existing accounts is a bigger opportunity than new accounts. But both will play a role.

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Ethan Starr, [27]

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Okay. And then one more quick question. How do [Metal X] and [Provita] differ from your current products? And when do you expect them to generate revenue?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [28]

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Since I've never heard of either one of them, I can't answer that question. Do you have any -- are these like trademarks running around. I wouldn't answer this. These are about trademarks in the

(inaudible).

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Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [29]

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Yes, both are new experimental products that are going to be field-tested in the fourth quarter.

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Operator [30]

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We have a follow-up question coming from the line of Robert Smith from Center for Performance.

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Robert Smith, [31]

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Mike, could give us an idea of the opportunity of poultry versus swine in the Amlan market?

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Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [32]

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Well, globally, they're both extremely large markets. And even though -- even in China and all of Asia, it's a very large market, which we don't have a very large share. So there's a great opportunity, our products work well in poultry equally that they do in swine. It's just giving the team to focus on it.

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [33]

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And this huge article in the New York Times this weekend regarding the continued global shift away from antibiotics in the food chain to get out of the human food chain so that we don't end up having resistance to them when we need them, and so the trend lines are in the right direction, the question's what's the best way to get to market, and we're continuing to look at them.

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Robert Smith, [34]

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So while this is all going on, you have these tests going on. Is that correct? I mean...

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Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [35]

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Correct.

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Robert Smith, [36]

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The test mark with potential customers.

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Michael Andrew McPherson, Oil-Dri Corporation of America - Chief Development Officer & Group VP of B2B [37]

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Yes. The poultry market is much slower to test and validate a new product only because the margins are razor-thin. So they tend to go upwards of a year, sometimes longer, to evaluate a new product to make sure that it actually works. But ultimately, I think these poultry producers will see that the products do work, and we expected the result in sales. A lot of our growth has been in poultry. It hasn't been 100% swine since we launched Amlan. It just was, let's say, overly focused on swine in the beginning in China and probably most of Asia.

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Operator [38]

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And we have follow-up questions coming from Ethan Starr, private investor.

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Ethan Starr, [39]

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Yes. Susan touched on this in her comments, but receivables and inventory are still higher than I'd like. And I'm hoping that we'll continue to see those numbers decrease and cash increase soon. And I guess it goes in tandem with the ERP system being installed a longer period of time as well.

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Susan Marie Kreh, Oil-Dri Corporation of America - CFO [40]

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Yes. And as I said, we just -- when we talked last quarter, I told you that we anticipated seeing some improvement over the third quarter, and we did. We aren't at what I would call the new normal yet. I think there's still some more opportunity, particularly on the inventory side. I think we've still got some safety stock built into the system that as people get more comfortable, you'll be able to see us drive it down.

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Ethan Starr, [41]

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Okay. How about DSO? Will that drop as well?

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Susan Marie Kreh, Oil-Dri Corporation of America - CFO [42]

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DSO is back to July 2018 pre-implementation levels today. So the opportunity there is can we get better terms? But really, as we move to business outside the U.S. and other types of customers, we end up with longer term, so we end up with a customer mix. So what I would tell you is DSOs are back to normal, and now, we just have to look for ways to improve it.

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Ethan Starr, [43]

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Okay. Great. And so it sounds like the ERP system is going much better these days.

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Susan Marie Kreh, Oil-Dri Corporation of America - CFO [44]

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It is going much better these days.

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Operator [45]

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We have a follow-up question coming from Robert Smith with Center for Performance.

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Robert Smith, [46]

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I just wanted to circle back to this question of the price increases. Is there an opportunity to get ahead of the cost curve? I mean when you try and implement the price increase, I mean is that a question of -- what is it a question of projections of your own cost going forward? Or how do you look at that?

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [47]

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Yes. No, that's exactly right. And we definitely were under-predicting last August 1 with last August 1 increases. So the increase we took in August 1 did not adequately anticipate the shipping crunch that occurred in what was our fiscal first quarter of August, September and October, and so then we were playing catch-up after that. But it was pretty dynamic, and no one's predicting that again. I didn't predict it last year either, but we are expecting to be ahead of the curve this year.

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Operator [48]

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And I'm showing no further questions. So now, it is my pleasure to hand the conference back over to Mr. Daniel Jaffee, President and Chief Executive Officer, for any closing comments or remarks.

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Daniel S. Jaffee, Oil-Dri Corporation of America - Chairman, CEO & President [49]

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Great. Well, thank you, and thanks, everyone. Great rounds of questions today, and I think you're seeing that we've absorbed the ERP go-live, which I call an oxymoron. It was anything but going live. With going shooting ourselves in both feet. But that's what everyone sort of predicts you're going to get, and we got it. But now the team is actually, I would say, getting to where the system is neutral, to actually helping us. It was hurting us in the first quarter. And we look forward to continuing to benefit from the system. And then that will allow Molly and her team to implement a robust forecasting program where we can actually get out on the front of a lot of things and play offense instead of just reactive defense.

So very bullish about the future. Always never give any kind of forward guidance. But in general, we're very excited about both the short, mid, and long-term future of Oil-Dri. So thank you for your loyal support, and we'll be back at you after the fourth quarter.

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Operator [50]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.