Oil-Dri Corp of America (ODC) Q2 2019 Earnings Conference Call Transcript

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Oil-Dri Corp of America (NYSE: ODC) Q2 2019 Earnings Conference CallMarch 11, 2019 4:30 p.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2019 Oil-Dri Corporation of America earnings conference call. [Operator instructions] I would now like to turn the call over to Dan Jaffee, president and CEO. Sir, please begin.

Dan Jaffee -- President and Chief Executive Officer

All right, Mark. Thank you, and welcome, everyone, to the second-quarter and six-month fiscal 2019 industrial teleconference. With me in the conference room here in Chicago is Mike McPherson, our chief development officer; Susan Kreh, our chief financial officer; Laura Scheland, our general counsel; Leslie Garber, who will be taking over the reins to be our director of investor relations. And last, but not least, and a big round of applause, this is Reagan's last meeting as our director of investor relations.

She got paroled for good behavior. She's been promoted to focus exclusively on marketing. So Reagan, thank you for everything. And please, take us through the safe harbor.

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Reagan Culbertson -- Director of Investor Relations

Thanks, Dan. 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.

Dan Jaffee -- President and Chief Executive Officer

Thank you. And at this time, I'd like to call in Susan to walk us through the quarter and the six months.

Susan Kreh -- Chief Financial Officer

Sure, love to. Today, Oil-Dri reported sales of $69.9 million from second quarter of fiscal '19, which was a 1% increase over the second quarter of fiscal '18. Sales in our retail and wholesale products group were up 5% in quarter, driven by growth in cat litter, where we are experiencing strong demand in our lightweight private label products. Our Business to Business Product Group continue to see weakness in the quarter, with sales down 3% compared to the second quarter of fiscal '18, as performance of our Fluids Purification products were down internationally due to price competition by local suppliers.

We also experienced the continuation of the first-quarter reductions in our Amlan business in Asia, driven by the widespread impact of the African Swine Flu. While we do not expect an immediate turnaround in the swine industry in Asia, we do expect to see some recovery in the back half of the year as we continue to work with our customers on the trials and adoption of products such as Varium for poultries and NeoPrime for piglets to improve feed efficiency around the world. We also reported sales of $136 million for the first six months of the fiscal year, which was flat from the same period last year. Our Retail and Wholesale Product Group reported sales that were up 4% over the prior year, and again, driven by the strong performance in cat litter.

Our Business to Business Products Group reported sales that were down 5% for the first six months, primarily for the same reasons that I talked about in the quarter. Our second-quarter net income attributable to Oil-Dri was $2.3 million, compared to a loss of $1.1 million in the second quarter a year ago. For purposes of comparability, I'll point out that during the second quarter of fiscal '18, we incurred a one-time tax expense of $5.1 million, resulting from the implementation of the 2017 Tax Cut and Jobs Act that was enacted in December of 2017. Our second-quarter diluted earnings per share was $0.30, compared to a loss of $0.15 per diluted share in the second quarter of fiscal '18.

And again, for comparability purposes, the second quarter of fiscal '18 continued the one-time tax charge that equated to $0.69 per share. During the quarter, our gross profit was 22%, which compares to 28.5% in the same quarter last year. This growth margin percent was impacted by a shift in mix from our higher-margin B2B group to our Wholesale and Retail Product Group that we talked about earlier. We've also incurred additional increased costs and those include fuel, freight, the manufacturing cost, packaging cost and customer-compliance fees.

While we anticipated the increased costs in both freight and packaging, we took pricing to the market in August of '18 to help compensate for these incremental costs. The actual costs in these categories had exceeded our estimates. As such, we are increasing price of cat litter, effective May 1. We do expect some cost reduction in the back half of the year related to manufacturing and customer-compliance fees as our new ERP platform becomes more efficient.

Now let's talk about the operating segments. First, Retail and Wholesale. As I mentioned earlier, sales for the Retail and Wholesale team were up 5% in the quarter and were up 4% for the first six months of fiscal '19, compared to fiscal '18. We continue to see strong growth in private label litter items, especially private label lightweight product.

Profit for this segment in the second quarter was up $230,000 over the same quarter in the prior year, after having been down by $2.3 million first quarter year over year. The second quarter was impacted by advertising being down $1.5 million in the quarter compared to the second quarter of fiscal '18. If you look at the B2B segment, profits for the quarter and the first six months were down as compared to the same periods in fiscal '18 on lower sales both in the quarter and year-to-date period. In addition to the lower volumes, B2B profitability has been impacted by increased manufacturing costs.

So now let's take a look at our balance sheet and our cash flow for fiscal '19. During the first half of the year, both were not only impacted by the shift in the mix that we just talked about from B2B to the Retail and Wholesale channels, but also by incremental costs that we mentioned earlier. In addition, our ERP implementation drove inventory and receivables to higher levels. Our inventory increased $5.6 million from the beginning of the fiscal year, primarily in finished goods and packaging.

Some of this inventory build was the impact of the increased costs I mentioned earlier, but some as the result of using our new ERP system capabilities, where we now have moved from a make-to-order system to some make-to-stock planning, where we built some safety stock in order to better serve our customers during the second half of the year. As we become more efficient in using this powerful new platform, I anticipate that we will bring safety stock levels down to more normal level. We also saw an increase in receivables of $4.7 million in the first half of the year. In addition to stronger sales in the month of January, compared to July of last year, which drove receivables up, our days sales outstanding are up four days over that same period.

Challenges in processing invoices in our new ERP have led to a delay in payments from several of our larger customers. Although not included in these reported results, we experienced strong cash collection in the month of February of 2019 as a result of working through the backlog of processing the inventory issues that were generated as we switched systems. And with that, Dan, I'm going to turn it back over to you.

Dan Jaffee -- President and Chief Executive Officer

Great. Thank you, Susan. Appreciate it. And Mark, before we open it up, I just want to remind everyone to please ask your most important question first and then go to the end of the queue just so we make sure everyone has a chance to ask at least one question.

And then if time permits, we'll then bring you back for question number two. So Mark, let's open up the lines.

Questions and Answers:

Operator

Of course. [Operator instructions] Our first question comes from the line of Ethan Starr, a private investor. Your line is now open, sir.

Ethan Starr -- Private Investor

Good afternoon. Before I ask my first question, I just want to thank Reagan for all her help with investor relations over the years, even though she never succeeded in getting you to lengthen the conference calls.

Dan Jaffee -- President and Chief Executive Officer

She tried though.

Ethan Starr -- Private Investor

OK, good. By the way, I really don't want to be in the private-prison industry, mentioned the word parole. OK? Anyway, my first question, Indonesia, you mentioned that I believe last quarter in the presentation, I guess, I understand it's a subsidiary you set up there or you're starting to sell into Indonesia. And I think, Vietnam is also going no -- eliminating antibiotics in feed as well at some point?

Dan Jaffee -- President and Chief Executive Officer

So is there a question?

Ethan Starr -- Private Investor

Yeah. Well, I asked you. Are you starting to sell into Indonesia?

Dan Jaffee -- President and Chief Executive Officer

At this time, no. We're currently discussing the right timing to do that, whether or not it's this fiscal year or next fiscal year.

Ethan Starr -- Private Investor

OK, but you have a subsidiary setup?

Dan Jaffee -- President and Chief Executive Officer

Correct. Yep.

Ethan Starr -- Private Investor

OK, I'll get back in the queue. Thank you.

Dan Jaffee -- President and Chief Executive Officer

Thank you.

Operator

And our next question comes from the line of Robert Smith of Center Performance Investors. Your line is now open.

Robert Smith -- Center Performance Investors -- Analyst

Thank you. Good afternoon. Thanks for taking my question. Yeah, I just want to ask about some color on Amlan and the trialing process.

And since you've altered your approach, how -- what's been happening with the conversion rate of the trials?

Dan Jaffee -- President and Chief Executive Officer

You're talking about the new product like Varium antibiotic alternatives or...

Robert Smith -- Center Performance Investors -- Analyst

Yeah, yeah. Yes, yes. Yeah, sure.

Dan Jaffee -- President and Chief Executive Officer

The conversion rate has been very high. We're seeing continued success in the product for the companies that spend the resources to trial the product. It's more times than not showing a favorable benefit. And not just in performance, but also the ability of producers to eliminate other alternatives to antibiotics that they're using.

Typically, Varium will replace two or three different feed additives that are being used like essentials oils or probiotics. So overall, it's been very successful.

Robert Smith -- Center Performance Investors -- Analyst

How long is the trialing process usually?

Dan Jaffee -- President and Chief Executive Officer

Probably nine months. Yes, very slow. So they do a very methodical process from typically a small trial at a research farm or oftentimes they'll repeat it again at a research farm. Then they'll take it into one or two chicken houses in their production operation and then slowly scale it from there.

Robert Smith -- Center Performance Investors -- Analyst

Right. Thanks. I'll get back in the queue.

Operator

And our next question comes from the line of John Bair of Ascend Wealth Advisors. Your line is now open.

John Bair -- Ascend Wealth Advisors -- Analyst

Thank you. Good afternoon. Having participated in these calls for quite a while, I'd like to -- and I can't resist not saying I appreciate the higher granularity of the information in your earnings release. So my question regards the cost involved with the ERP system and it looks like that's trending down.

Do you anticipate that trend to be ongoing and kind of when do you feel that it's going to be essentially fully operational and the operational cost will kind of wind down on that?

Susan Kreh -- Chief Financial Officer

No, we've still got some opportunity there to enhance the technology, but it will continue to trend down year over year. So in the second half of last year as opposed to the first half, almost everything we spent on it turned to expense as opposed to capital. So now the year-over-year comparisons will look flatter as we move forward in the year. But from a run-rate perspective, we'll probably stay at a run rate near where we are right now at least for the rest of this fiscal year and then look at what other opportunities may be ahead of us, whether we want to enhance the technology or ramp that rate down a little bit.

John Bair -- Ascend Wealth Advisors -- Analyst

OK. Thank you. I'll get back in the queue.

Dan Jaffee -- President and Chief Executive Officer

Thanks.

Operator

All right. And we'll move on to the follow-up questions. Our first follow-up comes from Mr. Ethan Starr.

Your line is now open.

Ethan Starr -- Private Investor

Yes, last quarter, you mentioned a couple of new products in the works that are going to be launched in fiscal '19 -- no, fiscal '20. I'm sorry. And I'm wondering are those tackling issues or diseases for which there are already competing products out there? Or will they have the market to themselves, initially? Are they different -- totally new things that nothing else just to work on?

Dan Jaffee -- President and Chief Executive Officer

They are new products and new approaches to multibillion-dollar diseases that exist in the industry.

Ethan Starr -- Private Investor

So there are already products out there dealing with the diseases or just different -- they have different approaches? They don't have -- you have the approach to yourself?

Dan Jaffee -- President and Chief Executive Officer

Different approaches to battle the same problem.

Ethan Starr -- Private Investor

OK. Thank you. I'll go back in the queue.

Operator

Thank you. And our next question comes from Robert Smith of the Center for Performance Investments. The line is now open, sir.

Robert Smith -- Center Performance Investors -- Analyst

Yeah, so circling back to my first question. You must have a long-term planning function. I'm not sure, whether it's three years or five years, but looking at Amlan, do you foresee something like a hockey stick where these products essentially take off? And is there any kind the way you're planning, your planning function, do you see this in the foreseeable future if you have a three-year or five-year plan?

Dan Jaffee -- President and Chief Executive Officer

That's what we're hoping for. We'll have a much better indication, let's say, in the next six to 12 months. But if the ramp rate of the new products continue, yes, we're seeing a much higher growth rate in our new products than we are in our traditional mycotoxin binders. So that's the expectation right now.

Robert Smith -- Center Performance Investors -- Analyst

And do you have a three-year or five-year plan?

Dan Jaffee -- President and Chief Executive Officer

Yes.

Robert Smith -- Center Performance Investors -- Analyst

Which one? Three or five?

Dan Jaffee -- President and Chief Executive Officer

Five.

Robert Smith -- Center Performance Investors -- Analyst

OK, thanks very much. I'll get back in the queue.

Operator

All right. And we have a follow-up question from John Bair of Ascend Wealth Advisors. Your line is now open.

John Bair -- Ascend Wealth Advisors -- Analyst

Thanks. Thanks again. Kind of a tag-on question with regard to ERP. Just can you elaborate a little bit or clarify a little bit more on the -- this compliance fines aspect of that? It does look like that was lower in the second quarter than the first and, again, is that a trend that you would anticipate to continue or is it something that will go away eventually?

Dan Jaffee -- President and Chief Executive Officer

I'm not sure it will ever go away, because they're sort of -- the bar is set so that you're never going to clear it all the time. But we accrue and have a certain baseline level of it in our pricing as do all consumer-product companies. We went way north of that in the first quarter and then we're able to cut it dramatically into the second quarter. I would say, the trend will continue to improve, but it's not going to go to zero, because that's just not realistic.

But yes, those were above and beyond sort of one-time start-up hiccups.

John Bair -- Ascend Wealth Advisors -- Analyst

OK. Well, forgive me for being ignorant out there, but those were just -- can you kind of define what that involves or what that -- what they involve?

Dan Jaffee -- President and Chief Executive Officer

Sure. Yeah, I mean, different accounts have different rules. But in general, it's all around when the products is going to arrive from the time you say it, the promise date. If it gets there too early, they fine you.

And if it gets there too late, they fine you, because they're trying to manage their distribution centers in sort of a just-in-time way. And if everybody, just all the suppliers just randomly let the trucks show up outside of an agreed-upon window, it would be complete chaos. So we all get it. And ordinarily, you're able to stay within that window a huge percentage of the time, 95%, 96% of the time.

We were nowhere near that during the first quarter, we still weren't there in the second quarter, but we were dramatically better. So it's like, I know once we get more stable, we will see the fines go down, but you're never there 100% of the time. It's just not feasible. Your drivers either get a flat tire or they miss their appointment, they don't show up, they get there too early.

And that's -- they fine you for that, and it's kind of hard to stop that one. So that's where they come from the compliance fines to help them manage their business and they know that there's a cost to them when suppliers don't need those windows and then they pass that cross right back into supply. Does that make sense?

John Bair -- Ascend Wealth Advisors -- Analyst

OK, is that a pretty tight window? I mean, are we talking hours, days, typically? Or does that vary from customer to customer?

Dan Jaffee -- President and Chief Executive Officer

It does vary. But I would say, in general, you're talking about a 24-hour window. Went down from 48.

John Bair -- Ascend Wealth Advisors -- Analyst

OK. Well, that would make sense with the tightness of the driver situation and so forth. OK.

Dan Jaffee -- President and Chief Executive Officer

Yes, and you think of all the thousands of trucks they receive.

John Bair -- Ascend Wealth Advisors -- Analyst

I'm sorry?

Dan Jaffee -- President and Chief Executive Officer

Well, you think about all the thousands of trucks they're receiving, if everybody missed it by three or four or five days, they wouldn't be able to plan their business. So it's a tight-enough window, where it makes sense logically to both parties.

John Bair -- Ascend Wealth Advisors -- Analyst

Right. OK. Great. I'll get back in the queue.

Thanks a lot. That clarifies a lot from my standpoint. Thank you.

Operator

And our next question comes from the line of Ethan Starr. Your line is now open.

Ethan Starr -- Private Investor

Thank you. Private label litter and private label lightweight litter, are more new customers launching soon? Or are you continuing to get new customers. I still see retailers out there without private label lightweight litter. And how is sell-through in the U.S.

and Canada?

Dan Jaffee -- President and Chief Executive Officer

Yeah, I mean, we are still rolling on new business and rolling on new SKUs with existing business. And as we continue to execute our all things being equal strategy, which I've talked about in the past, which is both pricing and performance, we are seeing a dramatic increase in the ramp-up of the velocity. So I'll give, just anecdotally, so a major retailer who we launched with was selling the lightweight at a significant cost premium through the heavy and our quality probably wasn't what it -- it wasn't what it is today, because we keep improving and they were outselling -- the heavy was outselling the light 7:1. Now they're at total parity.

The pricing is at parity, the performance is pretty much at parity. And their velocities are at parity. We're actually going to be testing with that major retailer having them take the lightweight below the heavy and see what it does to the movement. We think, it's going to tilt the scale continuing more in favor of the lightweight.

So we are absolutely seeing it. Can I quote Nielsen numbers? You reminded me not to quote Nielsen numbers, all right. So I looked at some neat stuff. I mean, we mentioned this a little bit in the release, but I got some new news and some new ways to look at it.

I looked at our unit share. So this is everything we supply the retailers that are covered by Nielsen on a unit basis. So not a dollar basis, but again, when you're competing on more of a popular price brand like Cat's Pride premium and at the opening price point at Walmart. So it's a very popularly priced or cheap, two ways to -- call it whichever you want.

And then private label, you're not going to get the same ring as other guys, but you're going to see a lot of unit movement. And a year ago, from the 12-week period that just ended, we're at about 13.9% of the category and now we're 15.8%, so we gained almost two full unit share points in the last 52 weeks on a running-rate basis, a 12-week running-rate basis. So to me, that just continues to validate why Oil-Dri is doing well and is thriving, despite a low dollar branded share. We're in about one out of every six shopping carts that lead retailers nationwide.

We're a very formidable supplier and that number is growing rapidly. So we like to work at units, obviously. It's self-serving, but the retailers know all about market basket. They know that shoppers don't just come and buy units, they actually spend on average depending on the retail $109 to $120 during each shop.

So grabbing that unit brings $120 to the store and they get it. So we're happy about that.

Ethan Starr -- Private Investor

OK, so one unit is one jug?

Dan Jaffee -- President and Chief Executive Officer

It could be one jug, it could be one bag. Whatever is the -- yes, whatever it is that they happen to format their buying unit.

Ethan Starr -- Private Investor

OK. And so 13.9, that's all stores or 15.8, is all stores?

Dan Jaffee -- President and Chief Executive Officer

That was last year and this year, it's 15.7 or 15.8, somewhere around.

Ethan Starr -- Private Investor

OK. And the self -- you're selling more -- you're selling the lightweight private label into Canada and now they sell more of it there, but just, I guess, more people use private label there?

Dan Jaffee -- President and Chief Executive Officer

Well, that's the hope. It's just -- it's been lagging. So private label lightweight is launching in Canada and ultimately, private label represents about 20% of the dollars in the U.S. It represents almost 40% of the dollars in Canada.

So clearly...

Ethan Starr -- Private Investor

Yeah, I know that.

Dan Jaffee -- President and Chief Executive Officer

Yeah, clearly there is a bigger pool right there.

Ethan Starr -- Private Investor

OK. One other quick question. How will the ERP system save you money long term?

Susan Kreh -- Chief Financial Officer

Well, it's not just about saving money. I mean, if you're talking about why would our run rate costs go down, it's because we've got incremental costs in there today to do savings like moving a lot of material around, because I mentioned earlier that we built inventory to support the launch. We've had to lease warehouses and add extra labor and all of that to support the peak time period. But then as we get to more normal levels, we would see some of those costs going back down, again.

Was that the question you were asking?

Ethan Starr -- Private Investor

No, the system itself. Forget the extra -- forget of getting rid of the extra costs to start it. How will the system itself, the software itself, save you money long term?

Susan Kreh -- Chief Financial Officer

Well, software itself is going to give us more capability long term. So I'd say, do more to improve profitability than just save cost. It should help us with insights into pricing, it should help us do better transportation management. There is a lot of capabilities that we didn't have prior to implementing this.

It should help us with our materials requirement planning. So I'd say there's a bundle of things that are not just costs that are really profitability, but it should help us improve.

Dan Jaffee -- President and Chief Executive Officer

And what I would focus more on, we'll see how it all plays out, but it really provides the infrastructure and the foundation upon which we could grow. We are pretty much maxed out on the old system, and it was all Excel spreadsheets, workarounds, because it was not a companywide, real-time database, where everybody had visibility into the same numbers and has one point of truth, and we've heard a lot of these euphemisms for why ERPs get put in. So I would more look at it as infrastructure and once it is in and working for us and we've figured out all the opportunities to enhance the technology, then it really will form the foundation upon which the future growth is possible.

Ethan Starr -- Private Investor

Great. Thank you.

Dan Jaffee -- President and Chief Executive Officer

Thanks.

Operator

And our last question will come from the line of Robert Smith of the Center of Performance Investments.

Robert Smith -- Center Performance Investors -- Analyst

I'm glad I got in some -- about your anticipated price increase in May, is this going to bring you forward ahead of the curve? Are you going to be lagging again? So give me some color on that. In other words, you're making up the cost profile that you didn't anticipate? Or is it going to give you some legal room ahead?

Dan Jaffee -- President and Chief Executive Officer

I mean, I hope so. But it obviously is a moving target. You hope that if costs have stabilized, natural gas, freight, all that kind of stuff, but yeah, that we'll be in good shape. If not, then you got to hope to be in the three-stage rationale, which has been very rational.

All our major competitors have taken price advances as well. And I think everybody were sort of caught behind on this one. So that's the hope. The hope is that, that we've gotten out in front of it, but you're just -- you're chasing a moving target.

Robert Smith -- Center Performance Investors -- Analyst

Thank you.

Dan Jaffee -- President and Chief Executive Officer

Well, thank you, everybody. I appreciate your interest as always, appreciate your support. We'll be back at you in three months, and we will talk to you then. Thank you.

Operator

[Operator signoff]

Duration: 28 minutes

Call Participants:

Dan Jaffee -- President and Chief Executive Officer

Reagan Culbertson -- Director of Investor Relations

Susan Kreh -- Chief Financial Officer

Ethan Starr -- Private Investor

Robert Smith -- Center Performance Investors -- Analyst

John Bair -- Ascend Wealth Advisors -- Analyst

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