Oil-Dri Corp of America (ODC) Q3 2018 Earnings Conference Call Transcript

Oil-Dri Corp of America (ODC 1.74%)
Q3 2018 Earnings Conference Call
Jun. 11, 2018 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Oil-Dri Corporation of America third-quarter 2018 earnings conference call. [Operator instructions] I would now like to introduce your host for today's conference, Mr. Dan Jaffee, president and CEO. You may begin.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

All right. Thank you, and welcome, everybody, to our third-quarter and nine-month Oil-Dri teleconference. With me in the Chicago conference room is Dan Smith, our CFO; Laura Scheland, our general counsel; Reagan Culbertson, our investor relations manager; and Mike McPherson, our chief development officer; and as always we're going to turn it over to Dan for a review of the results and then we'll open it up to Q&A. Oh, I forgot about the safe harbor.

They're all pointing at Reagan, I didn't know what she had on her face, obviously nothing. Reagan, let's do the safe harbor.

Reagan Culbertson -- Investor Relations Manager

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 ask that you review and consider those factors in evaluating the company's comments and evaluating any investment in Oil-Dri's stock.

Thank you.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Thank you. Apologize for missing the safe harbor. I figure most of our callers are loyal members and they know that nothing [Inaudible] this call [Inaudible] anything that's going to happen in the future. I'm just kidding, but that's basically what the safe harbor says in a nutshell. Let's turn it over to Dan Smith.

Daniel T. Smith -- Chief Financial Officer

Let's do that. Good morning, everyone. Oil-Dri reported sales of $64.8 million in the third quarter of fiscal '18, which was about the same as the third quarter of fiscal '17. Year to date we generated a little over $200 million of sales for the first nine months of fiscal '18, which was a 2% -- which was 2% better than same period in fiscal '17.

Net sales were up for our B2B segment, but down for the retail/wholesale segment. Earnings and diluted earnings per share both improved from the third quarter of fiscal '17. During the second-quarter teleconference, we discussed the approximate $5 million negative tax and deferred-tax asset adjustments which resulted from the federal tax rate change in the 2017 Tax Cut and Jobs Act enacted in December of 2017. In the third quarter, the company made a business decision to contribute an incremental $11.5 million to the company's pension plan before we filed our 7/31/17 income tax returns.

This contribution is deductible at the old 35% federal tax rate and allowed us to recapture over $1 million of the negative rate impact recorded in the second quarter. On a year-to-date basis, the tax expense adjustment has effectively reduced diluted net income per share by about $0.54, which was better than the $0.69 we discussed in the second-quarter teleconference. The incremental contribution also reduced the company's pension expense and federal PBGC pension insurance premium for the quarter, and we believe for years to come in the future. Our gross margin percentage for the quarter was 27.4%, which was almost identical to the third quarter of fiscal '17.

Year to date our gross margin is 28.1%, which was down from the 29.3% for the first nine months of fiscal '17. We've experienced higher freight, manufacturing, and packaging costs in fiscal '18 than in fiscal '17. Sales for the retail/wholesale team were down approximately 1% for the quarter. Sales for the first nine months are down less than a 0.5% compared to fiscal '17.

Increased sales of private-label lightweight cat litters partially offset reduced sales of our branded cat litter. Increased branded cat litter sales in the e-commerce area have partially offset the loss of the brick-and-mortar customer. Profit for the segment was up about 47% for the quarter and 17% year to date as compared to the same period in fiscal '17. Reduced advertising spending in the quarter and first nine months drove the improved profit for the segment.

The lower spending was partially offset by increased costs in freight and packaging. We expect advertising spending to be down for the full year in fiscal '18 versus the full year of fiscal '17. Sales in the B2B area continue to be better than comparable periods in fiscal '17. Our operating profit was down for the quarter due to the increased costs for freight and packaging.

On a year-to-date basis, the segment's 6% increase offset the increased costs and allowed the unit to report about $1.2 million more in operating profit as compared to fiscal '17. There were several significant changes to our balance sheet during the quarter. Like other companies, Oil-Dri took advantage of the old federal tax rate and made an incremental tax-deductible pension contribution in the quarter. This payment reduced expense, as I previously discussed, and it reduced our cash and investment balances, along with our long-term pension vulnerability.

We used about $6 million of our line of credit to facilitate the payment and anticipate paying off those short-term borrowings in the fourth quarter. Next, I will turn the meeting back over to Dan Jaffee.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Thank you, Dan. At this time, Schuyler [ph] I'd like to open it up to Q&A. We would like to encourage everyone to ask their most important question first and then go to the back of the line just to make sure everybody has time to get in at least one question.

Questions and Answers:

Operator

[Operator instructions] And our first question comes from Ethan Starr, who is a private investor. Your line is open.

Ethan Starr -- Private Investor

Good morning.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Hi, Ethan.

Ethan Starr -- Private Investor

How is the Litter for Good marketing program going? Are you pleased with the return on investment thus far?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Very, very pleased with the return on investment and very pleased with the traction. I have some sort of high-level metrics that I'd be happy to share. Before Litter for Good, this is really before January 1, we were putting on about two Cat's Pride Club members a day. And just to remind people who aren't as close to the company as you are, what Litter for Good is, is consumers can join the Cat's Pride Club for free, nominate any of their preferred shelter, could to be a local shelter, could be any shelter that they want to nominate to receive free litter.

And then every time we sell a green jug of Cat's Pride Fresh & Light, we donate a pound to a nominated shelter based on the pro rata nominations that they got. And so that's how the program works. So clearly a leading indicator is are we gaining Cat's Pride Club members. So for years, two, three years data that I'm looking at, we would put on one to two a day and that's it.

I mean, it's just really -- there wasn't a lot of activity with Cat's Pride Club members. We've been averaging since January for 65 new club members a day. So [Inaudible] twofold increase in the activity on that. Additionally, those members have made over 9,000 nominations for shelters to receive litter.

We now have 2,200 shelters in our database and of those, the shelters that need to register to receive free litter and basically -- about a third of them have registered. So we've got almost 700 shelters that have registered. And so what that's driven so far is 1.5 million pounds in litter donations and our top shelter actually, this donation period had over 800 nominations. So we sold, sent truckloads to the numerous shelters throughout the country, hitting both coasts and pretty much everything in between.

So the program is going very, very well, but it's a ground war. It's going to be a slug, slug, slug. We believe there are almost 13,000 shelters, independent shelters, in the U.S. So the fact that we've 2,000 is great, but we really just scratched the surface of where this thing can go.

Does that answer your question?

Ethan Starr -- Private Investor

Partly. The example you gave is an example of top shelter [Inaudible] nominations, are you seeing increased sales in the area around that shelter at retail?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Well, yes and no. I think what you asked for was, are we happy with the return on investment, so if you look at like, let's say, the retail and wholesale segment, you can see the operating income for the quarter was up 47%, yet sales were relatively flat. So that kind of tells you that the way that happened was we're spending less on advertising, yet we're getting the sales. So the efficiency or the return has exploded.

I mean, our cost per unit sold, in terms of marketing in the past was, a technical term, ginormous, when we were running lots of national TV and having to deep-discount our products to get them to move and to get displayed and so forth. This program is allowing us to get equal to or greater movement at a much-reduced price, cost, to Oil-Dri, so obviously a higher return on investment.

Ethan Starr -- Private Investor

OK. Glad to know that. I'll get back in the queue.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

OK. Thank you.

Operator

[Operator instructions] Our next question comes from John Blair with Ascend Wealth. Your line is now open.

John Blair -- Ascend Wealth -- Analyst

Thank you, and good morning.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Hi, John.

John Blair -- Ascend Wealth -- Analyst

In your news release, you indicated that sales for fluid purification for jet fuel, refining jet fuel, was up nicely. And I'm wondering if, you have a application or potential for increased sales due to a pending bunker fuel, reduced-sulfur content in bunker fuel used for the maritime industry that's going to come into play in 2020. And my understanding is it's pretty tight market on the diesel side. Any application there that could be beneficial to Oil-Dri?

Daniel T. Smith -- Chief Financial Officer

None that we know of. Where clay minerals are used in the refining industry are two applications. One is something called BTX that our clays don't work in. The other one is to refine kerosene.

That refining process to turn kerosene into jet fuel is where some refineries have some clay treatment that's used and we're seeing our increased sales in that application.

John Blair -- Ascend Wealth -- Analyst

Have you investigated or, I mean, is the clay material just not applicable to the low-sulfur diesel refining processes? Is that kind of a totally different area then?

Daniel T. Smith -- Chief Financial Officer

Yes, totally different, correct.

John Blair -- Ascend Wealth -- Analyst

OK.

Daniel T. Smith -- Chief Financial Officer

The type of processes these oil refineries have in place doesn't utilize clay or any other type of filtration media to achieve their finished product.

John Blair -- Ascend Wealth -- Analyst

Yes.

Daniel T. Smith -- Chief Financial Officer

We have looked at it conceptually, but no.

John Blair -- Ascend Wealth -- Analyst

Yes. OK. I've got other questions. I'll get back in the queue.

Thank you.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

All right. Thank you, John.

Operator

And we have a follow-up question from Ethan Starr. Your line is now open.

Ethan Starr -- Private Investor

Yes. I'm wondering to what extent are the higher trucking costs eating into profits?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Well, I mean, short run, clearly they are going to be a major reason behind our 81 price increases that we will be taking and it will all be around freight inbound on materials that we're buying and outbound on materials that we're shipping, but it's a nationwide pandemic. So we're not the only one experiencing it -- all of our competitors are as well.

Ethan Starr -- Private Investor

OK. But it is eating -- sounds like, so what, several hundred thousand dollars for the last quarter or two or hard to know?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Ethan, in the 10-Q we identified freight costs were up about 15% per ton.

Ethan Starr -- Private Investor

Yes. I noticed that.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Yes.

Ethan Starr -- Private Investor

So --

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

It's a good bit of money.

Ethan Starr -- Private Investor

OK. Well, I guess, I'll look forward to the 81-price-increase. And I'll get back in the queue. Thank you.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

OK. Thanks.

Operator

[Operator instructions] We have a follow-up question from John Blair. Your line is now open.

John Blair -- Ascend Wealth -- Analyst

Thank you. Just wondering with all the trade chatter and so forth that's been going on here this year, are you seeing any kind of impact with your activities in China with relation to potential customers? Are they holding back or are you seeing any impact of that with your China operations?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

No, we're not. The good advantage that we have being American and selling our products in China, the Chinese companies that make animal feed and make produce chicken and slime meat, [ph] love U.S products. They have a high degree of confidence in the integrity by which we make our products, label our products, don't adulterer our products. So we continue to see very strong demand and preference for U.S goods coming out of China for the livestock sector.

John Blair -- Ascend Wealth -- Analyst

OK. That -- well, that's encouraging and hopefully none of the products get snarled up in this mess, but I've got another follow-up question, so I will get back in the queue.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

John, you can ask your follow-up.

John Blair -- Ascend Wealth -- Analyst

OK. Real simply, I've noticed or read that there's a couple of new pet-themed ETFs and mutual funds. And I'm wondering if that's, you've garnered some interest, noticed that the trading volumes picked up a little bit here in the last few weeks, [Inaudible] maybe last month wondering if you're getting more inquiries or more exposure within the financial community as a result of these announced new investment products?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Yes, I mean, on that one, your assessment's good as ours, probably better. We have seen the increased activity, but at the moment we don't know where it's coming from.

John Blair -- Ascend Wealth -- Analyst

OK. Very good. I will get out back in the queue.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Thank you.

John Blair -- Ascend Wealth -- Analyst

Thanks.

Operator

Our next question comes from Robert Smith with Center for Performance. Your line is now open.

Robert Smith -- Center for Performance Investing -- Analyst

Hi. Good morning. I got on the call late, because I have a new iPhone and had some trouble with it. Anyway, so correct me if [Inaudible].

So can you give us some color on the penetration of the China market and what might be accomplished to move things on a little faster, so what are the obstacles there?

Daniel T. Smith -- Chief Financial Officer

First, right now we don't have any type of traditional economic or trade or any other type of barriers. And obviously our whole team there is Chinese and speaks Chinese so we don't have any language or cultural issues. As you might imagine, the size of the companies in China are vastly larger than most any other country. So it's a more complicated sale.

You're dealing usually with a nutritionist, a veterinarian, the head of production, oftentimes the head of the feed mill, as well as ownership -- usually one or two family members -- and you have to get in there and manage a very complicated decision-making process to approve. Really to test and evaluate very rigorously and then approve the new feed additive to go into their operations is not an easy task. So it's a longer more complicated sale, but when it occurs, one sale lands you a pretty significant amount of volume. So we're just -- our team is committed to continuing the process to get our products approved with the various entities in China and so far there's been no barriers, except time.

Robert Smith -- Center for Performance Investing -- Analyst

Are you able to take the results from a satisfied customer too and publicize that or use it as a segue to gaining a new customer?

Daniel T. Smith -- Chief Financial Officer

Typically not. Most producers in the industry will not share the results of their performance because they don't want to be used in the marketing efforts of the various companies that they used to buy different feed additives from, because that would be -- it would run rampant if they allowed that to happen. So all you'll get on a perfect day will be them telling you, "We've run your product over a series of two, three, four, sometimes five different increasing levels of usage and product looks good. We're buying it." And that's what's you're hearing.

"Well, could you tell us, did it help feed conversion? Did it help growth? Did it cut mortality?" "It had benefits that we thought were good for our operation, and we'd like to move forward," and you're left really not 100% sure what it did. You just know it did something to justify the cost.

Robert Smith -- Center for Performance Investing -- Analyst

And --

Daniel T. Smith -- Chief Financial Officer

Well, everywhere, not just in China.

Robert Smith -- Center for Performance Investing -- Analyst

Could you give me an idea as to what are the other promising markets, international markets?

Daniel T. Smith -- Chief Financial Officer

The broader Asia, in general, we're doing well in. We're having a record year in sales in the Middle East and we're doing great in Latin America, in particular, in Brazil and Mexico. We see nothing, but opportunity in the markets that we're competing in.

Robert Smith -- Center for Performance Investing -- Analyst

Thank you.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

OK. Thank you.

Operator

And we have a follow-up question from Ethan Starr. Your line is now open.

Ethan Starr -- Private Investor

Yes. I'm wondering if you picked up any more private-label lightweight customers recently and also what the private-label lightweight situation is in Canada, because you've said in the past that Canada is much more private-label penetration, like 40% versus 20% here. Just wondering how that's going?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Yes. Yes, we continue to grow our private-label lightweight business. We have a major retailer that's going to be coming online this month, starting shipping. I mean, it takes, as you know, six months to get the packaging and everything right, so it's finally going to hit the shelves, so you should be able to find that at some point in your retail search.

But let me give you some data. And there's two ways to look at share and historically we've always sort of just defaulted into what the accounts sort of default into, which is dollars. But when you're selling private-label or you're selling popularly priced, otherwise known as cheaper, brands, then units can be an interesting perspective as well. I'm not going to say a better perspective, but as we all know the retailers understand the concept of market basket, where they know a shopper doesn't just come in and buy one thing and then cross the street and go buy a bunch of other things someplace else.

They tend to bring the purchase with them. So if they buy a jug of our product, that's going to be part of maybe a $100 to $150 purchase. So having a higher unit share is relevant to the retailer. They get it.

They want to see that a lot of their shoppers liked your brand even if it's at a lower range and so your dollar share may actually be less than your unit share. So long-winded way of saying I'm now looking at both whenever I look at this stuff, and as you know, when we've historically talked about our share, our branded share's been about 3%, 3.1% is what I'm showing for the 12 weeks. I'm showing 3.3% for the 52 weeks, so it's about the same. Our private-label share is about the same in dollars, 3.7, 3.6, so our total share of the cat litter sold, not counting what we do for the co-pack side, meaning, so private-label and brand, is 6.7% in dollars-ish.

And then if you look at the units, though, all of a sudden it jumps pretty significantly. So our unit share is 13%, of which our branded is about 4.4 and our private-label is now up to 8.7. So we're supplying 13% of the units in the category. That's significant and it's interesting.

So that's how I look at it now. So just to show you our branded -- sorry, our private-label lightweight for the 12-week period ended a year ago, we had a 66 share of the private-label lightweight scoopable sold in the U.S in this snapshot, which is grocery and mass merch, which tends to be about two-thirds of the category. So again, you can't get your arms around the whole thing, but this is the best snapshot we got. Fifty-six percent a year ago, it's up to 70% now for the 12-week period this year and the 52 weeks are about the same, 64 and 70.

So, you can see it's growing and it will continue to grow as we continue to roll out new retail. So our private-label lightweight scoopable offerings are doing very well in the marketplace.

Ethan Starr -- Private Investor

OK. This new customer you mentioned, would that customer be material in size?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

When you say material, I think there's an SEC definition of materiality where we have to disclose our top-five customers or something. No, they won't be one of the top-five customers of Oil-Dri. Will they be material in the stance that they're a major player that will have a beneficial financial impact on our retail and wholesale segment results? The answer is yes. [Inaudible] material in the SEC standard.

Ethan Starr -- Private Investor

OK, great. And how about for Canada, any -- are you -- how is private-label lightweight doing there?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Slow, but we still are -- we believe in it, but again we're in discussions where, it's nothing imminent in Canada. But no "nos" either, just no "yeses" and we are working on packaging and we can give you a certain month when it's all going to start happening. We're still in the discussion phase with Canada. So the way we look at our sales target list, green is they've approved it and we have a date.

Red is they've rejected it, and they want no part of it, and yellow is we're discussions but it's neither green nor red. Canada is really yellow at the moment, with really all major players in the U.S being green and/or, the reds we've discussed in the past with two outliers that are sticking with their current format. It's not moving for them. It's sold at a much higher price point because they're buying from someone who is not basic in lightweight minerals, [ph] so they're basically 3 miles at the trough and we just have to wait.

Ethan Starr -- Private Investor

OK, great. Thank you.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Thank you.

Operator

And we have a follow-up from Robert Smith. Your line is now open.

Robert Smith -- Center for Performance Investing -- Analyst

Hi. So with respect to advertising and promotion, can you give us some -- [Inaudible] about the dynamics of the category as far as dollars go and the movements in one direction or another?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

I'm assuming you missed my comments on the Litter for Good?

Robert Smith -- Center for Performance Investing -- Analyst

Yes. Well, I heard the tail end of that.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Yes, so I would say, let's, go back, listen to the transcript -- read the transcript or listen to it because we covered it pretty well, but our return on investment is going -- is absolutely playing in the right direction to the point where we're able to achieve equal to-ish, slightly up sales at a dramatically reduced advertising cost, and so you can see that the segment income, we don't report just consumer, but the retail and wholesale segment income, was up very strongly. I want to say, 47%, yes, it is 47% in the third quarter.

Robert Smith -- Center for Performance Investing -- Analyst

So you're going to be moving toward social media and away from TV and things like that?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Social and our Litter for Good, which is socially driven, but it's more of a ground-level guerilla war.

Robert Smith -- Center for Performance Investing -- Analyst

And then at least to reduce the overall spending?

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Either reduced overall, or if we end of up spending the same, a dramatically increase in sales. So per unit, a reduced cost, yes.

Robert Smith -- Center for Performance Investing -- Analyst

Got it. Thanks.

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Might have time for one more question.

Operator

[Operator instructions] At this time, I'm showing no further questions.

[Operator signoff]

Duration: 28 minutes

Call Participants:

Daniel S. Jaffee -- Chairman, President, and Chief Executive Officer

Reagan Culbertson -- Investor Relations Manager

Daniel T. Smith -- Chief Financial Officer

Ethan Starr -- Private Investor

John Blair -- Ascend Wealth -- Analyst

Robert Smith -- Center for Performance Investing -- Analyst

More ODC analysis

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