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Oil-Dri Corp of America (NYSE:ODC)
Q4 2018 Earnings Conference Call
Oct. 15, 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 Q4 2018 Oil-Dri Corporation of America earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Dan Jaffee, president and CEO.

Sir, you may begin.

Dan Jaffee -- President and Chief Executive Officer

All right. Thank you. Welcome, everyone, to the fourth-quarter and fiscal year 2018 Oil-Dri investor teleconference. With me today participating will be Laura Scheland, our general counsel; Dan Smith, CFO; Mike McPherson, CDO; Mark Lewry, COO; and Reagan Culbertson, our director of investor relations.

And Reagan if you would walk us through the safe harbor, I would appreciate no problem.

Reagan Culbertson -- Director of Investor Relations

No problem. Good morning. On today's call comments may contain forward-looking statements regarding the company's performance and 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 in evaluating any investment in Oil-Dri stock. Thank you for joining us.

Dan Jaffee -- President and Chief Executive Officer

All right. Thank you, Reagan. And as always, I'd like to turn it over to Dan Smith to walk us through the quarter and year-end and then we'll obviously open it up to Q&A.

Dan Smith -- Chief Financial Officer

Thank you, Dan. Good morning, everyone. Oil-Dri reported earnings per share of $1.11 per diluted share for fiscal 2018, this value was down from $1.47 reporting fiscal '17. The decline was driven by a one-time tax expense increase of about $0.54 per diluted share in fiscal '18.

Without this adjustment, Oil-Dri would have reported 12% increase in EPS as compared to fiscal '17. Sales for fiscal '18 were up about 1% from last year. We reported sales of approximately $266 million, which was slightly below our a record year fiscal '14. The B2B team reported sales growth of about 5% as compared to fiscal '17.

The retail wholesale group sales were down about 1% compared to fiscal '17. Our gross margin percentage and for fiscal '18 was 27.1%, which was lower than the 28.1% we reported in fiscal '17. We experience higher freight packaging and non-fuel manufacturing costs in fiscal '18. Freight costs were up about 12% compared to fiscal '17.

The new federal regulations and an industrywide driver shortage both impacted our freight expense for the year. Drilling fuel costs were relatively flat in the fiscal '17. Our retail wholesale team reported about $7 million profit with fiscal '18, this value was about 3% improvements in fiscal '17. Sales for the segment were down slightly from fiscal '17.

Lower-branded cat litter sales were mostly offset by increased private-label lightweight cat litter sales. Increases in cost of goods sold adversely impacted gross margins for the segment. The decrease in gross margin was offset by over $3 million decrease in advertising expenses in fiscal '18 versus fiscal '17. Our B2B team was up almost 5% from fiscal '18 -- fiscal '17, sorry, per sales.

Improved sales of ag, fluid purification, and animal health products more than offset the decline in co-packaged cat litter sales. Ag led the sales increase for this segment with a 13% improvement. Thanks to the large part -- to the addition of a new customer in the traditional ag chemical carrier market. Profit for B2B also increased from fiscal '17.

Profit was up about 5% increased sales and improved product mix help overcome the higher cost of goods sold. There were several significant changes to our balance sheet during the year where I took advantage of the old federal tax rate and made an incremental $11.5 million tax-deductible pension contribution in the third quarter of fiscal '18. This payment was the primary driver of the $12.8 million decrease in cash and investments. The payment, along with the increased interest rates, lowered our pension liability by over $13 million.

We continue to invest in our fixed assets. Our capital expenditures exceeded our depreciation and amortization by over $2 million, or about 18%. Thanks. I'll turn the meeting back over to Dan Jaffee.

Dan Jaffee -- President and Chief Executive Officer

Thank you, Dan. And I guess before we open it up to Q&A I just want to take head-on something we put out in the news release because we don't often give any kind of forward guidance. Certainly, we try and avoid quarterly, and if we get into anything it's on an annual basis, but obviously we've had a significant hurdle to overcome. We went live on our new information system, it's something we call ODIN, the Oil-Dri Information Network.

And I guess the best way to analogize this is if you're going from one system that a company enterprise resource planning system to another. It's really not as disruptive an organization as when you're going from no-system to a system. And yes, we've had a system in the past, but it was really for financial accounting and analytic performance. It wasn't for manufacturing, for forecasting, for replenishment, all the various aspects of order fulfillment.

And so this really was groundbreaking for Oil-Dri and a major change from how we went to business. So we were not only having to implement a new system, we're having to implement processes where processes didn't exist. I'm happy to say I've been down to the plants and the team is, really was energizing me. They were very positive, they're embracing it, they're barcoding and wanding, and doing all sorts of neat stuff, which is going to give us real-time information in the long term and enable us to better serve our customers.

But short term it's painful. In the past that if a network went down or a wand went down there wasn't really a problem they weren't using the network or a wand in order to fill orders. Now they are. And so they're embracing the new technology.

It's who they are. It's what they're used to with their cellphones and everything else. But it's just that departure for what -- how Oil-Dri went to business for 77 years. And so we have given guidance that we are going to be impacting all sorts of our business in the short run, just because it is painful to get everything up out the door, invoiced, received, close the whole deal.

We are 100% confident that the numbers will be scrubbed and cleaned by the time we have to report our first-quarter earnings after the close of October 31. But we're sort of preparing ourselves and all of our investors that, you know, that first quarter is not going to be real comparable to the first quarter of the year ago. First quarter a year ago, we weren't implementing in the system and having to go through all these gyrations, this time we are. And so while we're very confident in the long-term growth prospects of all of our businesses I've felt, and the whole team did, that we needed to give you guys the same transparency and visibility into the short-term results, so that you know you can prepare yourselves for that for the first quarter of closing.

I can't really monetize it yet. We're still, we're still closing our books and getting our arms around the numbers. But I can tell you, we're shipping, we're billing, we're invoicing and hopefully this all will not amount to a lot but we all felt it was material enough to disclose it and give you some sort of a heads up on it even if it wasn't a very specific heads up. So at this point, I'd like to open it up to Q&A, I'll answer questions on this -- the team's here -- or anything else, but this is short term.

And for those of you who've been long-term holders of Oil-Dri know we are more than willing to make painful short-term bets in order to reap the benefits over the long haul and that sort of tortoise mentality has served this very well for the past 15 to 20 years. So let's open it up to Q&A, and as always, ask the most important question first and then we can go to the end of the queue and let everybody ask a question.

Operator

Thank you. [Operator instructions] Our first question comes from private investor Ethan Starr. Your line is now open.

Ethan Starr -- Private Investor

Good morning.

Dan Jaffee -- President and Chief Executive Officer

Good morning.

Ethan Starr -- Private Investor

What are the prospects for lightweight private-label litter in fiscal '19, both in terms of new and increased customers or distribution and also better velocity off the shelf?

Dan Jaffee -- President and Chief Executive Officer

Great question. And as always I want to be general enough to answer your question but not so specific -- or I guess specific enough to answer your question but general enough not to tip off the competition as to what plays we're running. So we are at the end of the fiscal year -- so in the fourth quarter we rolled out a new and improved version of lightweight litter with a major retailer, who has -- and you can figure it out who yourself -- but they have over 10,000 stores in the U.S. and when they initially launched it, we were involved in it but the pricing and the size was messed up, and we worked together to get the pricing and the size right.

We partnered up, we helped contribute to that but they relaunched it in a size that's exactly the same as their heavy. So they carry a heavy 10-pounder at $3.95 and in the same size jug they carry a lightweight 5-pounder at $3.95 and lo and behold the velocity has exploded. So we are doing very, very well with that account and it's really giving me confidence to -- that our line-pricing strategy is working and so we've gone to line pricing with all of our major partners and those who have implemented it have seen a 3-, and 4-, and 5x velocity increase over what they were moving. And as starting to see their velocity, you know, get to what their shouting distance of the heavies, and in some cases, actually equal the heavies, which is giving those retailers confidence to decrease or maybe get out of their heavies altogether.

Because at the end of the day, women 25 to 54 are the primary purchaser of cat litter and all things being equal, performance, price, they preferred less weight, not more, makes sense. But when things aren't equal, i.e., price is too high or the performance isn't there, they are willing to carry home more weight. So what we're doing is taking all the objections out of the equation. The product is fantastic.

Outperforms, every bit as well as the heavies, and then get the price point on a par with the heavies. And now, they have to decide do I want a great litter at $3.95 that weighs10 pounds or a great cat litter at $3.9, that weighs 5 pounds, and they're voting every day that they'd much rather carry home less weight, and in the larger size that means even more. So if their choice is 20 to 10 or 40 to 20, they're voting loudly for the lightweight. So we're very bullish, we're going to continue to roll out new retailers and continue to align price and adjust retails with existing retailers.

So I don't want to get into too many specifics but I will tell you that we are very bullish on the future prospects of lightweight private-label in the U.S. and Canada.

Ethan Starr -- Private Investor

OK. So there's still more new customers to have and you don't have lightweight private-label at all coming on this year?

Dan Jaffee -- President and Chief Executive Officer

Correct. And we'll have another major one rolling out. I think we start to fill their distribution channel in November so it won't really help the first quarter but -- and then it'll hit their shelves in early December and once it's public and out there I'll be able to give you more details around that.

Ethan Starr -- Private Investor

OK, great. What's the major TV brand integration? It's Litter for Good?

Dan Jaffee -- President and Chief Executive Officer

Yeah. So, well I guess, I mean, if you've been out on the web, it's public information out there.

Ethan Starr -- Private Investor

I've looked but couldn't find it.

Dan Jaffee -- President and Chief Executive Officer

Aha.

Ethan Starr -- Private Investor

Not yet.

Dan Jaffee -- President and Chief Executive Officer

OK. Well, OK. It is public and so I guess I'll challenge all of our investors to go out to ellentube, www.ellentube.com and play treasure hunt and see if you can figure out what week this is for Ellen and who's sponsoring it. And there's my teaser and my homework for you, guys but -- but it's been a major deal because as everyone knows, it's public information, again, Ellen reaches about 18 to 20 million viewers every week, every day actually, and it's primarily women 25 to 54, which fits perfectly with our demographic.

And so we are -- I'm going to leave it at that.

Ethan Starr -- Private Investor

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

Dan Jaffee -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Robert Smith with the Centers for Performance. Your line is now open.

Robert Smith -- Center for Performance Investing -- Analyst

All right. All right. So, yeah, I don't want this to count as a question but, Dan, when you reference the enterprise resource planning system when you issue the first-quarter numbers are you going to break out the cost of that at that time?

Dan Jaffee -- President and Chief Executive Officer

Dan Smith?

Robert Smith -- Center for Performance Investing -- Analyst

Yeah.

Dan Jaffee -- President and Chief Executive Officer

Dan Smith, I'll let you answer that.

Dan Smith -- Chief Financial Officer

Yeah. Robert, the cost of the system has mostly been incurred --

Robert Smith -- Center for Performance Investing -- Analyst

No, no, no. You've misunderstood the question.

Dan Smith -- Chief Financial Officer

OK.

Robert Smith -- Center for Performance Investing -- Analyst

When you -- when you issue the first-quarter earnings report, are you going to break out the incremental cost that is -- that it cost you in that quarter, so we can have our arms around what the number is?

Dan Smith -- Chief Financial Officer

Robert, I'm going to have to defer that question because I'm not sure if we were able to capture that specifically based on our reporting. But I understand your question. And let me ponder a bit more, but I'm not --

Robert Smith -- Center for Performance Investing -- Analyst

OK.

Dan Smith -- Chief Financial Officer

So I'm not sure we're able to grab that information as specifically as you may like it.

Robert Smith -- Center for Performance Investing -- Analyst

OK. And then just the, another housekeeping question. Not to count as my question -- were you at all affected with the hurricane?

Dan Jaffee -- President and Chief Executive Officer

Mark Lewry?

Mark Lewry -- Chief Operating Officer

Yes. Yeah, this is Mark Lewry, good morning. Yes, we were. Our Georgia plant, which is a significant part of our overall production footprint, was affected last week.

We were down for three days. We are back up and running, started back up late Friday and running, so we had a short-term impact. Actually, it was probably as minimal an impact as we could have expected or hoped for.

Robert Smith -- Center for Performance Investing -- Analyst

And the infrastructure is there as well?

Mark Lewry -- Chief Operating Officer

Yeah. There was no damage to the plant there was a little tin that was blown off, but no. No, no significant damage to the plant. We were able to get back up and running fairly quickly.

Robert Smith -- Center for Performance Investing -- Analyst

And transportation is OK?

Mark Lewry -- Chief Operating Officer

Yes. Transportation is --

Robert Smith -- Center for Performance Investing -- Analyst

OK. So my question, Dan, is what is Peregreen [ph]?

Dan Jaffee -- President and Chief Executive Officer

That's your seventh question and you've run out of time, I apologize for that. You got to get back in the end of the queue. Seriously Peregreen [ph] is the -- is not -- it's not material anymore. It's an old, old --

Robert Smith -- Center for Performance Investing -- Analyst

OK. It's the first time I saw it mentioned.

Dan Jaffee -- President and Chief Executive Officer

Yeah. It's an old trademark that my dad launched in the 60's. Anyway, it's an ag product.

Robert Smith -- Center for Performance Investing -- Analyst

OK. So I'll get back in the queue.

Dan Jaffee -- President and Chief Executive Officer

OK. Yes. And, boy, for not asking questions, you asked a lot of questions.

Operator

Thank you. Our next question comes from John Blair with Ascend Wealth Advisors. Your line is now open.

John Blair -- Ascend Wealth Advisors -- Analyst

Thank you. That was pretty sweet, Bob, nice job there. Hey, there's been quite a bit of issue with swine disease and so forth over in China, here regionally. I was wondering if that's had any positive impact on your work over there in China.

As far as new interest and as a side on that to any in this tariff tiff going on, is that having any impact on your -- on your operations there? Thanks.

Dan Jaffee -- President and Chief Executive Officer

Great question. Mike, will you please --

Mike McPherson -- Chief Development Officer

Yeah. This is Mike McPherson, I can answer those. On the tariff fronts, no, there's been a minimal couple percent impact on the duty and U.S. products in general are still viewed very favorably by Chinese livestock producers.

It's not enough of an impact to really affect our business. On the disease front, there's a range of different type of illnesses in swine from respiratory to bacteria. We continue to get strong interest from producers when they have bacterial-related diseases and swine, which is kind of a persistent ongoing problem. But when they have flare ups in respiratory diseases those tend to be viral, and our products don't work and viruses they were bacteria.

John Blair -- Ascend Wealth Advisors -- Analyst

OK. Are you working on anything in the respiratory front?

Mike McPherson -- Chief Development Officer

No, we're not.

John Blair -- Ascend Wealth Advisors -- Analyst

OK. Great. I have other questions, I'll get back in the queue. Thank you.

Dan Jaffee -- President and Chief Executive Officer

All right. Thank you, John.

Operator

Thank you. Our next question comes from John Barr with Needham and Company. Your line is now open.

John Barr -- Needham & Company -- Analyst

Hey, Dan, I was wondering in this quarter you made reference in the private-label growth, you gave us the number but you also mentioned e-commerce as one of the elements there that contributed. Maybe you could just give us your point of view on that market and how Oil-Dri and lightweight beat?

Dan Jaffee -- President and Chief Executive Officer

Great question and thank you, and thanks for asking a question. So yeah, e-commerce is very important to retailing in general, but really, really important to a challenger brands because in the past the power that a P&G, or a Unilever, or a Nestle Purina would have that was very hard for a challenger brand to overcome was they controlled the shelves. And it's a physical constraint. If the retailer is going to carry 40 SKUs and they have 30 of them, there's not a whole lot of room to challenge even if you get your product out there and they give you one little facing and in a category like ours, where the holding power is only three jugs, you go out of stock instantly and it doesn't get replenished till the next Monday or Sunday night, and so you really don't have a chance to grow your brands.

On e-commerce those physical constraints are gone. We have the same presence on Amazon, or chewy.com, or walmart.com as do the big boys. And so what we're seeing is a greater than our historic brick-and-mortar share at these retailers and that they're really seeing they can rapidly grow their business by partnering with us, so we're not only getting branded business. We do have private label business with one of the major -- really the biggest in pet e-commerce player.

And then we're in discussions with the other guys about doing private label for them as well. So we -- we see -- what works for us. We're agnostic in general, which is whoever wants to buy cat litter or wherever they want to buy it. We want them to have a chance to get Cat's Pride.

What we're saying is we have the best chance of getting to them through e-commerce than we do with brick and mortar. So we're still very committed to our brick-and-mortar partners. And frankly, what we've done is a study and those brick-and-mortar partners who have dedicated more than the typical share to Cat's Pride and Cat's Pride-made private-label products are outperforming the category. I can name them.

First of all, Walmart gives us a greater than -- we have a three branded share and they give us way more than that and they are outperforming, with Cat's Pride scoopable being one of their best-moving items. Meyer in the Midwest, Publix in the south, the Moulis in the Northeast, Albertsons, Safeway, these retailers have all gotten behind and partnered with us and they are outperforming the category. So they know that by giving the consumer more access to unique value-added products at great prices they can actually gain share and gain customers, and ultimately that grows their whole store because of the whole market-basket concept that people buy litter are also buying food and other items. So love e-commerce, love those retailers, they are really willing to partner with us.

Oh, sorry, ATB in Texas, in the South, has partnered with us and it's going very well. So, you know, other national players, I mean, look, that's just public. You go into a Kroger, you're hard pressed to find any of our products anywhere. And from what we can see on the national syndicated data, they're underperforming the category.

So that's strategy from our vantage point isn't working. I hope I answered your question. But I really appreciate you asking your question.

John Barr -- Needham & Company -- Analyst

Good. Thanks, Dan.

Operator

Thank you. And our next question comes from Jim Schwartz with Harvey Partners. Your line is now open.

Jim Schwartz -- Harvey Partners -- Investor

Hey, Dan. So one of the -- just comparing the 10-K of '18 to 10-K of '17. Yeah. Just following up.

I guess, John asked you about one of the additions was direct customers through e-commerce in the retail and wholesale-products group. And I guess, you know, without naming names maybe kind of size up the opportunity there and you know -- you know if you want to name names even better. Then I have one follow up to that. Thanks.

Dan Jaffee -- President and Chief Executive Officer

Yeah. I don't think I'll name names, but I think we all believe -- well, I can't say we all. I believe that if e-commerce is going to continue to grow. I do not believe it's plateaued peaked or is working its way down.

To me people and especially the millennials are going to want to be doing more and more convenient shopping where they may integrate brick and mortar with that e-commerce and that can be something, you know, that continues to give people like Wamart and Target and people with a with a brick-and-mortar footprint a leg up in the e-commerce world, which would sort of speak to why Amazon went ahead and bought whole foods. But having said that, I just believe in general that trajectory is going to continue to grow. So we need to be wherever people are buying cat litter and e-commerce, definitely a high growth aspect so we want to be there with our brands and we want to be there with our private labels and we do believe that our share in e-commerce is greater than our share in brick and mortar. So as e-commerce continues to win, Oil-Dri will win disproportionately.

Jim Schwartz -- Harvey Partners -- Investor

OK. And just follow up for that. You've added a microbiology lab this fiscal year for animal health. Maybe just kind of talk about what, why, and what it's working on and -- and just --

Dan Jaffee -- President and Chief Executive Officer

Yup. Great question. Great question. It's the Richard M.

Jappy microbiology lab. And I'm going to let Mike McPherson handle this one.

Mike McPherson -- Chief Development Officer

We work on a range of different microbiology projects. Actually, when you look across most of our divisions, if you take a look at cat litter, for example, if we want to make our litters more anti-microbial you have to have a foundation in microbiology. We were farming out a tremendous amount of work, which we don't do in-house but the heavy lifting is actually within our ag division and with that our animal health division. On the ag side, increasingly, there is a growth in microorganisms to grow.I'm sorry, to protect against different pests, whether it's weeds or insects.

So the old chemistry with the synthetic molecules that would be used for pest control. Increasingly, people are going to natural microorganisms. Sometimes those are spray applied. But increasingly they're put on the granules and you need to be able to demonstrate the ability for these microorganisms to live on our granules.

You need the basic in microbiology and then all of our new products that are focused on bacterial related enteric diseases and livestock are all about how to kill or control microorganisms in the gut. Again, you have to be basic in microbiology and we just found that we were farming out way too much that work, took too much time slowed down our development effort. So by hiring the microbe biologists to building the lab, we were able to move much faster and much smarter in our product development efforts.

Jim Schwartz -- Harvey Partners -- Investor

Great. Thank you.

Dan Jaffee -- President and Chief Executive Officer

Yeah. And Jim what I might add, you know, Mike touched on it there and what sold me on the investment was speed the market and obviously, return on investment. It was costing us time and money to farm all this stuff out. We're now keeping that knowledge in-house.

Dongping and [Inaudible] are doing a phenomenal job out there. In fact, it's grown so fast they've outgrown their space.So we're going to be looking at doubling or tripling the size of our microbiology lab this coming fiscal year. And ultimately, the goal is to turn it into a profit center where we've got enough capacity to then farm out our services to customers where they -- we can do work for them at a price. And so we're -- we're -- we're all in on this.

We believe this is going to be another competitive advantage for Oil-Dri.

Jim Schwartz -- Harvey Partners -- Investor

Great.

Dan Jaffee -- President and Chief Executive Officer

Great. Well, this time I'd like to just thank everybody for your support. We've got the annual meeting coming up. I've been strongly encouraged to include a president's letter this year and I will do so.

I've been working on it and I'm glad I have because of so much good -- so many good things have gone on this year with one, overwhelmingly glaringly negative, and that was the passing of my father, and so I'm using this president's letter as a way to recognize the incredible contribution he made but focus on the future and talk about all the things that he's going to miss. But you know what, his dad missed everything. His dad died when he was only 26 years old and he took over in 1960, his dad died in 1962. So his dad missed the total run-up of Oil-Dri.

I was fortunate enough that I took over in 1995, and he and I worked together for 33 years and he got to see the incredible growth of all the seeds he had planted and then new seeds that we planted in fields he never dreamed of. But I do spend a good portion of the letter talking about all the things that he's going to miss. And I believe he's looking down but he's, the future is very bright for Oil-Dri and so I hope you appreciate the president's letter. And like I said, it's going to be focused not so much on the past but really the future.

So we'll be back at you again in three months and appreciate your continued support and definitely do that little hunt there for our major intergration that's running all week long starting today on network television, but it's actually been posted out on ellentube, so there's your hint. Thanks very much, everybody.

Operator

[Operator signoff]

Duration: 29 minutes

Call Participants:

Dan Jaffee -- President and Chief Executive Officer

Reagan Culbertson -- Director of Investor Relations

Dan Smith -- Chief Financial Officer

Ethan Starr -- Private Investor

Robert Smith -- Center for Performance Investing -- Analyst

Mark Lewry -- Chief Operating Officer

John Blair -- Ascend Wealth Advisors -- Analyst

Mike McPherson -- Chief Development Officer

John Barr -- Needham & Company -- Analyst

Jim Schwartz -- Harvey Partners -- Investor

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