Q4 2019 Earnings Call
After the speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press Star then one on your telephone.
Please be advised that today's conference maybe recorded.
If you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your speaker today, Mr., Dan Jaffee, President and CEO , Sir you may begin.
Good. Thank you welcome everybody to the fourth quarter fiscal yearend 2019 teleconference. This is Dan Jaffee I'm, the president and CEO and we're going to introduce everyone. That's where you'll know who you can ask questions on.
Hi, Mike Macpherson under group, Vice President of the B to B area.
Hi, This is just become not Goodwin, Vice President and general manager that consumer products Division.
Lord feeling Vice President General Counsel.
Good morning, it's a feeling crazy CFO .
Hi, This is mallaband into real Chief operating officer.
Hi, I'm likely garber manager of Investor Relations and I will deliver the safe Harbor statement.
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 enter STC filings, we highlight a number of important risk factors trends in uncertainties that may affect our future performance.
I think you review it consider those factors in evaluating the company's comment in in evaluating any investment in oil Dri stuff. Thank you for joining us Dan.
Yes. Thank you mostly in before I turn it over to Susan for some play by play I'm going to put some color.
Fiscal year before it wasn't a credible from school here I mean on August 1st we went live with our new JD Edwards ERP system, and you know from what I've heard the easier transition when you're going from one system to another the hardest transitions or when you go from basically no system to a new system and that's a we ought to do because.
The legacy software. We had was written in the 19 sixties punch cards and was just updated updated updated and was the part of the swing from an ERP system, which is really a financial reporting system.
The plants in the sales provisions for the most part how to work around the system and have their own packages to try and get the information they need to do their jobs. So for the first time, we have an integrated real time system and August 1st we flipped the switch and it was painful and those of you have owned the stock through that period no.
On a California Central corridor, we have just trying to get.
Order shipped and Invoiced and snow and collecting the money. So it was a very dynamic beginning to the year.
Additionally, we made a number of very important.
Senior management organizational changes and I'd like to review them with you because as I've always felt the batsmen oil dri is really an adoption in the people who are coming in every day to try and create value from short of metals and I'll do these in chronological order BAFTA my memory as to when the moves were made but flemming mobs joined.
Since president of Amlan International pretty much August so I know I got that one right and then Susan Cray joined US as Chief Financial Officer Open Dombroski joins us from satellite T. Group Calebs Stevenson joined Us and take over our treasury function I'm only vandenheuvel <unk> joined us as our chief.
Operating models or just a moscowitz was promoted to VP of the consumer products Division and general manager a tough comps he became our vice president of global infrastructure, which then open up manufacturing. So then Aaron purchase and became the VP of manufacturing even made a couple of moves where do you moved appointment.
Merger, David Downs from roughly over to Georgia ought to take the place if I Remember Bureau, who is.
Beyond all their duties within the company. He then George handler was promoted and ready to take David's role so EM.
He was was promoted and Mississippi outside the regional manufacturing manager over all the mid western plants there. So.
A lot a dynamic changes.
As you see in the progression of result.
Pretty much I can say, they're all pretty good but to me they're all for the good I mean, it's hard to declare victory in one year, but I'm proud of every single moved it was made it sure made my life easier as the team is very solid and then we had a lot of people who stayed in their existing roles longtime players wanting each of our divisions.
So it really was a win win a blending of the knew what the old news system, and then implementing ethanol Peter try and take full advantage of that system. So we're very excited you ended on a high no Oh, what I forgot and we actually want to patent litigation case, which was you know an amazing thing ended up itself and that was the combination of about four.
In terms of legal work so.
Validation of our IP upwards, so a lot going on during fiscal 19, a lot of momentum heading into fiscal 20.
As I told the inside team and done as I'm, telling you now I really believe this could be one of the most important years and the company's history, it's gonna be a seminal moments, where we sort of transformed from.
Basically everything running through me because that's just the way the old system demand there just wasn't enough visibility for everyone to do their jobs and make the decisions I needed to make and now you know each of these individual leaders not only has the skill set to do to make their own decisions, but is now empowered to do so.
Actually has the information they need so I'm still very much engaged but I'm able to actually do the job of the CEO not always have to get down into the my newshel detail. So I'm very happy and I'll tell you as an investor and from aboard standpoint.
They compressor me for years to find succession planning and to get myself all the details and for the first time I'm really there so I get to do what I like to do which is create and think about a division and where we're adding 234 or five years out and then the team is doing a great job blocking and tackling and make sure we take care of the day to day <unk>.
The month quarter, a year, so I couldn't be happier with the direction of the company. So I'm not turned over to sums and she'll give you. The the play by play for the fourth quarter in fiscal year, and then as always we'll take your questions.
Thanks, Dan yesterday oil Dri released our fourth quarter and full year earnings oil Dri experience and continued momentum during the fourth quarter with stronger sales and with an easing of the year over year cross pressures that we've been experiencing in the prior quarters.
This morning, I'm pleased to be able to share with you or full year fiscal 2019 results.
Reported full year sales of 277 million, which was a 4% increase over fiscal 2018 sales of 266 million.
Sales in our retail and wholesale products group of 171 million were up 6% for the year driven by a strong 9% year over year growth in cat litter, which continues to grow both in our cat's pride scoopable litter as well as our private label offerings.
For the full year, our business to business products group sales of 106 million ended the year, 1% higher than the prior year after having done below the prior year for the first half of fiscal 2019.
We experienced 4% year over year growth in or you can play in fluids purification products, primarily in 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 our sales on our engineered granules and our agricultural section sector, which grew 2% over the prior year.
Conversely.
Sales in or animal health and nutrition business continued to be below last years level as our amlan business in Asia continues to experience decreases.
And by the wide spread impact of the African swine fever.
As we've said previously well, we don't expect an immediate turned around in the swine industry in Asia, particularly in our key market in China, We do project some recovery in our and when business going forward as we continue to work with our customers on trials in adoption of products.
Other geography, such as Latin and South America, and other channels such as poultry.
For the full year gross profit as a percent of sales dropped to 24% from 27% in the prior year as we've talked about in a prior quarters calls we've experienced significant increases in freight and packaging costs. It's also experienced increases in natural gas and non field manufacture.
Uh huh.
Because of these cost headwinds we raised their prices in may and saw the benefit of this cost recovery on a gross margin during the fourth quarter.
A fiscal 2019 net income attributable to oil Dri was 12.6 million, which compares to 8.2 million for fiscal 2018.
Now for purposes of compare ability I will point out that during fiscal 2018, you put a onetime net tax charge of 4 million.
Okay, but from the implementation of the 2017 tax cuts in jobs Act.
Also in our 2019 fiscal year, we had a onetime item in the form of a confidential legal settlement that we booked in other income.
Our 2019 diluted earnings per share, where dollarssixty seven compared to $1.11 per diluted share in fiscal 2018.
So now, let's talk little bit more about our operating segments.
<unk> retail and wholesale.
Sales for retail and wholesale team up 6% in the quarter and 6% for the full year compared to fiscal 2018.
Segment operating income was 8.7 million for the year up 24% over fiscal 2018.
Now, let's switch gears and talk about our business to business segment.
Sales for the quarter, when 9% tires in the same quarter in the prior year and were up 1% for the full year can as we continued to experience the sequential quarterly improvement year over year.
So as we moved through the year or growth in our our sales in the first quarter were actually down 7% compared to last year.
The second quarter, we were down 3% in the third quarter that turned around and moved up to growth of 5% and in the fourth quarter, we see the growth of 9% year over year. So some really nice strong sequential improvement there.
Segment operating income for fiscal 2019 was 31 1.4 million down 24% compared to fiscal 18.
Due to the higher cost impacts of freight.
Manufacturing costs, excluding fuel natural gas in packaging, we also experienced the unfavorable mix impact that resulted from reduction in sales in our profitable Hamlin business.
So to round out her discussion I'll make a few brief comments on the progress, we're making on reducing or trade working capital.
During fiscal 2019 or trade working capital was impacted by our ERP implementation as we went live as Dan mentioned earlier on our new system at the start of the fiscal year on August 1st.
That was used during the early part of the year to fund the building inventory and receivables, what we learned how to leverage the new capabilities of our ERP as well, while we worked out the kinks associated with going live.
As of July 31st 2019.
Inventory increased 1.6 million from the beginning of the fiscal year, primarily in finished goods and packaging.
Some of this inventory increases the impact of the increased costs, we discussed earlier and some has been driven by the build of incremental safety stock of resulting from launching our ERP.
During the fourth quarter, we made good progress in reducing our inventory levels as inventories drops to and a half million from the third quarter fiscal 19.
This occurred primarily in finished goods safety stock move towards more normal levels.
During the year, we've also seen an increase in receivables of 1.9 million.
This is driven by stronger sales in the fourth quarter, so to put a little color on that fourth quarter sales this year or 70.1 million compared to fourth quarter sales last year 65.6 million.
So this increase has been personally offset by improvements we've achieved in driving down our days sales outstanding given them down by 10.1 days from the peak of 58.8 days just subsequent to launching our ERP.
So with that brief summary, I'm going to turn it back over to you Dan.
Great. Thank you Susan and before opening up the culinary I just want to know I'm I'm on the road here.
We're already Latin American Animal Health conference and it's been fantastic, we've been a lot of great customer meetings, all around our new product offering barium, but that most of them on a couple of lectures and not only are they are talking about a b, which is antibiotic free but now it's moving rapidly toward.
HM which is no antibiotics.
And then they have an 80, plus which is no antibiotics plus the animals are fed called vegetarian products. So the globe is moving rapidly.
In favor of eliminating all antibiotics from the food chain, which creates a huge board because there are many issues that need to be solved the antibiotics, we're solving and we believe if we don't have the next best Mousetrap. We certainly have one of the next pests mousetrap. So we are tough and getting orders all sorts of.
New customers and the science is firmly on our side.
That arclight has a very synergistic benefit on some of these other additives, but known to help for years and years. So we're very excited about the future of our am one international group and a if you.
That's a little disconnect and how those calls going it's because Mike and I are in Latin America bunch of them are in Chicago, and I think someone else's actually dialing in from somewhere to but maybe I'm wrong, but anyway, let's let's open up the call. So Q1 I was always extra most important question first and then get to the under the Q. This allows everyone the chance to ask.
At least one question and what's the what's still come here.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your touched on telephone. If your question has been answered or you wish or move yourself from the Q. Please press the pound King and the interest of time, we do asset you. Please limit yourself to one question. If you do have additional questions you may rejoin the queue.
And our first question comes from John Bair from ascend wealth. Your line is open.
Thank you and good morning, very nice summary, here number questions, but I'll go with.
First one is.
As you indicated in the press release that your advertising expenses at the higher in fiscal 2020 versus 19, how does that relate to let's say.
We're spending levels from 17 and a 2018.
Sure.
The first part of it and then I'll turn it over to just go for the second part because I was wondering the division back in 17 and 18, it will still what maybe 119, which it's going to be it certainly well south of what we did when we first launched Russian light ramped up the advertising, but I'll dropped to go or soon.
Yes. So this is Susan I'd be taking a look forward at our budgeting Jessica can talk to you a little bit about let's see what we're going to use it for but we don't see the level in 2020, returning to the level that it wasn't 18, so it'll be split somewhere between <unk> expense. This year and what we spent then because we're doing it a little differently.
Okay. So just he yeah and and the key from an advertising perspective. It's just you obviously increase our ROI is and make our spends more efficient. So we're looking at tactics that you know have proven out to be more efficient like digital advertising focusing on markets, where we have high distribution like the north east.
And just overall looking at our marketing spend to make sure that is attrition as possible.
Okay very good I got other questions, but I'll get back in a few threats.
Thank you know I.
I hope everyone saw that we are on cat weaker jump. This week today will be the fifth and final day, a week on Ellen and once again brought your exclusively by jobs rising they've worked for product and all sorts of fun integrations of you've missed it just go to Ellen to Dot Com and you can see all the ruble and she's got them all out there on or website.
Thank you and our next question comes from Ethan Starr private Investor. Your line is open. Good morning. Thank you for presenting at the Midwest ideas conference in late August I found the presentation very helpful. When we'd like to encourage you to present to the conference again next year.
My first question is for Macpherson on page 18 of the Midwest ideas presentation.
It states that quote biological crop and plant protection is moving from liquids to granules and selected applications and quote or.
What applications are shifting to granules, what's the time horizon for these shifts and how hasn't how will this benefit oil dri.
But even.
That's some of the detailed market information that we're not going to be comfortable.
In closing on the call.
There was just a general trend for.
Certain segments within the biologicals market to move to granules.
Okay. Thank you cut back in the Q.
Thank you.
And our next question comes from Robert Smith.
From sensor performance your line is open.
[noise] Center for performance investing hi, good morning.
Huh.
My question is about the R&D.
That's correct.
You give me an idea what the spend like between 20 and you said you completed the second thing is of the or the new lab.
Which enhance the scope of your research capabilities could you give us some color on that.
This was the second phases are they're gonna be subsequent phases.
Thank you.
Okay. Thanks for your three part one question I'm, just getting Bob we we can answer though so I mean spending on R&D is going to be in line with what it's been historically a might be up a little bit, but not materially I'm going up like George is really just what's his brain child, the Richard I'm Jaffe Microbiology lab, which started as a just a John .
Through our existing facility right. There are 777 for such drive and now we've actually had to take on new space. We have a whole new labs will make money to tell tell him about it.
Yeah, the Nu lab, Robert will have the ability to.
Hold up to 15.
Microbiologists.
And.
For the foreseeable future I mean, well would then we expect the next decade.
There will be more than enough room to allow for the expansion of our life Science research.
To support our work and biological carriers, and our Amblin animal nutrition business.
Well what does the current status.
You're going to 16, you cinemax so what do you have now.
It's been stuff.
Yeah, not on the number of people.
Right.
But the current number will life science people that are moving there are approximately eight.
Okay. So it's about double the your coal burn.
[laughter] room to grow yeah, we have weakened we've got room to grow.
Okay. Thank you.
Right back into queue.
Thank you.
And we do have a follow up from John there from ascend wealth. Your line is open.
Thanks in your.
Earnings release, you mentioned that there was a pick up in coarse cat litter, which I found kind of interesting could you speak to that where that's coming from and that's something that you think.
Is a one off of that or how.
How do you look at that.
The dramatic I'm happy to take this and you can maybe color roughly if I read something out, but you know a few years ago, we were making all of the.
Southern pound bag. It was course southern pounds that was all retailing for a dollar and everybody was winning in the equation the retailers the consumer except for oil Dri who's getting.
Killed, we're basically putting money in every bag because there just wasn't enough margin to reach out cat litter at a dollar. So we were basically supplying 100% of the market. It was three major players we want to all three and we razor blades and just the look we're not going to tell you know who they all the guys all but you can hold it.
Basically the primary supplier here, we're not making money, we're happy to give out of this business, but if you guys want this product here's what it's going to cost a one of them took it and retail that at $1.18 or the other two walked away from the new supplier, who where they can keep their price of the dollar, but you know what that what they found it was.
The great validation to our quality was the guy who raised it to a bookkeeping saw their business growing by 20, and 25% every period because the consumers who are buying it at the block at the other locations got a very inferior products. So that's started the dominoes falling towards off getting that business back at the same time with other customers call us who were.
Marketing, a coarse cat private label Cat litter and they were seeing the same phenomenon that they got what they paid for by going with some of the cheaper lower and suppliers and they were more than happy to pay off a little bit more let him several margin and see the quality and see the growth come back. So you know where we're supplying it it's going.
Very well Jessica would you want to add anything.
Covered I think.
Okay.
So are you getting a higher price now for for someone to these folks.
That is article was helpful equation or or.
You know I wouldn't quite see we're getting a higher price what I would say we're sticking to our disciplines of this is our price. This is what we need to provide you with the quality and service that your customers expected demand and by the way you cheapened up your cat litter. Your private label, you're not just hurting that individual idle, but if I'm a consumer and I.
Buying a private label any account named I'm not going to name all the accounts, we got but if there were a number of them and I'm, it's inferior and I'm not happy I'm, not thinking that old, but I bet. The private label vitamins or private label Ibuprofen are good. They just have bad private label Cat litter, we believe and I think they do too there's a spillover.
Correct that where you have you leave the consumer with a bad impression on quality and one I know, they're going to assume a bad quality exists and other trials. So we're not necessarily raising anyone's prices, we just couldn't get the business in the past because we weren't willing to lower our price to match, what we perceive to be inferior quality and service and the.
Markets coming back to us and the recognizing you know what paying for quality and service is valuable.
Okay. So I.
Am I hearing then that this is that's a sticky situation in the sense that.
These the buyers of this coarse cat litter are not necessarily transitioning over to the lightweight stuff and that it's just it's all a price point kind of thing from the consumer standpoint.
No it your mix and sort of apples and oranges. So there's always been two segments of the category.
The course, non clumping, which is what we're talking about here.
And then which was held the whole category started back in 1947, and then you've got the Scoopable word forms a club and the consumer pays more for it on a per pound basis or per volume basis, but they don't use it all up all the time. They just use up what the cat went to the bathroom on and then maybe once a month ignored up sell their cost of.
You said that much higher so anyway, what we're talking about irrs coarse cat litter, which in no way is impacting what's going on on the Scoopable side.
Okay, Okay, very good I'll get back in acute that's.
Thank you and then the interest of time, we'll be taking our last question from Robert Smith from Center performance. Your line is open.
Hi, So I'm Mike. This is for you you referenced the and the release that the removal of the difficult comes in.
Swine flu and that's your emphasizing poultry Catlin agriculture.
So.
Can you give me a heads up is too is there any kind of market for that in China itself in those three categories and what is the.
What does the differential so to speak between swine a market opportunity and then the other three that I mentioned in China M. elsewhere.
Thank you.
China is either the number one.
Number two or numbers right.
It depends on the on the spacey and swine and poultry.
<unk> production Halabja production.
There are just an enormous country any more miss producer of animal protein.
So all of these segments are very large it represents about half the worlds.
Routine production when you look at it in total.
And the challenges, where we were overly reliant on swine when we first entered that's really where we had the strongest research.
On the benefit of using our Arclight products.
So we were a little slow to expand into these other segments. Our products also provide the same type value. All these animals have cut some tracks all of these intestinal cracks are contaminated with different.
Toxins that are produced by mold and the feed work for despite bacteria that these animals ingest so.
The problems are prevalent you just have to get into all the species and have the right access to those market segments.
To be able to weather when any one segment gets a particular d.'s disease outbreaks six years ago, They had avian flu in China.
But if you were only in the poultry market, you've got hit pretty hard.
And you need to be the lesson here as you need to be an all the segments.
So when there's a problem in one.
Buffered by the other seconds.
Sodium and you need different the marketing authorizations.
More distribution.
Generally.
In the animal health market, you'll get.
A distribution company that will specialize in a certain animal.
So the distributor, we'll hire veterinarians that are specialist and let's see poultry production.
Though supply products.
And their product line offering is for a particular species don't have customer relationships with producers of.
Let's see poultry.
And.
They specialize.
<unk> Judy multiple distributors in China.
That serve all these different seconds, we went into China. Additionally, where we were strongest and swine.
Well, we stayed in that too long.
Hi, Thanks, So what are the probably I think what are the weather prospects. The 2020 in the <unk> and these other aaron's in China.
We're already growing in poultry.
Again the products work you just have to get the distribution and you have to start the sales calls to poultry industry. It isn't a.
It isn't rocket science, it's just you have a disciplined to realize we have to call on all producers in a country not just one right back your Bob Yeah. We're at a time and so I just want to thank everybody for your interest like I said I think fiscal 19 is going to go down in the oil price what sub that was EUR 79, just go here.
And it can be one of our most important ones. So thank you everybody and we will look forward to talking you next quarter.
Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may all disconnect everyone have a wonderful day.