Transcript
Ladies and gentlemen, thank you for standing by and welcome to the Oil-Dri Corporation of America Second Quarter 2021 Investor Teleconference. As a reminder, today’s program may be recorded. I would now like to introduce your host for today’s program, Dan Jaffee, President and Chief Executive Officer. Please go ahead, sir.
Thank you and welcome everyone to the second quarter and six months Oil-Dri investor teleconference. We are still in a virtual environment, so our usual cast of characters will be on the call, but we are all in different places or most of us are anyway. Susan Kreh, CFO; Molly VandenHeuvel, our COO; Jessica Moskowitz, Vice President and General Manager of the Consumer Products Division; Fred Kao, our VP of Global Sales for Amlan International; Laura Scheland, our VP and General Counsel; and Leslie Garber, our Manager of Investor Relations, are all on hand today. And Leslie, please walk us through the Safe Harbor.
Thank you, Dan. Welcome everyone. On today’s call, comments may contain forward-looking statements regarding the company’s performance in future periods. Actual results in those periods may materially differ. In our press release and in 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?
Yes. Thanks, Leslie. And before I turn it over to Susan for a play-by-play, I would like to add some color to what’s been going on. We have really had a lot of positives on both sides of our major business opportunities, both the retail and the B2B. As you guys know, I took over as General Manager of Amlan International around November 1, and we have made some really good changes together. It’s been a complete team effort cross-functionally. We brought in some new players. I can distill it to people, poultry, clay, and target markets. Let me start with the people. Fred and I, Fred Kao, who is our Global VP of Sales, have worked really hard at building our team. Fred joining Oil-Dri was an initial badge of validation for the incredible opportunity we have because he has had a 20-plus year very successful career. He has made great contacts and people took notice when he joined the company. We have been in the enviable position of being able to attract a lot of talent quickly as these people first got to know Oil-Dri through Fred, but then spent a lot of time with Molly and our team out at the research center, getting comfortable with our data. It’s because of the global vacuum that’s been created by the elimination of antibiotics in the food chain that has created an incredible market opportunity for Oil-Dri. Just in this short period of time since November 1, we have been able to onboard Heath Wessels, who is covering all North America for us; Jay Hughes, who is our Americas tech service; Harold Zhou, who is covering APAC; and Dr. Wade Robey, who is our Vice President of Marketing and Product Development, who has had a stellar career in animal health. We have put out news releases on this, so I encourage our investors, if you missed them, to track them down. You can just search Amlan and you will find our latest news releases. We really have created a dream team in general, but in particular, they have incredible poultry experience. We are certainly not walking away from dairy or swine, but we are going to lean heavily into poultry. Poultry represents about 40% of the $3 billion global opportunity created by the elimination of antibiotics in the human food chain. You’re talking about a $1.2 billion opportunity where our team, with a quick phone call, can get to every level at all the major decision-makers around the world, and we are getting interest like never before. This is very exciting. So, I mentioned people, poultry. Why didn’t I mention clay? Because clay is our unique entrée into this market, we are the only player that has quality to the source. We have, as you well know, if you are a longtime Oil-Dri investor, we have hundreds of millions of tons. We have 100 million proven, but we have to equal that amount inferred, meaning we don’t even bother doing the drilling because we’re not going to need it in any of our lifetimes, but Mother Nature put it there. We have identified a particular reserve that has given us the highest quality and quantity of these animal health products that we’re actually discovering new applications for as we speak. The more we understand our mineral, the more beneficial things we realize it’s doing in the animals' gut and to the animal's well-being. We selectively mine these and have always a minimum of 40 years reserves in every product line. You have no worries. As this product explodes, we have the capacity to mine and supply this industry. We may have to spend some capital along the way, but we have the reserves, and that’s very exciting. Our people, our poultry, and our clay. Finally, our target markets—we are going to fish where the fish are. Eleven markets really are where we think we have a unique position to go after a large percentage of that $1.2 billion opportunity. My math is it’s between $700 million and $800 million of that $1.2 billion, so maybe two-thirds. Don’t hold me to it, but it’s obviously large enough to dramatically change the financial landscape of Oil-Dri. One of our most exciting markets is pristine because we have stayed away from it. I am not really sure why honestly, but our prior management had decided that South America and Asia were more important than North America. Our current team realizes we have a great right to win in America, and we are getting a lot of interest right in our backyard. It’s a language I speak. It’s a currency we trust. It’s contracts that are honored. We don’t have to open up new business entities to do business here. Very excited about the opportunity in the United States; we are hitting the ground running. But as I mentioned, things financially were going to get worse before they get better. We put on a lot of SG&A, a lot of infrastructure. While these guys are getting a lot of interest, we’re not getting a lot of orders. We’ve actually gotten some orders, but not enough to cover the investment we’re making in people. You are going to see our SG&A continue to trickle up in the short run, but these are all long-term investments for Oil-Dri. None of them will impact our dividend policy. These are all just using cash flow in a wise investment pattern for the B2B side. You will be hearing from Jessica on the retail side, and we are continuing to really gain share both with our brand and our private label lightweight. It’s very exciting. You did see in our news release that short term, we got hit with a lot of cost pressures, all at once and what she’s been able to do to offset those going forward. But none of that pricing was able to impact the second quarter, but the cost certainly did. So that’s my color. You’re going to hear a lot from Susan, and then feel free to ask questions on anything that may not have been clarified well enough for you. Susan, I’d like to turn it over to you for the second quarter and six-month results.
Hey, thanks, Dan. I am going to recap the second quarter for you. In our second quarter of fiscal 2021, Oil-Dri delivered another solid quarter of top-line growth with net sales of $74.5 million, growing 5% over net sales during the same quarter in the prior year. Both our Business-to-Business Products Group, which grew 7%, and our Retail and Wholesale Products Group, which grew 4%, contributed to this growth, demonstrating that, as Dan said, we are achieving success in two of the key areas of our strategic focus, which are mineral-based animal feed additives and lightweight cat litter. Additionally, it was a very strong quarter within our Business-to-Business Products Group as all product lines experienced year-over-year growth in net sales. We are seeing evidence that our focus on mineral-based animal health and nutrition products is paying off, with 20% net sales growth during the quarter over the second quarter of the prior year. Fred and his team, who Dan mentioned during his opening remarks, have done an excellent job of focusing on the strategy and are beginning to deliver on the opportunities, having just delivered an all-time high net sales for any second quarter for Amlan International, our animal health business. During the quarter, we saw the benefit of enhanced distribution of Varium and natural alternatives to antibiotic growth promoters for poultry. We also experienced strong growth in China, Latin America, and Mexico. An all-around good story for Amlan and the investments that we’re making there. Now, switching to other Business-to-Business Products, Agricultural and Horticultural Products also had a strong quarter, achieving 10% growth over the same quarter in the prior year, driven primarily by increased sales with existing customers. In our Fluids Purification Products, the decrease in sales of our jet fuel purification products that have been adversely impacted by the reductions in air travel due to the global pandemic were more than offset by the growth of our other products. Our overall Fluids Purification products grew 3% in the quarter over the prior year, favorably impacted by increased sales to our foreign customers during the quarter. Finally, our co-packaged cat litter product, which sits within our Business-to-Business Products portfolio, grew 5% during the second quarter of fiscal 2021. Similarly, within our Consumer Products group, cat litter sales grew 6% over the prior year. We believe that our continued strategic focus on growing our lightweight litter products contributed to this growth in both the U.S. and Canada. We also experienced increases in private label and branded scoopable litter sales, as well as growth through e-commerce sales. Switching gears, our second quarter gross profit of $18.2 million was down $800,000 from the same quarter in the prior year, representing a 4% year-over-year decrease. During the quarter, we experienced some significant cost challenges, which Dan alluded to in his opening remarks. Despite the favorable growth in net sales, the quarter was negatively impacted by cost increases, particularly in the category of freight, which was up 13% per manufactured ton over the same quarter in the prior year due to domestic trucking supply constraints that resulted in significant increases in transportation costs. Our packaging costs were also up 13% per manufactured ton, as increased resin pricing led to higher costs for packaging. Additionally, natural gas costs were up 8% per manufactured ton, which we used to operate kilns to dry our clay. Overall, our cost of goods sold per manufactured ton was up 8% over the same quarter in the prior year, driven largely by these market-based factors that were partially offset by operating cost reductions and efficiencies during the quarter. We responded to these significant cost challenges posed by these economic headwinds through implementing mid-fiscal year price increases. All of our products are impacted to various extents, with consumer cat litters particularly affected due to the amount of freight and resin-based packaging costs. Our total selling, general, and administrative expenses for the second quarter were $13.9 million, which were $843,000 higher than the prior year, representing a 6% increase. However, the second quarter of the prior fiscal year included a onetime curtailment gain of $1.3 million related to the freeze of the company’s supplemental executive retirement plan, which has since been terminated. Excluding that $1.3 million onetime gain in the prior year, SG&A was down 3% during the quarter. However, there was also an underlying shift in costs, as corporate expenses decreased from the prior year and SG&A costs to support our Business-to-Business Products, particularly the investments in our Animal Health and Nutrition Products, grew 26% or approximately $600,000 over the same quarter of the prior year. This incremental expense is consistent with our commitment to invest in this high value-add product line to drive growth for our future. Our second quarter other income of $1.1 million included an $800,000 gain upon the annual actuarial valuation of our pension plan. As a reminder, during the fourth quarter of fiscal 2020, the company executed a lump sum buyout for the terminated vested participants in our defined benefit pension plan who had elected to take this buyout payment option. A majority of the participants eligible for this lump sum buyout opted to take it, which contributed to the favorable annual actuarial valuation of this obligation. Finally, net income attributed to Oil-Dri for the second quarter of fiscal 2021 was $4.3 million, which represents an 11% decrease from the prior year for the cost and investment reasons we just reviewed. Our financial position remains strong, as reflected in our balance sheet. We ended the quarter with cash and cash equivalents of $31 million and have very little debt, equating to a debt-to-total capital ratio of only 6%. One of the primary uses of our cash flow is to fund our trade working capital. During the first six months of fiscal 2021, our accounts receivable increased $3.8 million, reflecting our sales growth and a shift in our customer mix, including an increase in sales to foreign customers who tend to have longer payment terms. We also use our cash to fund capital investments in our business, including those required for growth and those required to drive cost reductions, in addition to normal repair and replacement capital. Because of our strong position during the quarter, we also repurchased 33,594 shares of Oil-Dri common stock for $1.2 million at an average price of $36.09 per share. Based on our strong financial position, we often get asked if we are interested in pursuing acquisitions. The answer is yes, for the right opportunity. Because of our low leverage, we are well positioned to capitalize on strategic investment opportunities that may become available. That’s my summary for the second quarter. And with that, Dan, I’m going to turn it back over to you so people can ask questions.
Perfect. Thank you very much. Great summary. At this time, I’d like to open up to Q&A.
Thank you. Our first question comes from the line of Ethan Star, a Private Investor. Your question, please.
Yes. Hi, good morning. I know you’re in trials with some of the top poultry integrators in America. I’m wondering how those trials are going, and how long might it take to convert those trials into sales?
Sure. Well, if you know that, then you know more than I do. We have not disclosed, nor am I going to confirm nor deny we are in any trials with large poultry integrators in America. Even if we were, I wouldn’t tell you because, honestly, until – as you know me well enough, until we’re in the end zone, we don’t celebrate. We have nothing material to report at this time on that front. But I’ll let you ask another question.
Thank you. Hi, Ethan, your line is open again.
Do you see the sales cycle decreasing in terms of length of time to sales?
I don’t think it’s really going to decrease, so I’ll lead you in the right direction. Just generally talk about the sales cycle. I mean, what do you think it takes to go from the first time we contact an account to potentially getting a real order, not a trial, but a real order?
Can you repeat that sales cycle decrease? I didn’t understand that.
Yes. I mean I don’t think it’s really going to decrease, so I’ll lead you in the right direction. Just generally talk about the sales cycle. What do you think it takes to go from the first time we contact an account to potentially getting a real order, not a trial, but a real order?
Okay, understood. Good question. It really depends on the species, right? If we have a chicken poultry company that contacts us, the sales cycle will likely be anywhere between 3 to 6 months because for the customers to be convinced, they would like to have a couple of trials in place. For the swine market, this is going to be much longer, depending on the usage. If they are using it on the breeding side of the sales, then that cycle is going to drag out for more than 1.5 years. But if they are using it on the piglets, it is shorter, but we’re still looking at a year cycle, a 1.5-year timing.
So it’s clearly a lengthy cycle. But if and when they adopt, they are very slow to change. You’re in there for a while and hopefully forever. They are going to be very methodical in their decision-making process. Great question. Next?
Our next question comes from the line of Robert Smith from the Center for Performance. Your question, please.
Yes. Good morning. Thanks for taking my question.
Hi, Rob.
Hi. So congratulations on – I have, for a long time, felt that Amlan was going to be the tail that wagged the cat, so to speak. I’m glad to see the initiatives that are being taken. My first question would revolve around— you mentioned 11 markets. Can you name the markets for me?
I mean we could, but again, it would only hurt your investment. So no. Other than America, we’re not going to name exactly which markets we’re going to. That just tips off the competition too well.
I assume there are larger countries and the countries that have been named in the past, I mean.
Well, I mean, I just wouldn’t make any assumptions other than the opportunity is – what you need to focus on is that it’s two-thirds of the $1.2 billion opportunity. It’s large enough to dramatically change the financial landscape of Oil-Dri.
So you mentioned in the prepared remarks that China had this big increase. I assume it’s off a very, very low number, so to speak. Is that...
I’ll let Fred talk about China.
Bob, not really. I won’t say it’s based on a very low number. As Dan and Susan mentioned earlier, we were able to close on the existing customers, one of the biggest companies in China. It gave us a huge boost, and we’re able to bring back some of the old distributors we had a relationship with, where we lost connection due to the previous team. We’re able to gain on that. The 40% growth we’re seeing in quarter two has a lot to do with the potential we’re building on.
Thank you. Our next question comes from the line of John Bair from Ascend Wealth Advisors. Your question, please.
Good morning. First off, I wonder what – Dan what brand coffee you’re drinking? I don’t think I’ve ever heard you quite as animated in your opening comments as you were. So with that aside, you can get back to me on that. It sounds like there is a shift— your emphasis is shifting from – maybe from the international, let’s say, from your focus on China previously and now more of a focus domestically. This would also mean going from focusing on the swine market versus the poultry. I’ve read a lot about how the swine market is trying to be rebuilt in China and so forth, so I’m just wondering how that aspect of Amlan’s business is proceeding.
Alright. I’m going to let Fred answer the question about China. I’ll answer the question about my coffee. It’s Peppermint Bark iced coffee, and yes, I am— but I’m really excited about the opportunity. I drink that every morning. What you’re saying to me is I’m excited. But Fred, talking about China and what species we’re seeing business from? Where do we see maybe the future?
Yes. Thank you. For China, we’re working on multiple species right now. The biggest opportunity, like you mentioned earlier, is swine, especially after the African swine fever. Companies are focused on making sure that the population of pigs is healthy. We’re seeing a huge boost in that field. At the same time, we’re seeing a nice increase in the remnant market as well. It’s not just about the swine market; we’re seeing potential in both. Just to add a little more on the swine market, the increased risk in the vulnerability of that market with African swine fever means people are willing to invest more to ensure a healthy flock.
Great. Thank you.
Thank you. Our next question is a follow-up from Ethan Star. Your question, please.
Yes. I’m just wondering what kind of top feedback do you get from your existing customers for Amlan, the NeoPrime and Varium. What feedback do you get in the results and their return on investment, that kind of thing? And what – does that help you get additional customers?
Fred?
Yes. I can take that. Very, very positive. What we’re seeing is customers ordering more tonnage. We have not seen a customer that started using Varium and started reducing their orders since I’ve joined. It’s a very positive trend. For NeoPrime, we’re seeing the same as it takes time to convince customers to use our product. But once they start using it and see the effects, we’re only seeing an upward trend. That’s encouraging, and that’s the key message I can give you here.
I want to add to this anecdotally or generally. Fred and Jay and Heath and Wade and Harold really understand the data in the tests and turn it into terms that motivate decision-makers to keep moving forward. For instance, we did a study with a big player in a big country, and I’m not going to get into the details. We need to get into is why I’m so excited. It’s twofold. I’ve always believed in our products. We had a test with them where the feed conversion ratio (FCR) of ours against the control was about identical. Some members of our team perceived this as a failed trial because why would you buy our product if you’re not going to increase the FCR? Fortunately, Fred was on the call. It was 11:00 PM his time. He works 24 hours a day, and he’s like— but look at the mortality rate, meaning our mortality rate was much lower with our product. So let’s say you put 1,000 birds in— we decreased the mortality rate by 10%. They might have had 1,000 birds to sell, but the control only had 900 birds. So, our FCRs are the same, but by using our product, they have 100 more birds to sell, which is an 11% increase over the control. An unbelievable economic windfall. Once the customer looked at the data in that way, they were very excited.
Yes, and I just want to add. What we’re discussing is total output. If we’re able to have more birds in the chicken houses using our product, the output is what counts. We may not win on one specific metric, but in terms of dollar amounts, that’s a huge advantage for our product. It’s essential for us to interpret the data properly, educate our customers, and explain where we come in. We may not win on one thing, but at the bottom line, if we can win with dollar amounts, then we’re winning big.
Excellent. We’ve covered a lot here. Honestly, as an investor—and I’m the biggest investor here—we’ve covered what you need to know to be hopefully as enthusiastic about the long-term prospects. It’s going to take time, but the ship is starting to turn. It starts with the people and the strategy, and then we’ve got the support team. Thank goodness we invested in the ERP system a few years ago. Thank you for your interest. We’ll be back at you again after the third quarter and nine months. I’ll stay on my coffee because it’s working. Take care.
Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.