Earnings Call Transcript - ODC Q2 2022

Operator, Operator

Thank you for standing by. Welcome to Oil-Dri Corporation's Second Quarter Fiscal Year 2022 Investor Teleconference. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the call over to Dan Jaffee, President and CEO. Please go ahead.

Dan Jaffee, President and CEO

Thank you very much. Welcome to our first six-month teleconference. With me today are Susan Kreh, CFO; Molly VandenHeuvel, COO; Chris Lamson, Group Vice President of Retail and Wholesale; Jessica Moskowitz, Vice President and General Manager of our Consumer Products Division; Fred Kao, Vice President of our Global Sales for Amlan International; Dr. Wade Robey, Vice President of our Amlan Marketing and Product Development; Tony Parker, Assistant General Counsel and Assistant Secretary; and Leslie Garber, Manager of Investor Relations. Leslie, will you walk us through the Safe Harbor.

Leslie Garber, Manager of Investor Relations

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 Jaffee, President and CEO

Thank you. Before I turn it over to Susan, I just want to give some high-level comments. No one had been prepared for what we're all dealing with. It literally goes back to '79 and '80 for inflation, but when you factor in the global pandemic, the supply chain crunch that's going on, labor shortage, and then a war, these are dynamic times. I'm very proud of the Oil-Dri team. As I tell them, we are being graded on a curve, and we are doing very well. You can go to the shelves, and you can see our product. Yes, there’s some thinning in certain product lines, but the others are seemingly doing worse than we are, which is exemplified by the fact that we delivered 17% organic sales growth in the quarter. That's a fantastic job by our team. Obviously, we're not keeping up with the cost increases. We're getting price increases, but it's like catching a falling knife at this point in time. We're just chasing a moving target. The good news is we're in a rational market, and our customers understand it. We're passing through price increases left and right, and it's going to keep happening. I just don't see this inflation abating anytime soon. Susan, I'm going to turn it over to you for some highlights. We're assuming you guys have read the Q and the K, so take us through the highlights.

Susan Kreh, CFO

Thanks, Dan. We're going to change it up a little bit this time in order to leave more time for questions. A couple of key highlights: Dan mentioned the continuing cost pressure, but taking a look at the results, it was an exciting quarter during the second quarter. The benefits of our growth strategies are coming through our financials. A particular highlight was an all-time record second quarter for Amlan, our animal health business; and an all-time record second quarter for retail and wholesale and for the company as well. So our strategies are working. Dan mentioned we're chasing the costs. A little bit about pricing and costs: We have one major customer that has a pricing reset clause based on a major economic indicator that's embedded in the contract. That's backward looking. But most of our pricing tends to be backward looking. We're in a rational marketplace, and our customers prefer factual bases to set pricing instead of forward projections. Our processes are better and tighter, and you see us going to market much more quickly with these cost increases. We've announced several price increases for April 1 for our domestic cat litter business and our sports product businesses, and we continue to monitor these and work them into the market as quickly as we can. Switching to capital allocation, we issued a 10-year note for $25 million at an annual interest rate of 3.25%. We have that note set so that we make $5 million each repayment in years 6 through 10. One of the primary reasons we took this on was to support our growth. Our repayment schedule gives us time to make investments in our plants and other initiatives and for them to become accretive before we must start paying back principal. In the near term, we're supporting our growth through inventory build. We are investing more in inventory as both prices rise and as we increase inventory levels in order to better serve our customers during these times of many disruptions in the supply chain. We're also making investments in our plants. Normally, our plant investment or capital spending runs in the $14 million to $16 million annual rate. Year-to-date, we have spent $10.6 million, so a run rate slightly higher. We anticipate that run rate to continue as increased sales volumes push on capacity constraints and newer products also lead to growth opportunities. We've also continued to repurchase shares of our stock. The pricing is favorable. Year-to-date, we've repurchased $6.2 million worth of stock. We opportunistically repurchase shares to offset dilution. Those are just some of the highlights. Dan, I'll hand it back to you for questions.

Dan Jaffee, President and CEO

Yes, thank you. I want to thank people who submitted questions in advance. We have a bunch to go through. I encourage everyone, if you're online, Leslie, how do they give us questions?

Leslie Garber, Manager of Investor Relations

There's a Q&A field. If you submit your question in that field and push the button, you should be able to quickly submit it, and we'll be able to see it right away.

Dan Jaffee, President and CEO

Great. We've only used up 10 minutes, and so we're able to dedicate the final 20 minutes to Q&A. Leslie, let's go through the questions that were submitted.

Leslie Garber, Manager of Investor Relations

The first question was submitted by Ethan Star, a private investor. It's really a two-part question. Last quarter, you spoke very optimistically about the prospects for Amlan International and said you are shipping to major companies that are very sophisticated. What kinds of results are your Amlan customers seeing, and are you still optimistic that a tsunami is coming?

Dan Jaffee, President and CEO

Ethan, thank you for your question. Tsunami, I'm not sure I'm going there just because that could be a forward-looking comment. I will tell you, I couldn't be happier with where we are at. We are making a lot of progress. We are onboarding new accounts and getting traction. We had a record quarter for Amlan. In the U.S., which has been our focus, the team we put together has contacts from coast to coast with every major producer. Our clays work. We hosted the IPPE show in Atlanta where all the major players visited our booth. They couldn't have been more positive. We lead with our clay and finish with it. This selectively mined mineral is processed very carefully to achieve specific outcomes. We believe we have the absolute best all-natural, non-antibiotic solution for replacing antibiotics in food production. We're very excited about it and couldn’t be happier with where we are at this point in time. Let's go to part two.

Leslie Garber, Manager of Investor Relations

Part two is could you please explain Amlan's product strategy for the United States? Are you seeing orders already, and how did Amlan's presence at IPPE make a difference?

Wade Robey, Vice President of Amlan Marketing and Product Development

Yes. Thank you, Dan, and thank you, Ethan, for that question. We just executed our U.S. rollout at the IPPE show in January of this year, which is the world's largest show for poultry, meat, and animal food. Even with the pandemic, 20,000 registered attendees participated, normally it's about double that with 1,000 exhibitors. There was a great chance to demonstrate the Amlan technology and meet with customers. We're already taking orders in the United States after months of field trials with some major poultry industry integrators. We're also beginning sales in the dairy sector in the U.S. as well. We’re seeing cross-species interest in our products. Our product strategy aligns globally and provides benefits to improve economic performance with good gastrointestinal tract health and optimum growth. Our U.S. product line includes a new branded offering that's been well accepted by customers.

Dan Jaffee, President and CEO

Wade, great. I'd love to hear from Fred Kao about the IPPE from a sales perspective. I know attendance was down, but we felt the impact was actually equal or greater.

Fred Kao, Vice President of Global Sales for Amlan International

Yes, that's true. Good morning and thanks for the question. We had a lot of interest. Attendance was down because of COVID. However, we received numerous inquiries from visitors to our booth who had specific questions. I believe the interest level was high, even from customers who did not initially intend to attend the show. We also saw significant interest from international markets, particularly from South America.

Dan Jaffee, President and CEO

Great. Before we open to the next question, I want to mention our support for the boycott of Russia. We have suspended all shipments to Russia which is not material for us, but it’s related to the unity against what’s a horrific situation in Ukraine. Leslie?

Leslie Garber, Manager of Investor Relations

Thanks. The next question comes from John Bair from Ascend Wealth Advisors. He asks, your press release indicates higher sales for cat litter product lines, which is as much, if not more, a unit volume increase rather than just a price increase. If that is correct, to what do you attribute the increased demand for your lightweight cat litter products given your lower advertising spend? New customers? Higher market penetration? I would think the stay-at-home and pet adoption surge has largely passed.

Christopher Lamson, Group Vice President of Retail and Wholesale

Yes. So this is Chris. I'll take that question. Thanks, Dan. It’s about distribution. We're growing points of distribution in a market where retailers are tightening up. Total points of distribution tracked by Nielsen are down in the category, but our points are up, especially with winning retailers where traffic is growing.

Dan Jaffee, President and CEO

Will we partner with Ethan's question?

Leslie Garber, Manager of Investor Relations

The second part is from Ethan Star. What new business are you adding in the cat litter area? In light of the inflationary environment, to what extent do you see customers switching to lower-priced brands such as Cat's Pride or private label brands?

Christopher Lamson, Group Vice President of Retail and Wholesale

To the second half of that question, unprecedented times mean we’re not prepared to say private label and value brands will see a significant tailwind in this market, we just don't know. However, the most recent quarter shows private label and value-oriented brands growing share moderately. Likewise, the upper end of the market, premium alternatives are also growing, centering a sort of barbell effect in the market. We currently see modest growth in value-oriented brands but not to an extraordinary extent.

Leslie Garber, Manager of Investor Relations

Perfect.

Dan Jaffee, President and CEO

Jessica, do you want to add anything to Chris' explanation? Great answer, but anything you’d like to add?

Jessica Moskowitz, Vice President and General Manager of Consumer Products Division

No, I think he covered it. Thanks.

Dan Jaffee, President and CEO

Okay, great.

Leslie Garber, Manager of Investor Relations

The next question is from John Bair. Your 10-Q references that manufacturing capabilities are strained due to the age of equipment, availability of repair parts, and may limit production capabilities to meet your product demand. Do you anticipate increased CapEx spending on new equipment this year?

Molly VandenHeuvel, COO

Yes. So this is Molly. Thanks for the question. As Susan alluded to, I don't expect capital spending to increase significantly this year. We've been investing in the business as required this current year—repairs, as you mentioned, plus investments for business growth and cost reduction. Such actions should keep our capital investments relatively flat. Our business growth investment aims to meet current demand and anticipated growth. We see inflation pressures on parts and equipment, but we expect similar conditions next year.

Dan Jaffee, President and CEO

Great. Thank you.

Leslie Garber, Manager of Investor Relations

The next question is also from John Bair. Recognizing that avian flu is a respiratory issue rather than an intestinal issue, has there been any uptick in Amlan product interest due to the recent and growing number of avian flu outbreaks in the United States? Is there any R&D focus on products to address avian flu?

Dan Jaffee, President and CEO

Wade?

Wade Robey, Vice President of Amlan Marketing and Product Development

Yes, John, thank you for that. A couple of things: as you indicated, avian flu is a respiratory issue. Our current product line would not effectively treat or mitigate that condition. Our products aren't absorbed by the animal and don't work systemically. Consequently, we cannot capitalize on AI. The only action is to depopulate infected flocks. Thus, there’s a downward movement in the total number of birds produced as poultry companies replace them with new hatchlings. No, our products won't directly apply. We're also not a pharmaceutical or drug company, so we don't plan to develop vaccines or antiviral products for respiratory diseases.

Dan Jaffee, President and CEO

Thank you. Well said.

Leslie Garber, Manager of Investor Relations

The next question is from John Bair. Can you speak to the progress of Amlan product sales as it relates to the U.S. swine market?

Dan Jaffee, President and CEO

Yes. This will be simple. We're focusing heavily on poultry, not to say we would turn away opportunities; there may be some in other animals. The team we've assembled in the U.S. has excellent contacts and reputation in poultry. The opportunity in poultry is substantial enough for Oil-Dri to excel, so we're leaning heavily into that segment. Fred, any comments?

Fred Kao, Vice President of Global Sales for Amlan International

Yes, I'd like to add something, Dan. We're focused on poultry because that's our core business. However, we're also exploring opportunities with other species as well. As Wade mentioned, China is a significant opportunity in the dairy and swine markets.

Dan Jaffee, President and CEO

Okay, good. Well said. Thank you for the question, John.

Leslie Garber, Manager of Investor Relations

The next question is from John Bair. Do any of your clay deposits have associated lithium in them which might lend themselves to extraction for the EV battery market? There are several USGS bulletins and special reports discussing lithium association in clay deposits.

Dan Jaffee, President and CEO

I sent this question to Dr. Marc, who has a PhD in clay mineralogy and has been with us for years. Unfortunately, both our Georgia attapulgite and Mississippi, Illinois calcium bentonite deposits do not contain any lithium-bearing clay mineral phases that would be of any conceivable economic value as a trace source of lithium. There are known clay deposits in the western U.S. that have smectite clays with a high trace lithium concentration. However, the technical and economic viability of using such clays as a significant domestic source for lithium is very low compared to currently mined lithium brine salts and lithium silicate rock deposits in many parts of the world. Great answer, Marc, and he's available for parties and bar mitzvahs if you need entertainment, because he knows his stuff. Thank you for your answer.

Leslie Garber, Manager of Investor Relations

Great. Thank you. The next question comes from Lawrence Richards. He asks, I have seen a product named Pretty Kitty advertised lately that purports to track the health of cats changing colors based on the color of their litter after the cat uses the litter box. Have you heard of this product? And does Oil-Dri have any reaction to it?

Dan Jaffee, President and CEO

Yes, we've heard of it. I'll take part of this and you can jump in if you'd like. We've worked on an indicator in litter for years. The problem is, the cost of using that product year-round for what could be a very specific, time-sensitive problem, the cost outweighs the benefit. I believe it's retailing for $24.99 at Walmart, while our opening CPS jug is around $6.48. The cost difference is almost 4 times higher. Over the year, you could spend hundreds or even $1,000 more trying to determine if your cat has a urinary tract infection. It's much more practical to just take the cat to the vet. So we’ve never considered it worthwhile based on cost-benefit analysis.

Jessica Moskowitz, Vice President and General Manager of Consumer Products Division

Yes, I can build on that. We continually evaluate innovation, needing to assess market size and consumer appeal. We keep track of developments but must ensure they align strategically with Oil-Dri's long-term goal of pursuing lightweight solutions. So yes, I'll echo Dan’s sentiments while looking out for future opportunities.

Dan Jaffee, President and CEO

Thank you.

Leslie Garber, Manager of Investor Relations

Next question from Ethan Star: How is the cat litter business in Canada doing, and what are the growth opportunities? In the United States, are you adding new customers for cat litter that you had not previously sold to?

Dan Jaffee, President and CEO

Litter in Canada is doing great, actually slightly ahead of the U.S.'s already strong growth. We're leading the lightweight market there, so we’re very well positioned with our private label business and are seeing growth today. Regarding the U.S., as I mentioned earlier, we've mainly achieved growth from distribution growth at existing customers. We have a few tests with various customers performing well, and we’re optimistic about that.

Leslie Garber, Manager of Investor Relations

Great. We don't have any more questions.

Dan Jaffee, President and CEO

I'll ask a question, then answer it. We did mention that renewable diesel is starting to hit the U.S., creating another demand source for our bleaching earths, which is great. Demand will exceed supply quickly. Whether we engage in the renewable diesel business or continue supporting ADM and Cargill with fluid purification, there's incremental demand for our bleaching earths. We're continuing our strategic approach, providing long-term partners with the value needed to purify fuels or oils. This is an exciting time for our division as the edible oil business usually grows by 2-3% with population growth. Adding renewable diesel makes it even more thrilling. We aim to proceed strategically as these developments unfold. I love the Q&A format. We have much optimism for our business. Although we're not satisfied with our margins, we're pursuing our objectives. It's comforting to know it's a rational market and we're managing to secure price increases. Our focus remains on working with our partners to ensure they can pass costs along to their consumers. We’re in dynamic times, with inflation metrics continuously reaching 40-year highs, but I’m proud of the Oil-Dri team and grateful for our loyal investors. We’re generating cash and maintaining growth potential as a value stock. We also plan to continue our stock repurchase program when opportunities arise.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.