Earnings Call Transcript - ODC Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for joining us for the Fourth Quarter 2020 Investor Teleconference. At this moment, all participants are in listen-only mode. After the presentation from our speakers, we will have a question-and-answer session. I would now like to turn the conference over to Dan Jaffee, President and CEO of Oil-Dri Corporation. Please proceed.

Dan Jaffee, President and CEO

Great, thank you. Welcome everybody to our fourth quarter and fiscal year-end teleconference for Oil-Dri Corporation of America. This is actually the completion of our 80th fiscal year. Joining me today will be our CFO, Susan Kreh; our Chief Operating Officer, Molly VandenHeuvel; our Vice President and General Manager of the Consumer Products Division, Jessica Moskowitz; the President of Amlan International, Flemming Mahs; our VP and General Counsel, Laura Scheland; and as always, our Manager of Investor Relations, Leslie Garber, who will walk us through the Safe Harbor Provisions.

Leslie Garber, Manager of Investor Relations

Thank you, Dan, and 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 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.

Dan Jaffee, President and CEO

Thank you, Leslie. I’d like to turn it over to Susan to go through our financial results for the quarter and fiscal year. Susan.

Susan Kreh, Chief Financial Officer

Thank you, Dan. Fiscal 2020 was a record year for Oil-Dri, both for net sales and net income. Consolidated net sales for the year of $283 million reflected a 2% increase over the prior year. This growth was primarily due to increased demand for our cat litter and animal health products. Total annual cat litter sales within the U.S. and Canada increased by 9% compared to the prior year. In addition, our co-packaging coarse cat litter business, which is reported in our business-to-business products group, also grew by 6% over the prior year. In addition to growth in cat litter, our full-year sales of animal health products increased by 12% versus the prior year, driven primarily by growth in Latin America, Mexico, Africa, and Asia, excluding China. On the flip side and to a lesser extent, demand and less revenue in our agricultural, fluids purification, industrial, and sports products were all negatively impacted by COVID-19. And while revenue grew by 2%, annual consolidated gross profit increased by 16% with margins improving from 24% in the past year to 27% in fiscal 2020. Now, for those of you who follow us on a regular basis, you might recall that in some of our businesses freight is a prepay and add, and therefore we use gross profit per ton as our key metric to manage the business. In fiscal 2020, we set a new record by increasing our gross profit per ton by 15% over the prior year. This improvement was driven by lower natural gas and freight and warehouse housing costs, which were offset by slightly higher packaging and non-fuel manufacturing costs. Also called out separately in our financials and included in our operating results was a pre-tax gain of $13 million associated with the fourth quarter prudential intellectual property and licensing agreement. Our selling, general, and administrative costs for the last 12-month period increased by 16% over the prior year, primarily due to higher advertising spending of $3 million, higher compensation that was driven by higher year-over-year bonus costs of $6 million, and higher benefits costs. These higher expenses were partially offset by lower legal costs, lower deferred compensation costs, and a curtailment gain related to freezing our supplemental executive retirement plan. Our full-year net income attributed to Oil-Dri reached a record high of $19 million, reflecting a 50% increase over the prior year. We ended fiscal 2020 with cash and cash equivalents of $41 million. We also have approximately $10 million of debt. Therefore, we are in a really strong liquidity position, and that is after we made $8 million of voluntary contributions to our defined benefit pension plan and after executing share repurchases of $5.5 million. So now that we reviewed our record-breaking year, let's shift to our fourth quarter results. Our fourth quarter was coming off an incredibly strong third quarter that benefitted from pantry loading of cat litter. Our fourth consolidated net sales declined by 8% compared to last year, while our gross margins remained relatively flat. Weaker demand for products within all areas of our business, except for our animal health products resulted in this decrease. The $13 million resulting from the confidential intellectual property license agreement mentioned earlier helped consolidated net income attributed to Oil-Dri reach a quarterly record high of $6 million, reflecting a 55% increase over the prior year. Now, during the quarter, we made specific investment decisions based on our strong cash position, as well as the strong income that resulted from the confidential licensing agreement, and the fact that our plants were slowing down a bit following the high levels of production that were required to support unprecedented third-quarter demand. We invested in incremental and pull-forward maintenance and capital for our facilities. We also invested in advertising for our consumer business to stimulate demand for fiscal year 2021 and we invested in some technology initiatives to provide future efficiencies in our plants and our back office function. Now let’s talk a bit about the fourth-quarter results of our product group. Our business-to-business product group’s fourth-quarter revenues decreased by 5% compared to last year. Sales of our agricultural products declined by 10% versus the prior year as a result of COVID-19 related demand delays from a particular large customer, as well as the shift in timing of orders for our Verge product. Sales of our fluid purification products also declined this quarter by 6% compared to the fourth quarter in the prior year, mainly due to the improved quality edible oil in North America, thus resulting in reduced need of our bleaching clay. COVID-19 has adversely impacted the timing of product testing at edible oil plants and has also resulted in decreased demand for products that are used to process jet fuel since air travel has significantly decreased. Sales from co-packaging coarse cat litter declined by 8% in the fourth quarter compared to the prior year, which can be attributed to pantry unloading by consumers. These decreases in revenue were partially offset by a year-over-year sales increase of 8% in animal health products. These increases were primarily in Mexico due to higher customer demand and the sale of animal health-related equipment. Operating income in the B2B Group declined 26% in the fourth quarter versus the same period last year, where lower sales and unfavorable product mix were offset partially by a reduction in SG&A expenses over the previous year’s fourth quarter. Now let's talk a little bit about our Retail and Wholesale products group, where revenues decreased by 9% in the fourth quarter compared to the same period in fiscal 2019. While sales of our cat litter items grew significantly in the third quarter due to the COVID-19 pantry loading, they leveled off in the fourth quarter as a result of decreased demand from consumers who had already stocked up on our products. But when you look at the net sales for the third and fourth quarters combined, that reflects an increase of 7% over the same six months of the prior year, representing ongoing growth momentum in our cat litter business. In the fourth quarter, demand for private label scoopable products increased, including lightweight litter, when compared to the same quarter last year, while sales of private label coarse litter declined. Our industrial and sports products included in this product scoop was hit hard during the fourth quarter as these markets continued to be negatively impacted by COVID-19. Decreased demand and the national shutdown of sports fields continued to cause weak sales. Operating income for the Retail and Wholesale Products Group was $500,000 in the fourth quarter, reflecting a 74% decrease compared to last year. This decline can be attributed to lower sales and the $3 million higher advertising spending that I mentioned earlier when discussing specific investments in our business. Our targeted digital media campaign will continue into fiscal year 2021, and we currently expect advertising costs for fiscal 2021 to be comparable to fiscal 2020. In order to position ourselves well for potential opportunistic acquisitions, during the fourth quarter, Oil-Dri entered into an amended and restated note purchase and private shelf agreement. The company issued $10 million of notes payable over a 10-year term as part of the $75 million private placement shelf arrangement that provides Oil-Dri the ability to quickly issue additional note financing in the future to grow our business if needed. And with that, Dan, I’ll hand the discussion back over to you.

Dan Jaffee, President and CEO

Great, thank you. Great recap, Susan, of a great year, so that makes it fun. Before we open up the line for Q&A, I would just like to remind you to please prioritize your questions and ask your most important question first, and then after you do get to the end of the queue, so that you allow other investors to ask their most important questions. So let's go ahead and open the line.

Operator, Operator

Thank you. Our first question comes from Ethan Starr, a private investor. Your line is now open.

Ethan Starr, Private Investor

Good morning.

Dan Jaffee, President and CEO

Hi Ethan.

Ethan Starr, Private Investor

You've been hiring more people for Amlan and you increased your ownership in the Mexican subsidiary over last year. So I'm wondering, what are the prospects for Amlan over the next year, particularly with regards to Varium, and has Varium been licensed in more countries and U.S. states?

Dan Jaffee, President and CEO

Okay, Flemming, why don't you handle that question?

Flemming Mahs, President of Amlan International

Sure, thanks for asking. This is exciting ground for us and we're moving quickly with the investment to move Varium and our portfolio into markets that we have not addressed in the past and we see good opportunity for growth.

Ethan Starr, Private Investor

Okay.

Dan Jaffee, President and CEO

With regards – let me just add, with regards to Mexico, Susan I don't think we increased our ownership during the year. It might have just gotten more transparent, but our ownership in Mexico stayed the same in fiscal 20. Susan, is that correct?

Susan Kreh, Chief Financial Officer

No, we did move up from 51% to 78% during the specific year.

Dan Jaffee, President and CEO

Oh! Alright, so then I stand corrected. Ethan, once again, you're ahead of me on the curve.

Ethan Starr, Private Investor

Well, it was in the K.

Dan Jaffee, President and CEO

Oh! I do remember that move. Okay no, now I was forgetting that secondary move. Yeah, it’s there, you're right.

Ethan Starr, Private Investor

Okay, any other color on this?

Dan Jaffee, President and CEO

I mean, Susan, I don't know if you want to add any color to it. It was a matter of consolidating ownership and taking out some of the lesser players, so that we could have a greater influence on this business.

Ethan Starr, Private Investor

Okay, any more licenses for Varium in other countries and states?

Flemming Mahs, President of Amlan International

We're continuing to add more licenses in more countries and we are continuing to add more supports to really push promotion as you've seen on the marketing side. There's been a lot more activity than in the past and that will also continue.

Ethan Starr, Private Investor

Okay, thanks. I’ll get back in the queue.

Dan Jaffee, President and CEO

Thank you.

Operator, Operator

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

Robert Smith, Center for Performance

Alright, so thanks and good morning.

Dan Jaffee, President and CEO

Good morning, Perfo. The Center for Performance Investing, it's long.

Robert Smith, Center for Performance

So, alongside Ethan’s query, what are the principal objectives in Animal Health for this current year? I mean, do you have some targets that you're working against as far as the progress you're going to make?

Dan Jaffee, President and CEO

Absolutely. As we bring on new personnel, including salespeople and tech support, we are focused on achieving a revenue per employee metric to ensure we are maximizing our investments. Once we meet those goals, we will continue to expand our team and maintain momentum. We are consistently tracking our progress. Flemming, do you have anything to add?

Flemming Mahs, President of Amlan International

No, I mean, the opportunity is still material and very exciting, so we're continuing to execute and expand our presence. I mean we've seen in the past where we are present with people, we do a lot better than when we go through a third party, so that's a key to growth, to have a presence and build our brand.

Robert Smith, Center for Performance

What do you principally have to overcome to move this along more quickly, in your opinion? What are the major things that you have to get over?

Flemming Mahs, President of Amlan International

Probably education, you know that we have been a small player in the past and present in the distribution channel primarily, and now we're moving into the key accounts in the industry and getting our presence and brand awareness and our scientific information in front of them, so they can make a – they always make a very educated decision, but get to know us and building those relationships.

Robert Smith, Center for Performance

And in the commentary, there was a reference to Mexico and equipment in Mexico. What is the equipment?

Flemming Mahs, President of Amlan International

It's primarily swine artificial insemination and swine farm equipment.

Robert Smith, Center for Performance

Okay, thank you. I'll get back in the queue.

Dan Jaffee, President and CEO

Thank you, Bob.

Operator, Operator

Thank you. And our next question comes from Ethan Starr, who is a Private Investor. Your line is now open.

Ethan Starr, Private Investor

Yes, it's really nice that you got a $13 million one-time payment in the fourth quarter. But as an investor, no matter how you sugarcoat it in the press release, the bottom line is you’ve lost money on an operating basis, and I'm just wondering – trying to understand why SG&A increased so much in the fourth quarter over last year and I hope it's not a trend.

Dan Jaffee, President and CEO

No…

Susan Kreh, Chief Financial Officer

I can jump in.

Dan Jaffee, President and CEO

Okay, you go ahead, Susan.

Susan Kreh, Chief Financial Officer

What I would say – what you said is true, Ethan, but the reason I was trying to highlight the investments that we made, those were significant. They were about $6 million worth. We wouldn't have done those had we not had that $13 million or maybe likely would not have done those. It was opportunistic for us. The other thing we have in the fourth quarter is the bonuses are significantly higher than they were last year.

Ethan Starr, Private Investor

Okay. Well, how much of that was like investments for the future, like the maintenance and advertising, and how much was the bonus accrual?

Susan Kreh, Chief Financial Officer

They were each about $6 million.

Ethan Starr, Private Investor

Oh! So $6 million in an investment and $6 million in bonus accrual.

Susan Kreh, Chief Financial Officer

Yeah.

Ethan Starr, Private Investor

Okay, so the bonus accrual alone now, does the $13 million one-time payment affect the bonus accrual?

Susan Kreh, Chief Financial Officer

Yes, it does.

Ethan Starr, Private Investor

Oh! Okay.

Dan Jaffee, President and CEO

Yeah, and we were at a double bonus before that as well. I mean we had already maxed out through the third quarter. So yes, it affected it, but really ultimately went back to the shareholders, because our bonus program caps out at double bonus and we were at a double bonus through three quarters.

Ethan Starr, Private Investor

No, the first three quarters were great. Go ahead.

Susan Kreh, Chief Financial Officer

No, I was just going to say that last year we didn't pay a full bonus because, as you recall, the first two quarters of fiscal '19 were quite challenging as we implemented our JVE ERP.

Ethan Starr, Private Investor

Sure. But you know, I really would appreciate it if you know – I don't know, I mean perhaps you didn't know the full extent of the bonus accrual when you had the last conference call, but you know you specifically mentioned in the last conference call that the $13 million had already been received, yet you didn't mention the huge increase in SG&A, which would've been appreciated had you known about it then.

Dan Jaffee, President and CEO

Duly noted.

Ethan Starr, Private Investor

Okay, I'll get back in the queue.

Operator, Operator

Thank you. And our next question comes from John Bair, Ascend Wealth Advisors. Your line is now open.

John Bair, Ascend Wealth Advisors

Thank you and good morning. Hi there! Can you speak at all to the trends you’re seeing right now with regards to consumer de-stocking? Has that kind of stabilized out or are you starting to see a more normalized trend in that and also I was kind of interested. In your press release you said there was an increase in the coarse – what was it, co-packaged cat litter business was up and is that trend – I mean that kind of goes counter to what you know we've been seeing over the past couple of years. So I’m kind of curious where that plays out or how that plays out?

Dan Jaffee, President and CEO

Sure. I’ll let Jessica take the de-stocking and restocking question and then I'll close with the co-pack answer.

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

Thank you for the questions. We have started to see things normalize again regarding inventory loading and unloading following COVID. While we can't predict future trends with certainty, we do anticipate some additional loading around the holidays. Overall, we have noticed a stabilization in the fluctuations in inventory loading.

John Bair, Ascend Wealth Advisors

Okay.

Dan Jaffee, President and CEO

Again, on the co-pack business, our major partner there has done a good job of offsetting the U.S. decline in coarse cat litter as scoopable cat litter has become the cat litter of choice for consumers. They've done a good job of offsetting that with international business and so we've benefited from that, so that really was the key driver there.

John Bair, Ascend Wealth Advisors

So are you shipping that internationally or is that internationally sourced?

Dan Jaffee, President and CEO

No, no, it’s all coming out. We make 100% of it. It's all coming out of our Georgia facility.

John Bair, Ascend Wealth Advisors

Okay, and then they ship it? I mean how do you handle those costs?

Dan Jaffee, President and CEO

We provide the product to them on a consistent basis, and they take care of all the shipping, whether it is domestic or international.

John Bair, Ascend Wealth Advisors

Okay. Okay, well I've got another question, but I’ll pop back and…

Dan Jaffee, President and CEO

You can ask it – I mean Ethan’s already done a couple. Ask your question and probably Bob will have a question.

John Bair, Ascend Wealth Advisors

It’s a fairly quick one. Just kind of curious on what you're seeing trend-wise with orders for product coming through sources such as say Amazon, online, or Chewy or that kind of demand. Can you tell us anything about that?

Dan Jaffee, President and CEO

Sure, I'm going to let Jessica answer that, but I'm first going to give you my 50,000-foot view on e-commerce as it relates to cat litter. If you think about e-commerce, it makes the most sense for things where freight is a very small percentage of the delivered cost of goods. There's a reason why big box stores and grocery stores have been able to be very competitive on bulky, low-priced items, because they can buy in full truckloads and then their distribution model allows the consumer to benefit from that. When you decide to buy one bag of cat litter and have it stuck in a box and you know overnight it to you, the cost of that is greater per unit than putting it in a truckload, sending it to a distribution center, and putting it on the store shelf. So ultimately somebody has to bear that cost in the equation. It either has to be the manufacturer, the e-tailer, Amazon, or Chewy, or the consumer. The consumer has to say, ‘I’m willing to pay an extra 30%, 40% for my litter because I don't want to be carrying it home.’ So just recognize that while e-commerce is having a major impact and is currently having a major impact in cat litter as well, it's because someone in that equation is making the decision to participate to that extent. So I'm just going to leave it there. It just doesn't – it will never be as competitive from a cost per unit standpoint as the full truckload of brick and mortar model. Now having said that, especially during COVID it's been going crazy and I'll turn it over to Jessica.

John Bair, Ascend Wealth Advisors

Yeah, okay.

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

Yeah, just to echo Dan’s comment, we have continued to see an increase in e-commerce, you know again driven partially by COVID and partially by kind of a long-term consumer trend erring toward buying online.

John Bair, Ascend Wealth Advisors

I would think certainly within urban areas you would be seeing and I don't know if you're able to determine that or not, but within urban areas I would imagine home delivery through one of those e-tailers would make a lot more sense than outside, just you know, so anyway. Okay, very good, thanks. I'll get back in the queue.

Dan Jaffee, President and CEO

Thank you.

Operator, Operator

Thank you. And our next question is a follow-up question from Robert Smith of the Center for Performance. Your line is now open.

Robert Smith, Center for Performance

Yeah, so maybe you could say something about the opportunities for animal health here in this country.

Dan Jaffee, President and CEO

Right, Flemming I'll let you field that.

Flemming Mahs, President of Amlan International

Yeah, I mean, it's an untapped market for Amlan and Oil-Dri and the product fits well. We know there's a lot of emphasis in the market for antibiotic alternatives, and no antibiotics ever. It’s something I think Tyson is even taunting, saying they are – 60% of their production is no antibiotics ever, and so our product positioning is well fit. We are just leading the feet on the ground to really get our positioning in place with, you know, the U.S. 80% of wholesale production is probably 10 accounts or less. So we are just getting the people in place to move forward, and it's a great opportunity.

Robert Smith, Center for Performance

So, is there any particular regulatory matter that has to be overcome?

Flemming Mahs, President of Amlan International

No.

Robert Smith, Center for Performance

Okay, thank you.

Operator, Operator

Thank you. And our next question comes from Joseph Gabelli of GAMCO Investors. Your line is now open.

Joseph Gabelli, GAMCO Investors

Hi guys, thanks for taking the question. Could you just discuss what drove you to buy back some stock in July and maybe update us on your thinking and strategy around share repurchases going forward?

Dan Jaffee, President and CEO

Sure. Susan?

Susan Kreh, Chief Financial Officer

Sure. Our thinking around the share repurchases in July were just our cash position and honestly, you know we're not making anything on our cash. It’s basically sitting in the bank. So we did an evaluation around what good buyback share price points were and because the stock price was under what the evaluation said, we decided to go ahead and buy some back.

Dan Jaffee, President and CEO

A significant aspect of that calculation is the avoidance of the dividend on those shares. When you are paying nearly a 3% dividend and not earning anything on your money, share buybacks can be advantageous and benefit shareholders. What is your view on the share repurchase? Joe, that question is directed to you.

Joseph Gabelli, GAMCO Investors

Well, obviously it's another tool for capital allocation depending on where you can get returns and what do you think the stock is worth relative to where it's trading?

Dan Jaffee, President and CEO

Yeah, we tried to rather do a special dividend when we got that big influx of the one-time licensing. We said, let's – this is the way of sort of returning some value to the shareholders and through our share repurchase. So that was part of the overall equation.

Joseph Gabelli, GAMCO Investors

Great, thank you.

Operator, Operator

Thank you. And our final question comes from Ethan Starr, a Private Investor. Your line is now open.

Ethan Starr, Private Investor

Yes, do you know what's the potential for growth in both the branded and private label cat litter markets? You know, you’re still adding more accounts there and how is that one going? Are more SKUs being introduced in various accounts and new accounts?

Dan Jaffee, President and CEO

Yeah Jessica – I mean, you can certainly talk about it, because it's out there and it's public. The Blue Jug at Wal-Mart which we're seeing some good results from and any private label lightweights that we’ve – you know if that business is continuing to grow.

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

Yeah, so Ethan I would just say we do continue to see both growth organically of our existing SKUs as well as kind of creation and expansion of new SKUs and new customer acquisitions. So we – you know as we have successes with customers and key customers, you know obviously those become great data points to go out and expand the business. Private label lightweight has been very successful, both on the private label side, as well as the branded side and really leveraging the trends that we're seeing in lightweight. So excited to continue to see growth and again go through organic growth, as well as customer acquisitions.

Dan Jaffee, President and CEO

Anything – I'll add just to expand the question and I’ll have to wrap up into all of North America. We're seeing even more rapid growth on private label lightweight north of the border in Canada for two major reasons. First, private label’s always been about 20% of the category in the United States, with 80% being branded sales. Canada, being more like Europe, is more like 40% private label and 60% brand, so you've got a more developed market. You have a consumer more attuned to private label and buying their cat litter that way, so that's been good for us. And then about a year ago, and I've mentioned this before, you know our largest competitor, Nestlé Purina, went all lightweight in Canada and so they sell only lightweight offerings. They have 17 lightweight SKUs in Loblaws and Walmart Canada and no heavyweight SKUs, zero. And so they've clearly educated the consumer on the benefits of lightweight and they can buy a brand or they can get a national brand equivalent made by us in the private label. So we're seeing great results north of the border and we obviously hope that trend will make its way down to the United States and that'll be all good for Oil-Dri. So, thank you all for your focus and attention and your loyalty. We had a great fiscal ‘20. I want to thank our frontline workers for making it possible. You know they came in every day and Molly and Aaron Christiansen and their team kept them safe and healthy, exercising really strict social distancing, wearing masks, and three times daily cleaning, everything we could do to keep COVID out of our facilities. As far as we know, no COVID emanated from our facilities. We did have a few teammates, not many, who did contract COVID, but all the tracing pointed to spots outside Oil-Dri and because of their work, we were able to deliver a record year and we look forward to continued momentum into fiscal ’21. So we'll be back to you in 90-days or so. Thank you very much.

Operator, Operator

Well, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.