Earnings Call Transcript - ODC Q4 2023

Operator, Operator

Thank you for standing by, and welcome to Oil-Dri Corporation of America Q4 and Fiscal Year 2023 Earnings Discussion. 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 Chairman, President, CEO, Dan Jaffee. Please go ahead.

Dan Jaffee, Chairman, President, CEO

Thank you very much and welcome everybody. First, we're in virtual mode, so I want to introduce who's all on the various lines ready to answer your questions. Thank you for getting those into the portal. In advance, we have Susan Kreh, CFO and CIO; Aaron Christiansen, VP of Operations; Dr. Wade Robey, VP of Agriculture and President of Amlan International; Chris Lamson, Group VP of Retail and Wholesale; Laura Scheland, VP of Strategic Partnerships and General Counsel; David Atkinson, VP Corporate Controller; and last but not least, Leslie Garber, our Manager of Investor Relations, who will walk us through our Safe Harbor provision.

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 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, I'm turning it back over to you.

Dan Jaffee, Chairman, President, CEO

Sounds good. And before I turn it over to Susan, I'd like to make some general comments. We just concluded our 83rd fiscal year. One of the things we're very proud of is our accumulated lessons learned, which we like to carry on from my grandfather to my dad to me and on into the next generation. One of those lessons is that winning at Oil-Dri is a team game, and that's what you saw in fiscal '23. The outstanding results and record performance were all due to the collective effort of our nearly 900 teammates globally. Recently, we went through a flawless ERP upgrade, which is almost impossible to do. In the fourth quarter, we achieved near-perfect scores for on-time deliveries and received plenty of kudos from our customers, which was very exciting. All of these things had to happen to deliver the championship year we just delivered. We're obviously entering the new fiscal year with a lot of momentum, but we must remain mindful of maintaining our standards as we move forward. You'll hear that we're very confident about our growth plans, and while fiscal ‘23 was our best year ever, the best is still yet to come.

Operator, Operator

Susan, can you hear us?

Dan Jaffee, Chairman, President, CEO

I wonder if Susan got disconnected. I'll go, I like open mic nights. I'll cover some of the highlights, and Susan, if you get yourself back connected, I'm happy to turn the floor over to you. The fourth quarter was a record $107 million in net sales, up 15% over the prior year, helping us finish over $400 million for the first time at $413,021, up 18% for the year. The increase in the fourth quarter was 129%, up to $11.9 million, and a 421% increase to $29.5 million for the year. If you back out the two non-recurring events—the impairment charge from fiscal ‘22, which was an accounting non-cash charge, and the closing of our defined benefit plan replaced by a defined contribution plan in the 401(k)—the year-over-year financials show an increase from $10,136 a year ago to $36,469 this year, representing a 260% increase. We report by segment: our business-to-business segment saw sales up 18% in the quarter and 26% year-to-date, with operating income up 63% and 50%. The retail and wholesale group, led by Chris Lamson and his team, reported sales up 14% in the quarter, 15% year-to-date, and a robust increase of 478%. If you adjust for the impairment charge, the increase was down to 204%. We'll cover more details in the Q&A.

Leslie Garber, Manager of Investor Relations

Okay. Sounds great. Susan, if you are back on the call, let us know; otherwise, we're just going to continue. Our first question comes from Robert Smith, and he is from the Center for Performance Investing. His first question is regarding Amlan. You mention that there were timing issues affecting the fourth quarter shortfall. What would the quarter have looked like without those issues? Will the current quarter include all the shipments that missed the last quarter? What are the prospects for Amlan in fiscal ‘24? Thanks. Wade, can you please take that?

Wade Robey, VP of Agriculture and President of Amlan International

Yes. Thank you, Leslie, and thank you, Robert, for the question. You've asked a number of questions. I'll try to address all of them quickly. With respect to our business in animal nutrition, we don’t see much seasonality quarter-to-quarter. Generally, our growth is pretty smooth as we continue to expand in all global markets. Sometimes we encounter timing issues, particularly in logistics, which affects how quickly our products reach our Asian or Latin American markets and can create volatility on an individual quarter basis. Looking ahead, we expect to recover anything missed in the fourth quarter in the upcoming quarter. Overall, we anticipate growth as our business progresses.

Leslie Garber, Manager of Investor Relations

Perfect, thank you. Next, we're going to combine two questions regarding advertising. The first is from Robert Smith: What were advertising expenses in the fourth quarter? How much of an increase are you budgeting for fiscal ‘24? The second part is from Ethan Starr, an individual investor, and it also relates to advertising: What results are you seeing from the most recent Cat's Pride Celebrity Endorsement Campaign with a prominent actress? Are the results meeting or exceeding your expectations for return on investment? I'm going to turn that over to Chris Lamson to answer.

Chris Lamson, Group VP of Retail and Wholesale

Good morning, Robert and Ethan. Thanks for the questions. Regarding the advertising expenses from the past year and our future budget, the consumer business spent the overwhelming majority of our advertising dollars this past year; that's why I'm addressing it. We spent roughly two-thirds of our total fiscal spend in Q4. For three reasons: we aimed to promote full shelves knowing our supply chain was stable; we shifted our ad campaigns from our Litter for Good campaign to emphasizing the benefits of lightweight litter, and we launched antibacterial litter at the very end of the fiscal year, which we wanted to support right away. Looking into fiscal ‘24, we'll see a modest increase in spending for the full year, but it will be more evenly distributed than last year. Regarding influencers and celebrity campaigns, we continually monitor our return on investments and adapt our strategies. The content you mentioned performed well for us, and we anticipate leveraging influencers further.

Leslie Garber, Manager of Investor Relations

Thank you. The next question comes from John Bear. There have been numerous announcements recently of poultry and swine plant shutdowns in the U.S. Since quarter-end, have you seen any impact on your domestic sales effort? Backing out the timing of shipments that caused softness in animal health sales in Latin America, Asia, and China, as noted in the press release, are animal health sales trends continuing to improve? Wade?

Wade Robey, VP of Agriculture and President of Amlan International

Thank you, Leslie, and thanks, John, for that question. Let me start with your last question: are animal health sales trends continuing to improve? The answer is yes, although it varies by region. We're seeing improvements across the animal production industry worldwide due to the lingering effects of the pandemic and regional economies. In the U.S., there has been some pressure on profitability among large producers, leading to a bit more scrutiny regarding new products, but we don’t expect a significant impact on our growth as our portfolio is new and we're continuing to see good testing, adoption, and growth not just in the U.S., but globally as well.

Leslie Garber, Manager of Investor Relations

Thank you. The next question comes from Ethan Starr, and he asks, to what extent are your costs continuing to increase, if at all? Aaron Christiansen will handle that question.

Aaron Christiansen, VP of Operations

Leslie, thank you, and Ethan, thanks for the question. Unfortunately, costs do continue to rise. I'll cite four factors quickly: First, the Employment Cost Index indicates that national total compensation costs are up 4.5% over the last 12 months, peaking as high as 5.5% recently. We're continuously working to remain competitive in total compensation for our teammates. Second, material costs continue to rise. The consumer price index has increased for nine consecutive months, and many of our suppliers base their costs accordingly. Third, we are also facing ongoing repair costs related to our aging infrastructure, which increase our expenses beyond historical levels. Lastly, as a mining and milling company, our costs are rising due to environmental regulations and the need to source materials from greater distances as we exhaust nearby resources.

Leslie Garber, Manager of Investor Relations

Thanks, Aaron. The next question is from Robert Smith. He asks, what accounts for the dramatic increase in diluted common shares? I'll turn that over to David Atkinson.

David Atkinson, VP Corporate Controller

Thank you, Leslie, and thank you, Robert, for the question. I would like to point to the earnings per share reconciliation noted in Note 1. Although it’s unlikely, we included the potential impact of all of our Class B shares being converted to common shares. There have been no new share issuances other than those related to the restricted stock program, which has been consistent with prior years.

Leslie Garber, Manager of Investor Relations

Okay, thank you. We will move on. Robert Smith asks, discuss your R&D efforts including new products for the current fiscal year, and what is the R&D budget for the current year? Did it decline meaningfully last year, and if so, why? I'm also combining this with John Bear's question, which is: when did you receive EPA approval for your new antibacterial product? Will it be marketed as a standalone product, or will the additive component be included in your other offerings to enhance overall marketing efforts? Wade, can you start us off?

Wade Robey, VP of Agriculture and President of Amlan International

Thank you, Leslie, and thank you, Robert. We consider our R&D efforts in two buckets: traditional R&D at our innovation center and contract research organizations for product development, and field validation work either with customers or at regional universities that helps validate our products' performance. As a result, we see volatility in our expenditures, as R&D in research and discovery can be more costly than field validations. Currently, we’re focusing on field validation for two new products we've introduced to market. These evaluations help us be more efficient with our spending, allowing us to offset some of the typical R&D expenses. Now, I'll turn it over to Chris to discuss our antibacterial cat litter.

Chris Lamson, Group VP of Retail and Wholesale

Thanks, Wade, and thanks for the question, John. At the end of fiscal '23, we launched Oil-Dri Cat's Pride antibacterial clumping litter—the first and only EPA-approved antibacterial litter in the U.S. This product kills 99% of odor-causing bacteria and helps improve the overall effectiveness of our clay. Retailers are excited about this product, and virtually all of our customers have taken it into distribution, and many beyond that are expanding their distribution. We intentionally chose to market it as a new item to build shelf space and highlight its unique benefits. We're also working on further innovations. The EPA approval process was lengthy—over 18 months—leading to an extended timeline before we could bring this product to market, but we’re pleased with the initial responses from customers and retailers.

Leslie Garber, Manager of Investor Relations

Thanks, Chris. The next question comes from Ethan Starr, who asks, is Amlan making progress toward securing significant orders from large producers of poultry or swine? Wade, can you please answer that?

Wade Robey, VP of Agriculture and President of Amlan International

Yes, thank you, Leslie, and thank you, Ethan. The simple answer is yes. In the North American market, we are already selling to several of the largest integrators. We're continuing to grow our presence through recent engagements with key accounts here. Globally, we have established relationships and are seeing growth in our sales across alternative species, including the dairy market in Asia, and as we replicate our success in the Brazilian cattle market, we're excited to see the adoption of our products across multiple species in these markets. We expect to continue progress in this direction.

Leslie Garber, Manager of Investor Relations

Thank you. The next question comes from John Bear, asking whether we've seen any benefits in shipping costs given recent drops in ocean freight rates. Aaron will answer this question.

Aaron Christiansen, VP of Operations

Yes, John. I'm happy to answer. As mentioned earlier, we continue to battle rising cost inputs overall, but we have seen relief in our freight costs, both domestically and for exports. This area was extremely impacted during the supply chain challenges and pre-pandemic period. While these costs have not returned to historical lows, we are experiencing relief. More importantly, we're witnessing improvements in reduced lead times, allowing us to meet customer needs better.

Leslie Garber, Manager of Investor Relations

Great, thank you. Susan, is your line working now? The next question is from Robert Smith, asking about seasonality and quarterly numbers. Dan, would you like to take that?

Dan Jaffee, Chairman, President, CEO

Good question. Generally, there's not a lot of seasonality in our business when you consider our diversified portfolio. While individual products may have some seasonality—like Pro's Choice, which relies on field usage in spring, summer, and fall, and our fluids purification business, which is tied to harvest timings—overall, the consolidated business remains relatively flat, validating our diverse portfolio. In fiscal '23, we had fortunate success across most products, and we see a lot of positive momentum moving forward. Thank you for your question. Regarding Clorox, it’s relevant because they face cyber security issues affecting their ERP system, which has impacted their supply chain. They appear to have resolved their issues and are back on track. We expect any impact on us to be immaterial despite being their second-largest customer. We appreciate them and wish them the best.

Leslie Garber, Manager of Investor Relations

John Bear has one last question: do you anticipate any significant increases in capital expenditures for upgrades or replacements of plant operations over the next three years?

Dan Jaffee, Chairman, President, CEO

Yes, the answer is a resounding yes, but Aaron mentioned it already.

Aaron Christiansen, VP of Operations

Dan already answered the key message: we are currently in the midst of a multi-year cycle of higher capital spending than we have seen historically. We have an intelligent 5 to 10-year plan established to overlap business continuity, growth, and savings investments.

Dan Jaffee, Chairman, President, CEO

I want to thank our customers for understanding that the depreciation we charge is based on historical costs, while the cost to replace these aging assets is significantly higher than original costs. They've received the message well; we appreciate their support, which is critical for us to continue supplying them with quality and quantity. We’re out of time. I assume everyone is happy with the quarter, happy with the fiscal year, as is the team and I. We look forward to talking to you after our first quarter, which ends on October 31. Our next call will cover first quarter FY '24. Until then, be safe, be healthy, and thank you for your support.

Operator, Operator

This concludes today's conference call. Thank you for participating.