Earnings Call Transcript - ODC Q1 2020

Leslie Garber, Manager of Investor Relations

Good morning and welcome to the Oil-Dri Corporation of America's 2019 Annual Meeting of Stockholders. My name is Leslie Garber and I'm the Manager of Investor Relations at Oil-Dri. During the meeting today, we will be covering the election of Directors and two other stockholder voting items. Next will be the presentations and financial review followed by time for Q&A. We ask that you hold your questions until the Q&A portion of the meeting. At that time we will be taking questions from the live audience, phone lines and from our webcast. Now it is my pleasure to introduce our General Counsel and Secretary, Laura Scheland.

Laura Scheland, General Counsel and Secretary

Good morning ladies and gentlemen. It is 9:30 a.m. on December 11, 2019, and I now call to order the 2019 annual meeting of stockholders of Oil-Dri Corporation of America. While I conduct the meeting, Tony Parker, the Assistant Secretary of Oil-Dri will record the minutes for this meeting. As you entered the meeting room, you should have received an agenda and the rules of conduct that will govern the meeting. We ask that you adhere to these rules. Stockholders who previously voted by proxy using the internet, telephone, or mail need not cast ballots today unless they wish to change their vote on their proxies. We will provide ballots to those who desire them at the appropriate time. Oil-Dri has appointed Gerry Lane of CT Hagberg LLC to serve as the inspector of elections for this meeting. He is present and has taken the oath of office. Commencing on October 30, 2019, a notice regarding the availability of proxy materials or a copy of the proxy materials was mailed to all Oil-Dri stockholders of record as of the close of business on October 14, 2019, which is the record date fixed by Oil-Dri’s Board of Directors for the termination of stockholders entitled to notice of and to vote at this meeting. I have an affidavit of mailing signed by Broadridge Financial Solutions Inc. confirming the foregoing and such affidavit is available for examination by any stockholder present here today. As described in the proxy statement, the purpose of this meeting is to elect nine directors, ratify the appointment of Grant Thornton LLP as Oil-Dri’s independent auditor for the fiscal year ending July 31, 2020, approve an amendment to the Oil-Dri Corporation of America 2006 long-term incentive plan and transact such other business as may properly come before this meeting. As of October 14, 2019, the record date for this meeting, there were 5,388,672 shares of Oil-Dri’s common stock and 2,219,468 shares of Oil-Dri’s Class B stocks outstanding. I have an alphabetical list of the holders of such outstanding shares and such list is available for examination by any stockholder present here today. As many of you know, holders of our common stock are entitled to one vote per share, and holders of our Class B stock are entitled to 10 votes per share, and generally vote together without regard to Class. A quorum is present at this meeting if holders of a majority of our common stock and Class B stock outstanding and entitled to vote are present in person or represented by proxy. Thus, the number of votes necessary to constitute a quorum at this meeting is 13,791,677 votes. Mr. Lane has informed me that there are more than enough votes represented at this meeting. Therefore, I declare that a quorum is present and accordingly, this meeting is properly convened and ready for the transaction of business. As described in the proxy statement, the first item of business is the election of nine directors. The proxy statement listed Oil-Dri’s nominees for director each of whom currently serve as a director of Oil-Dri. The nominees are Daniel S. Jaffee, Ellen-Blair Chube, Paul M. Hindsley, Joseph C. Miller, Michael A. Nemeroff, George C. Roeth, Allan H. Selig, Paul E. Suckow, and Lawrence E. Washow. In accordance with Oil-Dri’s bylaws, stockholders are required to provide advance notice of their intent to nominate candidates for directors. No such notice was received. Therefore, I declare the nominations for directors closed. A motion to elect nine directors as described in the proxy statement is now in order.

Dave Weiske, Stockholder

My name is Dave Weiske, I am a stockholder of record. I hereby move that each of Daniel S. Jaffee, Ellen-Blair Chube, Paul M. Hindsley, Joseph C. Miller, Michael A. Nemeroff, George C. Roeth, Allan H. Selig, Paul E. Suckow, and Lawrence E. Washow be elected as directors to serve until the 2020 Annual Meeting of Stockholders or until their respective successors are elected and qualified.

Bruce Sone, Stockholder

My name is Bruce Sone and I am a stockholder of record. I hereby second the motion.

Laura Scheland, General Counsel and Secretary

Are there any questions or comments on this motion? I hereby call the question and declare the polls open to vote on the motion. We will provide ballots to any stockholders who have not previously given their proxy or who desire to change their vote. Please raise your hand if you would like a ballot. Is there any stockholder of record who wishes to vote in person? I now declare the polls closed on this motion. As described in the proxy statement, the second item of business is the ratification of the appointment of Grant Thornton LLP as Oil-Dri’s independent auditor for the fiscal year ending July 31, 2020. Grant Thornton has just completed its six years as Oil-Dri’s independent auditor. The audit committee of the board of directors of Oil-Dri has appointed Grant Thornton to again serve in the role for fiscal year 2020 and has directed that the appointment be submitted for ratification by the stockholders at this meeting. A motion to ratify Grant Thornton as Oil-Dri’s independent auditor for the fiscal year ending July 31, 2020 is now in order.

Michelle [ph], Stockholder

My name is Michelle and I'm a stockholder of record. I hereby move that the appointment of Grant Thornton LLP as Oil-Dri’s independent auditor for the fiscal year ending July 31, 2020 be ratified.

Bruce Patsey, Stockholder

My name is Bruce Patsey and I am a stockholder of record. I second the motion.

Laura Scheland, General Counsel and Secretary

Are there any questions or comments on this motion? I hereby call the question and declare the polls open to vote on the motion. I now declare the polls closed on this motion. As described in the company's proxy statement, the third order of business is the approval of an amendment to the Oil-Dri Corporation of America 2006 long-term incentive plan to increase the number of shares of stock authorized for issuance thereunder. A copy of the proposed amendment was included as Appendix A to the company's proxy statement. A motion to approve the amendment is now in order.

Steven Klein, Stockholder

My name is Steven Klein and I'm a stockholder of record. I hereby move that the amendment to Oil-Dri Corporation of America 2006 long-term incentive plan be approved.

Leslie Stephen Shaw [ph], Stockholder

My name is Leslie Stephen Shaw and I'm a stockholder of record. I second the motion.

Laura Scheland, General Counsel and Secretary

Are there any questions or comments on this motion? If not, I hereby call the question and declare the polls open to vote on the motion. I now declare the polls closed on this motion. I will now report the results of the voting at this meeting. As described in the proxy statement, a director may only be elected by a plurality of votes cast. The nine nominees who received the largest number of votes will be elected. Mr. Lane has informed me that the nine candidates nominated by Oil-Dri received the largest number of votes. I therefore find that each of Oil-Dri's nominees for director has been elected as a Director of Oil-Dri, to serve until the 2020 annual meeting of stockholders or until his or her respective successor is elected and qualified. Congratulations to each of you. As described in the proxy statement, an affirmative majority of the votes represented at this meeting is necessary for ratification of the appointment of Grant Thornton as Oil-Dri's independent auditor for the fiscal year ending July 31, 2020. Mr. Lane has informed me that such ratification received more than a majority of the votes represented at this meeting. I therefore find that the appointment of Grant Thornton as Oil-Dri's independent auditor for the fiscal year ending July 31, 2020 has been ratified. Note that representatives of Grant Thornton are here with us today and will be available after the meeting to answer any appropriate questions. As described in the proxy statement, an affirmative majority of the votes represented at this meeting is necessary for approval of an amendment to the Oil-Dri Corporation of America 2006 long-term incentive plan. Mr. Lane has informed me that such proposal received more than a majority of the votes represented at this meeting. I therefore find that the third amendment to the Oil-Dri Corporation of America 2006 long-term incentive plan, a copy of which was included as Appendix A to the company's proxy statement is approved. You have now heard the results of the voting and this completes the business to be conducted at this meeting. Since there are no other matters to come before this meeting, a motion to adjourn is now in order.

Curtis Wellborn, Stockholder

My name is Curtis Wellborn and I'm a stockholder of record. I hereby move that this meeting be adjourned.

Tony Mitchell [ph], Stockholder

My name is Tony Mitchell and I am a stockholder of record. I second the motion.

Laura Scheland, General Counsel and Secretary

All in favor of the motion of adjournment please signify by saying 'I'. Those opposed please signify by saying 'no'. The motion has been carried. It is now 9:36 a.m. on December 11, 2019, and I hereby declare the meeting adjourned. Thank you all for attending. I'm now happy to introduce Dan Jaffee, our President and Chief Executive Officer.

Dan Jaffee, President and CEO

Thank you, Laura. Good morning. I would like to start by saying fiscal 2019 was quite a year. Those of you who followed the company know we had quite a rollercoaster ride in fiscal 2019. We literally started the year on August 1st, launching our new ERP system and while we picked the right package and we did a lot of things right, as those of you who've been through this yourselves know, it never goes as planned. And while they call it a 'go live', we pretty much went dead. And the whole company had to join in and make things right or not impact our customers. And they did a phenomenal job. You've seen on our name tags that we call each other teammates; these are Oil-Dri teammates. Because that's truly what we are. At Oil-Dri, we believe that achieving success is a team effort. I want to start by acknowledging the board, as they played a significant role in this. I will read out their names and please hold your applause until the end. Knowing that Joe Miller and Bud Selig are not here: Ellen-Blair Chube, thank you, Ellen; Paul M. Hindsley; Michael A. Nemeroff; George Roeth; Paul Suckow; and Larry Washow. Did I miss anyone? No, I did not. So please give a round of applause for the board. I had the opportunity to interact with some investors who are here today, and universally, everyone was very impressed with the talent of the Oil-Dri team. The board deserves a lot of credit. For years, they've been pushing me to keep upgrading. Every time someone leaves, let's take it as an opportunity to upgrade and let's bring more training and give our current teammates the experience to up their skills. And so the results you're going to see today and going forward are a direct result of that team's effort. And I'm proud to be the leader of the team. I would say my most important job is to put the team together and then help the team put our direction together, our strategies, our goals as we move forward. So I always like to recognize the new vice presidents. I'd love to recognize everybody in the room. I think I just did in a general way. But specifically, I'm going to recognize people who are either with the team which are promoted into a new vice-presidential role, or people that weren't even with us a year ago and are now in a vice presidential role for us. So first, I would like to start with Aaron Christiansen. So Aaron has been with us for what, eight years? No, five years now. Is that about right? Four years, there we go. I hate to take notes because I like to speak extemporaneously, but then I miss some stuff. But we've had some dynamic growth in our consumer area. For the first 73 years of Oil-Dri's history, our packaging was primarily in rail cars, big bags, and 50-40 pound bags, bulk hopper cars, big one-time bags. It didn't get to be until we launched lightweight litter and fresh and light and then got into private label lightweight that the majority of our units became sold in jogs, boxes, and the like. And so we needed to have some experience and some skills on someone who could put stuff in high speeds at low costs and small packages. And that really wasn't a skill set we had at Oil-Dri. So we set out to find someone who had significant CPG experience like Unilever and Procter & Gamble. We were lucky to find Aaron. He graduated from Wash U. with a degree in mechanical engineering. He then went to Procter and spent years at Procter working on well-known household names. And he did everything he could to look like Mr. Clean. So that's just how committed Aaron is to his job. In fact, I'm proud to say he was promoted to VP of all North American manufacturing this year. Under his leadership, our North American operations team has been rebuilt, relocated, and refocused. All the plant managers have either been moved around or brought in new. This team is really reinvigorated. Our safety, quality, and financial metrics are all headed in the right direction. And we're very fortunate to have Aaron on the team. So Aaron, please stand up and be recognized. And not with us today is my brother-in-law. Let me get through this. Okay, there we go. Tom Cofsky, our family dog, my parents had a dog Daisy and they had a dog Lily from the same litter, their golden retrievers. They're 14.5 years old, if you can imagine. When my father passed away, Carey and Tom took over the stewardship of Daisy so that she can be reunited with her sister. They've been doing great, and Daisy's not doing so well anymore. But at 14.5, she has lived an amazing life. So Carey and Tom rightly so are with Daisy. This is a tough day for them on that front. But Tom joined us after working at UOP and has now been with Oil-Dri for 32 years in a variety of roles. He started out in the ag division and then went manufacturing. When we went live with JD Oracle, his unique skill set of being able to get very focused and process-oriented really made him invaluable to us. He has always been a proponent of processes over people, making sure we have the right disciplines in place. He's doing a phenomenal job as our VP of Global Infrastructure. Sarah Heidkamp is our Vice President of Non-Foods and E-Commerce. She got her BFA from UIC and we sponsored her to receive her MBA from Kellogg Business School at Northwestern. She has a great background in consumer packaged goods with Kraft, Meyers, Vitafoods, and she's been with us six years. We give her accounts to cover like Walmart and Target. They're in great hands; I mean, those are two really tough, demanding accounts. They want data to drive decisions. Paula got her BS in Accounting from Northern Iowa and her MBA. She then went to Arthur Young and worked in public accounting, and has been with us for 19 years. She was our Assistant Controller before being promoted to Vice President Controller. The thing I love about Laura is that she leads by example and if she has any flaws, it's her commitment to her job. She literally will forego the life part for the work when the job demands it. Next is Jessica Moskowitz. Jessica got her accounting degree in finance from Indiana. She got her MBA from Kellogg too. She was an analyst at William Blair and did a lot of research. She then went to Kraft and rose to the level of Brand Manager working on desserts. She has been with us for only two and a half years, and she has done such a great job leading our consumer products division. So when we went live, we had the perfect storm; not only were we trying to implement a new system but our business was booming at the same time. Our supply chain was under a lot of pressure. Getting product to our customers became something that used to be easy and routine, but it became difficult. Example: we've always been one or two at Publix on their supplier scorecard. After we went live, we dropped to 53 out of 54. It became painfully clear we needed a supply chain guru, and we were very fortunate to find Molly. So Molly got her Industrial Engineering degree from Northwestern. She worked at Procter for 19 years, went to Kraft and then Abbott. She has been with us for eight months, and her impact has already been incredible. She is an S&OP Sales and Operating plan guru. We are now trying to catch up to what she knows. This is how they ran the business in large companies. We used to rely on people, which is great, but when people get sick or take vacations, you're in big trouble. We're rapidly becoming data-driven with forecasting, rolling forecasts, and helping to drive our supply chain. We're back number one at Publix, which is very exciting. At this point in time, the best part about today's presentation is that you will hear from the team. Before I do that, I'll show a video. This ran nationally on Fox Business Network. They were looking for people who have used earth for innovation. They stumbled across lightweight litter. They called me to discuss, and I told them about how we're cutting the carbon footprint by up to 40% by using lighter litter.

Molly VandenHeuvel, Chief Operating Officer

Hello, everyone. Good morning, I'm Molly VandenHeuvel, the Chief Operating Officer now. I want to talk to you this morning about our implementation of our sales and operations planning as mentioned earlier. I will reference it as S&OP. This is a broad integrated business planning approach that allows for better decision-making across our business. The first week of the month, we have our portfolio management review; the second week is our demand review; the third week involves supply, and the last week is our management business review. Why S&OP and why now? Well, when looking to make major changes in the organization, we really have to focus on three areas for implementation: people, processes, and tools. We've spent a lot implementing JDE and we want to leverage it to its full extent. The S&OP process goes hand in hand with that. Some benefits of S&OP include integrated plan visibility, the focus on forward-looking horizon and better collaboration across functions. The focus is always on the customer first, followed by cost, cash, and then capabilities. We've also been working on optimizing inventory management and ensuring processes and people have the capability to sustain results in the future.

Jessica Moskowitz, VP and General Manager of Consumer Products Division

So good morning, everyone. I am Jessica Moskowitz, and first of all, I want to thank Dan for entrusting me with leading our consumer products division. Our branded litters and accessories continue to have a strong strategic push. This past year has seen a significant rebranding effort of our Cat's Pride brand, culminating in the packaging and rebranding launch this past May. The impetus for this was thinking about consumers who are challenged to make decisions in less time. We literally have seconds to connect and influence. As we redesigned our packaging, we simplified our communication and increased differentiation between our product lines. The changes are designed to connect with consumers on a more emotional level. We have also partnered with Clear the Shelters to help animals find forever homes and we're excited about our sponsorship of 'Cat Week' with Ellen DeGeneres, bringing our brand message to life.

Mike McPherson, VP of B2B Business

Today I'm going to spend a few minutes talking about how Oil-Dri is creating value from our unique mineral and the new era of antibiotic-free livestock production. Our expertise in mineral absorptive technology is key for modifying our unique minerals to help remove contaminants from various fluids, including those found in livestock. We are seeing significant opportunities as the industry moves away from antibiotic use in animal production. The trend in antibiotics has created opportunities for our technology. The total market in antibiotic alternatives has been growing rapidly, and we believe our unique minerals are perfectly suited for this application. We've made substantial investments in R&D, combining material sciences with life sciences to leverage our technology for greater impact.

Susan Kreh, Presentation Speaker

Good morning! Like Jessica, I am excited to be here this morning. It’s actually my first time speaking at the Annual Meeting and yesterday marked my one-year anniversary at Oil-Dri. The year has been both challenging and rewarding. We’ve moved from survive to thrive, and we’re positioned well to serve our customers with the new ERP technology. Our first quarter results have shown significant improvements across the board, with record net sales of $71 million. Volume growth of 4% year-over-year reflects strong performance in all of our business segments. Our gross profit per ton has also increased from $89 to $105 per ton, which demonstrates improvements in our cost position and overall operational efficiency. This robust performance gives us a strong cash position. With only $3 million of debt and a $45 million undrawn revolving credit facility, we are well-positioned for future growth initiatives.

Dan Jaffee, President and CEO

Now I’d love to open up to Q&A and will circulate a mic just so that the people on the line can hear you. I encourage open dialogue and any questions you may have.

Terry [ph], Shareholder

Yes, I'm Terry. I've been a shareholder for a couple of years, I'm impressed by what I'm seeing. Your material, is that something that’s readily available or do you need to find a specific location to mine?

Dan Jaffee, President and CEO

Great question! The material is very pervasive across the United States but not easily accessible due to the economics of mining it. There haven't been any new clay plants built in the United States in the last 25 years. We have over 40 years of proven reserves with an established infrastructure. So yes, we are well-positioned. I appreciate your interest in our company.

Dan Joseph, Shareholder

Thank you for combining the names of all cat litter products under Cat's Pride. Could you tell us where the mining facilities are located and the type of clay being used?

Dan Jaffee, President and CEO

The plant featured in the video is located in Ripley, Mississippi, and we primarily use calcium bentonite in our products.

Ethan Star, Shareholder

What will it take to significantly increase B2B sales? Is it a matter of new products or greater distribution?

Dan Jaffee, President and CEO

What it takes is patience. We made fundamental changes to our commercial team and are now positioned to capitalize on the growing market for antibiotic alternatives. There’s a huge opportunity for us as regulations tighten around antibiotic use. With a greater foothold in select regions, we expect substantial growth opportunities in the coming years.

Laura Scheland, General Counsel and Secretary

We're ready for the next question on the telephone lines. Anyone have a question?

John Bair, Analyst

Great quarter, great outlook. Have you considered having John Holden do a follow-up segment focused on Oil-Dri’s significant efforts in the animal health market?

Dan Jaffee, President and CEO

That's a great question! We would certainly want to participate. I appreciate everyone’s contributions and questions during this meeting. We have a lot of potential moving forward, and I personally believe in the direction we are headed.