Earnings Call Transcript - ODC Q1 2021

Operator, Operator

Welcome to the 2020 Annual Meeting for Oil-Dri Corporation of America. Our host for today's call is Leslie Garber, Manager of Investor Relations. At this time, all participants will be in a listen-only mode. I will now turn the call over to your host, Leslie Garber. You may begin.

Leslie Garber, Manager of Investor Relations

Good morning. Due to the current pandemic, we are conducting this meeting virtually to ensure everyone's health and safety. By hosting this meeting via live webcast, we're able to be more inclusive, reach a greater number of our stockholders, and save costs. On your screen, under meeting materials, you will find the meeting agenda, rules of conduct, lists of stockholders of record, and Oil-Dri's proxy statement and annual report.

Laura Scheland, Chairperson

Good morning, ladies and gentlemen. I now call to order the 2020 annual meeting of stockholders of Oil-Dri Corporation of America to conduct the formal business set forth in the notice of meeting and proxy statement. Commencing on October 27, 2020, 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 9, 2020, which is the record date fixed by Oil-Dri's Board of Directors for the determination of stockholders entitled to notice of and to vote at the meeting. Broadridge Financial Solutions, Inc. has delivered an affidavit confirming the foregoing. Oil-Dri has appointed Peter Sablich of CT Hagberg to serve as the inspector of election for this meeting. He is present and has taken the oath of office. As of October 9, 2020, the record date for this meeting, there were 5,384,560 shares of Oil-Dri's common stock and 2,077,599 shares of Oil-Dri's Class B stock outstanding. Holders of our common stock are entitled to vote one-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 webcast or represented by proxy. Thus, the number of voters necessary to constitute a quorum at this meeting is 13,080,276 votes. Mr. Sablich has informed me that there are more than such number of votes represented at this meeting. Therefore, I declare there is a quorum present for purposes of transacting business. Now, I will present some matters to be voted upon. If any stockholder would like to make a comment regarding any of our proposals, please submit your comments through the Ask a Question field in the web portal, and we will review any comments on the proposal themselves after all proposals have been presented. I will move to the first proposal. As described in this proxy statement, the first item of business is the election of eight Directors. The proxy statement listed Oil-Dri's nominees for Directors, each of whom currently serves as a Director of Oil-Dri. Those nominees are Daniel S. Jaffe, Ellen-Blair Chube, Paul M. Hindsley, Michael A. Nemeroff, George C. Roeth, Allan H. Selig, Paul E. Suckow, and Lawrence E. Washow.

Dan Jaffee, CEO

Thank you, Laura. Hello and welcome, everyone. First, I appreciate the recount of the vote; since it favored me, I won’t make any unfounded allegations of voter fraud or initiate lawsuits against our electorate. I’m glad to know we were properly elected, and I will respect the decision. Fiscal 2020 is a year none of us will forget, and we often say at Oil-Dri that our success is a team effort, which has been exemplified this year. I want to start and end by thanking the global Oil-Dri team, as none of this would have been possible without their contributions. It is an honor to lead such a dedicated group of individuals who share our core values and strive daily to create value from sorbent minerals for our investors. This year, we’ve had the added responsibility of ensuring everyone’s fiscal and physical well-being. Since March, our non-frontline workers have been working remotely, while our frontline workers have been on-site every day, adhering to strict social distancing measures. We clean our facilities three times a day, and we conduct thorough cleanings on weekends. Thankfully, we’ve had only a few teammates who tested positive for COVID, and to our knowledge, they contracted it elsewhere. Thanks to our policy allowing people to stay home, recover, and quarantine, they haven’t brought it into the workplace. I want to thank everyone for maintaining both the fiscal and physical health of Oil-Dri.

Susan Kreh, CFO

Thank you, Dan and I know you love to sometimes add color on the finance stuff, so feel free to jump in. It's a privilege to be here today at our first ever virtual annual meeting on behalf of my teammates here at Oil-Dri to share the financial results of our record fiscal year in 2020 as well as our strong first quarter of fiscal 2021. Fiscal 2020 was a record year for Oil-Dri both for net sales and net income and momentum continued to carry into the first quarter of fiscal 2021, which had the highest net sales of any of Oil-Dri's first quarters. As I proceed through these slides, I will be sharing a look back at the past decade of performance trends as well as focusing on our first quarter results. So, let's start by looking at 10 years of net sales growth, noting the stronger growth in the past two years, driven by our retail and wholesale products group where we are seeing the benefit of our strategic focus on the lightweight and private label segments of the cat litter market. Looking at the first quarter of fiscal 2021, the $76 million in first-quarter net sales represents year-over-year growth of 7% and is driven by 9% growth in our retail and wholesale products group. The company based 4% growth in our business-to-business products group, where strong sales of our agricultural products were partially offset by a year-over-year reduction in net sales of our Amlan products. As Dan mentioned, we have made some key organizational changes in our Amlan business to better position us to serve the animal health market and Dan has refocused the team on the execution of our animal health product strategy. Taking a 10-year look at our tons sold, you can see the downward impact as we very purposefully continue to focus on our mission of creating value through sorbent minerals. We continue to review our product portfolio to weed out products that no longer achieve our mission of value creation, while developing new products that create additional value for our customers. As we look at net sales per ton, we see the 10-year impact of focusing on value creation because while volume has decreased 16% over the past 10 years, our net sales per ton has increased from $244 to $375 per ton, an increase of 54%. And that continued focus led to a net sales per ton of $383 in the first quarter of fiscal 2021, an all-time record for Oil-Dri. Right. And not only are we driving growth in our net sales per ton, we are driving even stronger growth at a 10-year compound annual growth rate of 6% in our gross profit per ton, a key profitability metric that we use to manage the performance of our business. In fact, the $100 gross profit per ton that we achieved in fiscal year 2020 was an all-time high for Oil-Dri, and we continued that momentum into the first quarter of fiscal 2021, delivering gross profit per ton of $102. Next, you can see that our strong gross growth in gross profit per ton over the past decade has translated into an even stronger 10-year compound annual growth rate of 8.6% on net income per ton. The $25 of net income per ton is another all-time record for Oil-Dri. Looking at our first-quarter performance, gross profit of $20.3 million was $400,000 higher than the same quarter in the prior year. At the same time, our selling, general, and administrative expenses were down by $700,000, due primarily to reduced travel and related expenses and some timing shifts in advertising. With our first-quarter net income attributable to Oil-Dri of $4 million, which is a 5% increase over the same quarter in the prior year, we generated a strong $20 net income per ton in the quarter. On an earnings per basic common share basis, we came off a record year at $2.70 per share to deliver $0.57 per share in the first quarter of $0.06 per share over the first quarter last year. Next we see the 10-year delivery of dividends per share that are both predictable and growing. The dividends per share during our first quarter rose to $0.26 from $0.25 per share marking as Dan noted earlier, 17 consecutive years of growth and the dividends we paid to our shareholders. We continue to maintain a strong balance sheet and our solid financial performance enables us to invest on multiple fronts. In addition to the return to our shareholders through dividends, we fund new product development through R&D, we maintain our plants, and we fund cost reduction opportunities in those plants through our CapEx. In fiscal year 2020, we repurchased 5.5 million of our outstanding shares. From a liquidity standpoint, Oil-Dri is well-positioned with a low level of debt and with a $75 million shell financing arrangement that is already in place that should enable us to have quicker access to funding when the right investment opportunity arises. And speaking of opportunities, with the focus and alignment on our key strategies in cat litter and animal health, and with some key investments that have been made in technology, in organizational capacity, and in leadership, combined with the strong financial performance of our business, we are eager to pursue the right investment opportunities when they become available. And with that summary, it is my pleasure to turn this over to Molly VandenHeuvel, our Chief Operating Officer.

Molly VandenHeuvel, COO

Thank you, Susan. Good morning. As Susan mentioned, I’m Molly VandenHeuvel, Chief Operating Officer at Oil-Dri. I also want to start the discussion with a COVID recap and impact. Dan summarized some of this, but I'll get into a little bit more detail. So, 2020 was a tumultuous year. But it is times like these where the true values and core of a company become evident, and at Oil-Dri, our core is focused on keeping our teammates and our business healthy. As you heard from Susan, we did keep our business very healthy. I’ll talk about how we kept our teammates healthy and how we kept our business operations running. First of all, being an essential business was a key component. We are essential through many of our applications; to name a few, we're part of the food supply chain and oil purification. We supply antibiotic alternatives for animal health. And of course, cat litter is still essential for cat owners, more so now that we're all inside at home. So, we needed to make sure that we kept our business running while keeping everyone healthy. Our teammates have been amazing, and we have done what we can to support them. Their physical safety, financial health, and emotional well-being have been a top priority. At the start of the pandemic, we pivoted quickly. Anyone that was not directly needed for production worked remotely. We had a paradigm before the pandemic that many roles in the past just could not be effective remotely, such as our important customer service representatives. But we leveraged many of our teammates, and many of our functions and processes to make the adjustment and break that paradigm. We ensured a rapid and successful transition that has reinforced something we say often, which Dan mentioned earlier: winning at Oil-Dri is a team game. For our teammates still on the front line, we implemented measures to keep them safe, including enhanced cleaning processes, social distancing requirements, online meetings, and of course, wearing masks, which we ensured was done 100% of the time while on property. These actions have been successful, and we prevented any outbreak or transmission at Oil-Dri. Through this transition, we had no major impact on customer service, and in some cases, we shipped and produced in record quantities. So, not only has Oil-Dri survived this pandemic, but we've worked as a team to thrive, and we’ll continue to do so. Now, let’s talk a little bit about operational stability over this past year. Last year, I reviewed the sales and operations planning process we were implementing at Oil-Dri. As a reminder, this is a holistic process in how we run the business. It has a regular cadence of meetings each month with tools and processes to improve our end-to-end and cross-functional decision-making. It turns out that having this foundation prior to the pandemic has been instrumental in our success this year. It has really helped us through this transition and keeps us organized and focused. Our new portfolio management review has resulted in a robust list of potential new items for all of our divisions at various project stages. We spent a lot of time redefining current project success criteria and developing many new breakthrough product ideas. Project still must meet financial hurdles at each stage and have detailed timelines that are managed to keep us on track. We are setting ourselves up for healthy future growth with solutions that create value from sorbent minerals. Additionally, we have a monthly demand process to forecast the future. We've also seen improvements in the supply area, including a rough cut capacity planning process to identify capacity gaps early and develop plans to close these gaps, enabling service level improvements. We are proud of the continuous improvements made in our operations, both for our internal and external customers. In terms of cost, we took out $5 million in costs in the supply chain in 2020, which helped improve gross profit. Our cash and inventory position slightly reduced. But I will say that mix and active inventory has improved considerably. We've spent a lot of time right-sizing working capital, focusing on inventory by SKU, and reducing obsolete stock. All these efforts have built a strong foundation for continuous improvement in the foreseeable future. With that, I'd like to hand it off to Jessica Moskowitz, our VP and General Manager for our Consumer Products Division.

Jessica Moskowitz, VP and General Manager

Thank you, Molly. Hello, good morning to everyone. My name is Dr. Moskowitz, and as Molly mentioned, I'm the Vice President and General Manager of the Consumer Products Division. Our consumer division continues to post strong growth in 2021, coming off an 8% net sales growth in 2020. Net sales were up 12% in Q1 2021 driven primarily by gains in our branded scoop cat litter and private label cat litter businesses. These gains reflect continued focus on three key pillars. The first is creating value through vertical integration. Our access to premium lightweight clay mines across the country drives value for Oil-Dri, but it also drives value for our customer partners and pet parent consumers. Our vertical integration, coupled with our 80%-plus years of experience in cat litter, provides us with a meaningful point of difference. Secondly, we continue to invest resources with a focus on continuous improvement and quality, ensuring that we delight consumers by offering them great products at a great value. Thirdly, our team embraces our role as a cat litter company that cares, not just through our long-term commitment to giving back to animal causes, but also in the daily decisions and strategies we set as a business. From a product perspective, on the cat litter side, we've focused on expanding our lightweight business for obvious reasons. Lightweight cat litter addresses a key pain point for consumers, as traditional cat litter is very heavy. Second, our vertical integration in lightweight materials allows us to uniquely offer premium benefits to consumers at a value. Thirdly, this shift benefits the entire supply chain, allowing for less weight, less freight, and ultimately fewer trucks on the road. Our emphasis on lightweight continues to yield growth across our private-label category, both from new customer acquisition and organic growth, as well as in our branded portfolio. On the branded side, we continue to focus on our best performing lightweight products. Thanks to a strong cross-functional team effort, this year we launched two new items under our best-performing formula, natural care and bacterial odor control. Both products combine a 25% lighter formula with a 10-day odor control feature. We're using those wins to fuel our growth and refine our lightweight strategy into the future. Our lightweight experience has led us to launch a new line of flushable cat litter. This is important because handling and disposing of cat litter is a concern for consumers. About 30% of consumers keep their litter boxes in their bathrooms, and with our flushable option, consumers can simply scoop and flush. Our flushable litter is designed to dissolve once dispersed into a toilet pipe, making it safe to flush while still clumping. Today, only 1.4% of distribution points offer flushable products, but 5.6% of buyers are already purchasing them. This creates a significant opportunity for growth once these products gain distribution. Our media plan will focus digitally, targeting consumers who are already seeking out flushable options. Through our targeted marketing campaign, we will illustrate how easy it is to use flushable cat litter. In closing, I want to thank the entire division. The most critical growth drivers stem from our dedicated team members who have helped us become the catalyst that cares. Thank you, and with that, I’ll turn it over to Fred Kao from Amlan International.

Fred Kao, VP of Global Sales for Amlan

Thank you, Jessica. Thank you, Dan, for the introduction earlier. Good morning. I'm Fred Kao, and I'm here to talk about the opportunity for Oil-Dri's unique mineral to improve global food production by sharing our most exciting animal health product and why it has so much potential to make significant impacts in the $3 billion antibiotic market, especially as trends move towards non-antibiotic practices. China, for example, started this trend in July 2020. On the feature of Build in America aired in September, our CEO, Dan Jaffee, emphasized the importance of our unique mineral to capture the animal health market for years to come. Mother Nature has provided everything we need to survive, and our international business is harnessing the use of mineral technology to reduce or even eliminate antibiotics used to promote growth in animal protein production. Amlan stands apart due to key differentiators: not only do we have the best scientists working in our innovation center, but also a growing portfolio, anchored by our unique mineral technology. Our mineral technology surpasses competitors in the marketplace. We control our raw materials, ensuring product quality and independent product sustainability. Our activated minerals not only treat the animals but can also prevent challenges through quorum sensing communication. This mode of action inhibits bacteria from taking over the host. Our products absorb harmful toxins in the gastrointestinal tract, allowing for healthy feed conversion ratios that lead to significant profit improvements for animal protein producers. Our growth strategy includes identifying opportunities, expanding our team strategically, targeting key players in different regions, aligning marketing initiatives with sales objectives, and accelerating growth with both new and existing products. We've already secured positive feedback from major protein producers in countries like the Philippines and Thailand, and we've doubled orders in China last month. Currently, we are expanding our team and plan to triple our size in the upcoming years. We are also developing diagnostic services and biologics that will strengthen our market position. Amlan is focused on driving growth strategies in the global market, and with that, I'll pass it back to our CEO, Dan Jaffee.

Dan Jaffee, CEO

Fred, thank you, and I’m really impressed with your grasp of our business. We're going to turn it over to Q&A. We've got a bunch of questions about Amlan and the changes, and you've answered a lot of what's out there. But Leslie, why don’t you read the questions and then we'll...

Leslie Garber, Manager of Investor Relations

We have two related questions. The first one is from Robert Smith, the Centre for Performance Investing. He asked, where was the direction failure at Amlan? And how will your approach be different? Do you believe you will be able to accomplish substantive progress during the current fiscal year? The second related question is from Ethan Star, a private investor. Aside from the pandemic, what are the biggest challenges in growing Amlan sales and why will you succeed where others have not?

Dan Jaffee, CEO

Great. Thank you, and I'm going to take the 50,000 foot view. I think you heard a lot from Fred, but I'm going to emphasize what he was talking about. I’ll analogize it to what went on with lightweight cat litter. Before we revolutionized cat litter, it was considered on a price-per-pound basis. Those with the lowest price per pound were perceived as the best value. Despite the fact that no consumer uses it by weight, they all buy it by volume. This produced a race to the bottom, incentivizing cheap, dense materials, which led to heavier and less environmentally friendly products. What we did was turn the entire category on its head to the advantage of the consumer and the environment because we were able to cut the carbon footprint by 50%, reducing the number of trucks going into our retailer distribution centers in half. It required a contrarian mind, and I was unique in my position to take a significant risk to turn this $2 billion U.S. market upside down. A similar approach is essential for Amlan. The previous strategy was letting competition define the playing field, painting minerals as a negative. Our goal is to make them come to our field. We control quality from mine to farm, ensuring our minerals deliver exceptional value. Our products work uniquely by absorbing toxins and preventing outbreaks, which is a better solution than antibiotics. We're focused on the poultry segment, where we have significant expertise and opportunities. We’re not abandoning swine, but poultry will be our primary focus. We are also committed to improving our communication of value to the consumer. I believe you'll see improvement, though it will require some time. We are making substantial adjustments to our go-to-market strategy, ensuring we’re well-prepared for the future.

Leslie Garber, Manager of Investor Relations

Great. Next question from John Bair from Ascend Wealth Advisors. He says congratulations on a great year in a difficult time. Are there any new markets in animal health outside of poultry and swine that R&D efforts are either being evaluated or being actively pursued? If so, what might they be? And how far along in the process are you to possibly launch any new products?

Dan Jaffee, CEO

Yeah, John, great question. However, I'm not going to disclose specific strategies at this time. We are leaning into poultry and prioritizing excellence in that area. We believe being exceptionally good at one species will yield better results than being mediocre across various species.

Leslie Garber, Manager of Investor Relations

We do have a question from Ethan Star regarding the $5 million in supply chain savings. Could you share examples of how this was achieved and what prospects there are for future savings?

Dan Jaffee, CEO

Molly, take it away.

Molly VandenHeuvel, COO

Sure. I classify savings into three main categories: logistics, procurement, and manufacturing. In fiscal 2020, the most significant savings came from logistics through market-driven strategies and optimizing our contracts. We consolidated some ancillary warehouses, which helped reduce mileage and extra handling costs. For manufacturing, we've implemented foundational process improvements optimizing operations. In fiscal 2021, we plan to introduce significant capital projects aiming at alternative energy solutions and enhancements in our processes. The procurement team has also made great strides in renegotiating contracts and evaluating supplier options, which will lead to ongoing savings.

Dan Jaffee, CEO

Great. Thank you. Leslie, what else do we have?

Leslie Garber, Manager of Investor Relations

Yes. Our next question comes from Ethan Star. I'm pleased with the growth in cat litter sales. What opportunities are there for continued sales growth and the addition of new retail customers?

Dan Jaffee, CEO

Great. Jessica, you want to take this one?

Jessica Moskowitz, VP and General Manager

Sure. Hi, Ethan. Thanks for the question. As we look at our business, we see opportunities for customer acquisition and organic growth. Consumer behavior is changing rapidly, and we need to adapt accordingly. This requires a data-driven approach—evaluating what strategies are effective and reallocating resources toward those initiatives. There's substantial runway for growth in both private label and branded segments of lightweight cat litter.

Dan Jaffee, CEO

Great answer. Thank you, Jessica. And we are out of questions. I want to thank you all and I promise to finish the way I started, which is thanking the Oil-Dri teammates globally for keeping not only ourselves fiscally and physically healthy, but also our investors. Many people rely on our dividend and appreciate our commitment to maintaining it, unlike many companies that had to cut their dividends last year. We entered the pandemic in a strong financial position, and we didn’t panic but evaluated the circumstances. This led to a surge in cat litter demand and continued strong performance in almost all our businesses. While we are seeing some weakness in our jet fuel purification segment due to decreased flights, we remain cautiously optimistic about opportunities on the horizon. As vaccines roll out, we anticipate improvements in multiple areas for our business. Thank you for your continued support, and I look forward to our next discussion after the upcoming quarter.

Operator, Operator

That concludes today's conference. Thank you for your participation and have a pleasant day.