Earnings Call Transcript - ODC Q3 2025

Operator, Operator

Good day and thank you for standing by. Welcome to the Oil-Dri Third Quarter Fiscal 2025 Earnings Discussion via Webcast. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dan Jaffee, President and CEO of Oil-Dri. Please go ahead.

Daniel Jaffee, President and CEO

Thank you, and welcome, everybody. Before we get started, I'd like to introduce all the people that are on the call with us today. Susan Kreh, our CFO and CIO; Aaron Christiansen, Vice President of Operations; Chris Lamson, Group VP of Retail and Wholesale; Wade Robey, Vice President of Agriculture and President of Amlan International; Laura Scheland, Vice President and General Manager of the Consumer Products Division; Bruce Patsey, Vice President of our Fluids Purification Division; Tony Parker, Vice President, General Counsel and Secretary; and of course, Leslie Garber, our Director of Investor Relations, who will walk us through the safe harbor.

Leslie Garber, Director 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. Turning it back over to you, Dan.

Daniel Jaffee, President and CEO

Great. Thanks, Leslie. Before Susan shares some of the quantitative highlights, I want to provide some qualitative insights, along with some quantitative data as well. Those who know me are aware that I keep detailed spreadsheets stretching back many years. On a comparable basis, this quarter has been outstanding. We posted a net income of $11.644 million, which surpasses all but 8 of the past 84 fiscal years. And so far this year, we are ahead of all 84 of our previous fiscal years. This means we’re in a strong position moving into the fourth quarter, which feels really good. Most importantly, we are reinvesting in our business as we promised our customers. I also want to thank our customer partners for supporting our capital replacement program. It has been expensive to replace the capital compared to when we initially put it into service, and we are depreciating it. This year, we expect to spend around $32 million in capital, with another $32 million projected for next year. Over the five-year period from fiscal years 2022 to 2026, which concludes next July, we will be investing close to $143 million in capital. In contrast, during the five fiscal years from 2017 to 2021, we only spent $78 million. So, we've increased our investment by $65 million, averaging nearly $14 million more per year, to ensure we continue delivering the quality and quantity that our customers expect and deserve. Everything is going well, and I appreciate the support for this initiative. We had our board meeting this week, where it was announced that the Board approved a 16% dividend increase, so you can thank them for that. We always conclude with a roundtable discussion, and I’m pleased to have Bud Selig still serving on our Board since 1969. He expressed how impressed he is with our team, drawing on his extensive experience with teamwork. He noted that what’s happening at Oil-Dri is remarkable, though not surprising. Bud has great memories tied to my grandfather, who established the business in 1941, including attending his first baseball game with my dad and grandfather. Bud has been a close friend of my father as well. When Bud joined our Board, our annual sales were $4.9 million; we now generate approximately $9 million each week based on a five-day work week. This means we achieve in just over two and a half days what we previously accomplished in one year. When Bud came on board, we made $365,000 in net income, and if we annualize our performance from the past nine months, we are now generating around $1,000 in net income every week. That translates to earning in just under two days what we used to earn in a year, which is quite remarkable. I wish my father and grandfather could witness this progress; perhaps they are watching through Bud. I want to thank Bud for his continued presence on our Board and for being an incredible mentor to me. Now, I’ll pass it over to Susan Kreh, our CFO, the year’s top CFO in the city of Chicago. Susan, go ahead.

Susan Kreh, CFO

Thank you, Dan. To allow more time for questions, I’ll touch on a few financial highlights and then address any additional inquiries during the Q&A segment of the call. As Dan mentioned in his opening remarks, following yet another quarter of strong and record financial performance, our Board of Directors and management team are confident in our solid financial position and the future of Oil-Dri. This confidence is evident in our announcement of a significant double-digit increase in our quarterly dividend. We are working together to strengthen our balance sheet and demonstrate our ability to generate cash flow, which is crucial for supporting our growth and providing returns to our stakeholders. Year-to-date, as of April 30, Oil-Dri's net cash from operating activities was $55 million, marking a 49% increase compared to the same period in fiscal year 2024. Our belief in the sustainability of this cash flow generation led us to raise the dividend by 16%, which is a much larger increase than our typical annual adjustment. We recognize that sustainability and predictability of our dividend are crucial for our long-term shareholders, and this increase reflects that understanding. Moving forward, we will maintain a long-term disciplined approach to capital allocation, balancing shareholder returns with reinvestment in the business and potential M&A opportunities. Our capital allocation priorities are as follows: firstly, investing in our business for long-term sustainability, which includes significant capital investment in our manufacturing facilities and expensive mobile equipment in our mining operations. We have invested $24.5 million year-to-date in these assets and have also enhanced maintenance to improve the uptime of our facilities. This not only maximizes our investments but also improves service levels and responsiveness for our customers. Additionally, we are investing in people, processes, and technology to support our growth strategies, such as funding a centralized data analytics function this fiscal year. Secondly, we continue to explore M&A opportunities to expand our business and support our growth strategies. Our acquisition of Ultra Pet, which celebrated its one-year anniversary in the Oil-Dri portfolio on May 1, is a strong example. This acquisition has performed well, meeting our internal financial benchmarks and gaining favorable reception from our customers as a value-added product extension. We funded this acquisition with approximately $24 million in cash, $10 million in short-term financing, and $10 million in long-term financing. Thanks to our strong cash generation this fiscal year, we have already paid off the $10 million in short-term financing, leaving us better positioned for future opportunities. Our third priority in capital allocation is our dividend, with the aim of providing a predictable and sustainable dividend to our shareholders. The announcement of the 16% increase marks the 22nd consecutive year of increased dividends, a track record we are proud of. Lastly, we consider share repurchases, which we conduct to offset dilution from the restricted stock program for our employees and to opportunistically repurchase shares when we believe they are undervalued. Year-to-date, we haven't made any open market purchases, but we have repurchased shares from teammates to cover taxes when their restricted shares vested. That summarizes our approach to cash and capital allocation. Before I hand it back to Dan for questions, I want to provide some insight on our effective tax rate. For the third quarter of fiscal year 2025, we estimated an effective tax rate of 18%, down from 23% in the third quarter of fiscal year 2024, representing a 500-basis point difference. Our process for determining this rate involves preparing our fiscal year's tax return during the third quarter, following the previous year’s completion. Once the prior year's tax return is finalized, we assess expected annual taxable income for the upcoming year and include necessary tax adjustments, such as the depletion deduction and other discrete items. Although this analysis led to notable year-over-year variations in quarterly effective tax rates, we still estimate the full-year effective tax rate to be around 19% compared to last year's 20.5%. In the current year, we benefited from a one-time tax credit for solar investments at our Taft, California facility, which explains why this year’s rate is slightly lower than the full-year rate we used last year. I recommend focusing on the full year when thinking about the business's future. With that, Dan, I’ll turn it back over to you.

Daniel Jaffee, President and CEO

Thank you. For our investors, if you're ever having trouble sleeping, just ask Susan to explain our international taxes. I’m just joking, Susan, but I really do have a fondness for international tax. Now, I’ll hand it over to Chris Lamson for an update on the Ultra Pet acquisition.

Christopher Lamson, Group VP of Retail and Wholesale

At the end of Q3, we have completed our first year of ownership of Ultra Pet, which seems like a good time to provide an update on the acquisition. We are pleased to report that we are aligning well with our acquisition economics and performing better than expected in terms of cost synergies, particularly in logistics and administration. For example, we have successfully closed expensive third-party warehouses and integrated these operations into our existing Oil-Dri facilities more quickly and efficiently than anticipated. This has benefited our customers, who are enjoying efficiencies as the lighter crystals are shipped alongside our heavier clay litters. On the other hand, the top-line performance from the Ultra legacy business has been somewhat soft. However, the distribution initiatives we implemented right after acquiring the business have proven successful and are in line with our acquisition model. There have been inquiries about the tariff situation regarding silica gel sourced from China, so I will provide an update. Although crystals are a focus due to potential growth opportunities, they account for only about 10% of our total litter business and less than 5% of Oil-Dri's overall business, indicating limited exposure in this area. When we assess our approach, our primary focus remains on consumer value. Our strategy, as indicated by our tortoise mascot, emphasizes long-term thinking. To remain competitive in the category, we need to consider price gaps similar to those in our base clay business. Our Cat's Pride and Ultra brands, along with private label offerings, must provide solid value compared to premium branded competitors. We must also be mindful of our competition within the clay segment. Currently, we are not observing significant shifts regarding crystals and clay. However, due to tighter margins in comparison to premium players, it is crucial that we manage our P&L effectively. If tariffs negatively impact our margins to an unreasonable extent, we may need to implement minor price adjustments while focusing on maximizing overall value. Thankfully, we have achieved notable cost savings from synergies that can help mitigate the short-term effects of tariffs, along with any necessary pricing adjustments to maintain an attractive value proposition. It’s important to stay focused on growing the crystals business despite the challenges posed by tariffs and margins. As previously mentioned, we are entering a selling cycle where we will actively utilize our strong capabilities in the lightweight private label sector by collaborating with retailers to create private label offerings in the crystal market. While we do not disclose our retail plans, we are optimistic that our strategy to expand our private label business remains on track. The momentum we established with the Ultra brand and Cat's Pride's entry into the crystals segment positions us well for future growth. We are optimistic about driving penetration in the private label market as we move forward. Overall, we are satisfied with our current position and excited about the growth opportunities ahead, with our teams focused on expanding the business.

Leslie Garber, Director of Investor Relations

Thanks, Chris. Our first question comes from John Bair from Ascend Wealth Advisors. He and Ethan Star, a private investor, have some inquiries regarding Amlan. I'll present the first question. Although Animal Health and Nutrition revenues for the nine months showed an increase this past quarter, they remained unchanged year-over-year, as mentioned in the press release. Was the result of this quarter affected by seasonality or shifts in customer order patterns? Are international customers hesitant due to tariff issues? What is needed to resume sales growth? Wade, I’ll let you address that.

Wade Robey, Vice President of Agriculture and President of Amlan International

Yes. Thank you, Leslie, and thank you, John, for the question, and good morning, everyone. As you know, the performance for the third quarter was flat as we compare it to the previous year. But actually, as we look at the year-to-date, we're on very good growth and meeting our expectations and targets that we've set for the year. So why is that? As you know, we have quite a bit of volatility currently being caused by the tariff situation. This really exacerbates a previous situation we had where because of some of the challenges we were seeing on logistics and delivering to our international markets, we are seeing longer transit times. So the combination of those has caused increased volatility as we look month-over-month or as we compare on a quarter basis. So that we expect to work its way out. It actually has caused us to work even more closely with our distribution partners, forming stronger relationships, helping them manage their inventory, so we don't have product shortages and that we meet our customer needs for our products. So overall, we're very pleased with the performance year-to-date and expecting to finish the year on track, but it has caused, as you know, some month-to-month and quarter volatility that was unexpected.

Leslie Garber, Director of Investor Relations

Great. Thank you, Wade. The next question comes from Robert Smith from the Center for Performance Investing. He asks, the U.S. renewable diesel production was down 12% in the first quarter of calendar 2025, yet you were up 13%. While not fully comparable in fiscal year months, it was significant outperformance. Please explain. So I'm going to turn that over to Bruce Patsey.

Bruce Patsey, Vice President of Fluids Purification Division

Yes, Robert, thanks for the question. And yes, the market was down slightly in the first quarter of this year. But in fiscal '25, new plants came online in the renewable diesel sector, and Oil-Dri was able to secure a lot of that new business that we didn't have the prior year. So even though the whole market was down slightly in the first quarter, we saw a gain in our business as we had new business and worked with new plants. In addition, we saw an increase in some of our vegetable oil business as we picked up a few new customers in that segment as well. So overall, we're very strong and looking forward to a good fourth quarter coming up.

Leslie Garber, Director of Investor Relations

Our next question comes from Ethan Star. He asks, noting that you recently lost what appears to be a significant private label clay cat litter account, what are the prospects for growing private label clay cat litter distribution and sales? I'm going to have Laura Scheland answer that.

Laura Scheland, Vice President and General Manager of the Consumer Products Division

Thanks for the question. We're continuing to see a lot of momentum in the private label clay cat litter, particularly for lightweight litter. And despite the loss of an account, we continue to have commanding share of private label lightweight. As we've mentioned during past calls and the stockholder meetings, our strategy has been to grow the lightweight segment, and we're very pleased to see that these efforts are paying off and the lightweight segment is growing more than the litter category, which poises us for long-term success as the lightweight litter pie grows, our sales grow as well. As more consumers move to the lightweight litter segment, the opportunity for private label lightweight is growing. We've made great progress on private label lightweight accounts over recent years, but still have about 4 to 5 national retailers who don't carry us that we are targeting. We are leveraging existing relationships and are in active conversations with a couple of them and are very excited about the prospects. In addition, we've continued to develop the best-performing products to offer consumers the best value and have evidence of the superior performance and quality of our products versus other private label lightweight offerings and are actively using this evidence and data in our selling efforts with customers. So net-net, we remain very optimistic and excited about the momentum of the growing lightweight litter segment and our prospects to grow in the private label lightweight business along as well.

Daniel Jaffee, President and CEO

Great answer, Laura. I just want to add because lightweight is so near and dear to my heart that my belief is if it's a great lightweight litter, then it conforms to our patents. And if it doesn't conform to our patents, it's not a great lightweight litter because that's what we did. When we invented this category and we launched lightweight litter, we pretty much patented everything we thought that would make an effective lightweight litter. So what you're seeing, we're not going to get into the details, but we can see what customers are saying about this product that they replaced us with. And the reviews are not friendly. And I would guess that their sales are declining. So we're going to play the long game like we always did. Sometimes when something is too good to be true, it's because it really isn't, and they obviously got a lower price, but I'm confident that over time, the consumers will get to vote, and my bet is we will be back in. But we'll see. And sometimes you got to take a step back to go 2 steps forward.

Leslie Garber, Director of Investor Relations

We have another question from John Bair. He asks, natural gas is a key production input cost. We know you partially lock in forward supply contracts for those needs. Natural gas prices are widely considered to be headed higher in the second half of 2025 and in 2026 due to increased demand for LNG exports, summer cooling demands, and data center power demand. Are there any alternatives available to Oil-Dri to power your kilns or otherwise reduce your operating costs at the plant level? I'm going to turn this over to Aaron Christiansen.

Aaron Christiansen, Vice President of Operations

John, that's a great question. I'm happy to answer it in several ways. First, as you mentioned, we make partial purchases to secure a portion of our natural gas needs. In a rising market, this demonstrates the value of long-term dollar cost averaging for the natural gas we buy. From another perspective, we have looked into alternative fuels, fuel oil, and even coal in the past, but currently, liquid natural gas remains the most cost-effective and efficient fuel source. Additionally, Oil-Dri has explored various alternative drying technologies, different types of dryers, and even options like microwave technology. Unfortunately, most alternatives to traditional drying methods come with significant drawbacks, such as high capital costs, maintenance expenses, and issues with reliability. So far, we have not found an alternative that we truly believe in. Nevertheless, our goal every day is to improve upon yesterday. We continuously seek ways to optimize fuel consumption, enhance moisture control and management, and find innovative ways to achieve optimal combustion in our dryers, including exploring pre-drying methods. Lastly, I would like to note that Oil-Dri has transitioned more than half of our warehouse forklift fleet to electric power, moving away from propane or natural gas-powered forklifts. This change has proven to be beneficial for several reasons. I hope I've addressed your question, John.

Leslie Garber, Director of Investor Relations

Okay. We'll take another question from Ethan Star. Are you gaining new distribution of the Ultra Pet crystal cat litter? If so, how many doors are they in? And how is retail sell-through? Chris Lamson, I'm going to turn that over to you.

Christopher Lamson, Group VP of Retail and Wholesale

Sure. Thanks, Leslie, and thanks, Ethan. I answered this partially in my earlier comments, so I'll be a little brief here. In short, we're up significantly in terms of what we call points of distribution year-over-year, which is number of doors, to your point, Ethan, times number of items. In fact, year-over-year from a brick-and-mortar branded perspective, we added more points of distribution than we had when we acquired the business. Now recall, Ultra Pet also had a sizable online business and a private label business. But branded year-over-year between Cat's Pride and Ultra Pet, we added more points of distribution than we already had. We went right into selling season. It's been quiet since we built that distribution. We're back into selling season. And I outlined our plans to sell more branded business, but also now add private label points of distribution going into this next selling season, which really culminates with some customers and shipments in the fall and some customers with shipments in the early winter. So we'll be back with results as that stuff starts shipping and tell you about the progress we've been able to make then. Thank you.

Leslie Garber, Director of Investor Relations

Great. Thanks, Chris. Our next question is from Robert Smith. He asks, is artificial intelligence playing any role yet in controlling expenses or in targeting advertising? I'm going to have Susan Kreh address that.

Susan Kreh, CFO

Yes. Thanks for the question. This is one that's near and dear to my heart. We do have a 5-year roadmap with artificial intelligence on it. I would say today, we're at the beginning of this journey. Today, we use it primarily to supplement our teammates and provide technology that makes them more efficient. So think about applications in customer service and in accounts payable. But we definitely do have items on the roadmap to get to your point here, Robert, where we will be taking a look at using them to control expenses. And hopefully, my boss will find that more exciting than international taxing strategies. But yes.

Daniel Jaffee, President and CEO

I will. Thank you. We're running out of time, and we have one more question that ties into my closing comments. Samuel, I hope I pronounced your name correctly, asked how Oil-Dri will look in 10 years, noting that Wall Street often focuses on short-term performance. This is a great question because we believe we have the best hybrid capital structure. We are a public company, which provides total transparency. Many have made significant profits by investing in and holding Oil-Dri shares over the years. As Susan mentioned, we've increased our dividend for 22 consecutive years, with a substantial increase of 16% this year. Recently, our company's value has risen sharply, justifiably, as we've generated more earnings and increased revenue. However, we have always focused on the long term. Chris pointed out that our mascot is the tortoise because the tortoise always wins the race. I remind investors, even if they sometimes feel frustrated, that the tortoise moves as fast as possible without risking the future. He didn’t do anything short-term that could jeopardize his outcome. He had short legs and a shell but wasn’t lazy. We are not lazy either. We aim to move our organization as quickly as we can without intentionally risking the future. Naturally, we are human and will make mistakes. I cannot provide specifics regarding your question, but I can tell you that we are benefiting today from investments and decisions made years ago when we began an acquisition strategy and introduced new products and materials. We also invested more in research and development and capital. These are long-term investments. We are committed to maintaining at least 40 years of reserves for each product line, which is our objective. We have more than 100 years of reserves when considering all our materials, but we ensure each product line has at least 40 years. I greatly appreciate your support and loyalty, and we have been rewarding it in the short term. I hope to continue rewarding it in the long term, but this is a long game. Let’s aim to deliver next quarter. Thank you, and we'll talk again when we close fiscal '25. I wish everyone a great, happy, and healthy summer.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's presentation. We thank you for your participation. You may all disconnect and have a wonderful day.