Earnings Call Transcript - ODC Q4 2022

Dan Jaffee, CEO

Hello everyone. Welcome to Oil-Dri’s Fourth Quarter and Fiscal 2022 Year-End Teleconference. We are doing this virtually, so I want to introduce the group to you. Susan Kreh is on hand today. She’s our CFO. Aaron Christiansen, Vice President of Operations, Chris Lamson, Group VP of Retail and Wholesale, Jessica Moskowitz, VP and General Manager of Consumer Products Division, Wade Robey, VP of Agriculture & Amlin Marketing, Laura Scheland, Vice President of Strategic Partnerships and General Counsel, David Atkinson, VP Controller and last but not the least Leslie Garber, our Manager of Investor Relations. And Leslie, if you would walk us through our Safe Harbor.

Leslie Garber, Manager of Investor Relations

Thank you Dan. 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?

Dan Jaffee, CEO

Yes, thank you. And before I turn it over to Susan for a financial review of the highlights of the quarter, I’d just like to say we delivered a good quarter. We were happy with it. We still have a long way to go, given the pandemic, the war, supply chain disruption, high inflation, and everything else that's going on in the world. We felt good that we finally got our prices, not where they need to be, but at least strong enough to return us to profitability and earnings. As I see our gross profit trend going back four or five years, we were making 29 points, 28 points, 27 points? Well, we only made just under 19 points in the quarter. So, while we clearly feel good about the income we made, we are not done; we still have to get the business back to where it was. And it's really in everyone's best interest, not just our shareholders and our teammates, but our customers because we need financial health to continue to invest in our business. You can see almost every segment is growing rapidly. That growth not only requires more working capital but also a greater capital expenditure focus on our plants. So sort of a long-winded way to say we're happy that we've made a lot of progress, but we clearly recognize we're not done yet. And as I mentioned in the release, we are very hopeful, cautiously optimistic that the momentum will carry over into the first quarter of what is fiscal 2023. So I will turn it over to Susan for our financial results.

Susan Kreh, CFO

Thanks, Dan. You'll note that we put out a pretty detailed press release. So in responding to some of your prior feedback, I'm going to keep my comments really brief and leave more time for Q&A. As we exited the third quarter, we started talking about the momentum that we were seeing and we continued to see that during the fourth quarter and into the first. You'll note our fourth quarter results revenue of $93 million, or 19% year-over-year, so the momentum continued. And if I dive into that just a little bit to give you an idea, about 75% of that was based on pricing and the other 25% on volume. If we talk about that a little bit by segment in retail and wholesale, 87% of their growth during the fourth quarter on the revenue line was based on pricing, and 13% on volume, whereas in B2B it was more balanced at 51% price and 49% volume. So we continued to achieve improved gross profit during the fourth quarter, moving that back up to 18.8%, still below our pre-pandemic levels, but definitely with the momentum moving in the right direction. We continue to focus on restoring those margins. We continue to seek price increases to cover the inflation we are experiencing on multiple fronts, like many others in raw materials, energy, transportation, labor and even other areas. So those are kind of the key highlights in the momentum. There was a note in there about a subsequent event. So prior to year-end, we announced that we are terminating our defined benefit pension plan. There are many details on the plan contained in Note 8 to our financial statements. But at a high level, basically, our most recent actuarial value indicates that our plan is essentially fully funded. So as we move to terminate, we expect that there'll be no material cash draws on the company, and that we'll be able to pay most of the liabilities with assets that are in our pension. We've actually shifted those assets into a presentation mode to make sure that as we're trying to wind this pension down, we don't get hit with equity market losses. We expect that this will be terminated within the next 12 months, so just a little highlight there on what's going on. And with that, Dan, I'll pass it back to you.

Dan Jaffee, CEO

Great. Thank you, Susan. Appreciate it. And appreciate those of you who got questions in advance. It's allowed us to sort through them and prepare our answers. You can also submit questions if you want using the after-question field on the webcast and select, click submit. So Leslie, what is our first question?

Leslie Garber, Manager of Investor Relations

Okay, our first question comes from Bob from the Center for Performance Investing. His question is about whether you can reaffirm the $40 million in revenues for fiscal 2023 for Amlin that was mentioned during the last call. If you cannot, what has changed? Dan, would you like to address this?

Dan Jaffee, CEO

Yes, great question. And look, as I said, even last quarter, it was very much in startup mode, and it's hit or miss. We are still cautiously optimistic. That's our number for the fiscal year. We're only two months into the fiscal year. We have a lot of trials, we have repeat business. So I would say I'm not ready to change the number, but I'm not seeing anything that's indicating we'll blow through that number either. So I don't know if that helps you, Bob, but we're still cautiously optimistic. We've got a bunch of trials going on, and the initial results are very positive. So that's how I feel about that.

Leslie Garber, Manager of Investor Relations

Okay, great. The next question comes from John Bair from Ascend Wealth Advisors. He says congrats on a solid quarter and record revenues. Are you seeing any relief or flattening of raw material costs, such as resins and packaging that may help improve overall margins in the next few quarters? Has there been any meaningful improvement in shipping and logistics bottlenecks? So Aaron Christiansen, our VP of Operations will answer that, but there's a second part to his question, and that the second part was, what is the status of share buybacks and Susan Kreh will take over after Aaron's done.

Aaron Christiansen, VP of Operations

John, thanks for your question. And thank you for the acknowledgment of the quarter we had. The first element of your question, we are seeing flattening of input costs, and even some signs of mild compression, notably in a number of areas of our packaging costs, similar in the area of utilities, natural gas and diesel, which are key cost drivers for us. So it's fantastic to be in a place we have absolutely seen flattening, and there's some hope and expectation that we continue to see mild compression. To your question about freight availability and cost, I need to really split my answer up into two parts. Domestic freight and cost has absolutely improved more in the area of availability. Domestic freight has become far more readily available as it was pre-pandemic. Export and international freight is a different story. Export freight continues to be extraordinarily expensive and unavailable, not unique to Oil-Dri. That's anticipated to continue throughout much of the year. We are trying to adapt and overcome in ways where we carry more local domestic freight to ensure we can be ready to ship when the equipment's available, and the same on the other end. So I hope my feedback has been beneficial.

Susan Kreh, CFO

Thanks, Aaron. And this is Susan. I'll jump in on the second part of the question on share repurchases. In order of our cash priorities, that's one of the lower ones. Our first priority is to fund our business and fund our growth opportunities. You see our commitment to capital spending, ratcheting up a little bit year-over-year as we can fund some of these growth opportunities for Amlin and other growth initiatives. We'll have to probably fund some working capital to support those. In order to support some of our foreign businesses, Aaron mentioned the logistics for some of those are longer, and that requires more working capital. We also fund our dividend and after all of those priorities are taken care of, then come share repurchases. So I'd say at this point in time, we don't have any plan to do any, but that's always just something we evaluate on an ongoing basis.

Leslie Garber, Manager of Investor Relations

Okay, great. Thank you. The next question comes from Ethan Starr, a private investigator. The 10-K noted there was reduced need for trade spending because of higher demand for your cat litter. Is that reflecting consumers switching to Cat's Pride for more expensive brands, or what other factors are causing the higher demand? Chris Lamson, will you answer that please?

Chris Lamson, Group VP of Retail and Wholesale

Yes. Good morning, Ethan. Thanks for the question. So really the reduction in trade that we noted in the 10-K year-over-year is a function of both strong demand. Yes, our demand is strong, especially across the more strategic segments of our business, including lightweight litter, but also the supply chain malaise that was certainly not unique to us, right. We were up against what everybody else was up against. Strong demand has continued. As you see in the results, of course, volume has been tempered a little bit by the pricing marketplace, the category showing a little bit of elasticity over time. So as we think about that going forward, we are starting to reinvest in trade and do it in a rational way that drives good pay out for us. Candidly, we're able to see that across our competition as well. So when we look into Nielsen, we see the other players in the cat litter category doing the same, getting back into trade promotion as the supply malaise has lifted. Aaron and his team have done a fantastic job getting us back into a position where we can fully meet demand and promote the business.

Leslie Garber, Manager of Investor Relations

Great. Thank you. The next question comes from Bob Smith. Regarding Amlin, do you believe that fiscal '22 will be significant?

Dan Jaffee, CEO

You know, Leslie, your audio was really rough, I'll read the question. As it relates to Amlin, do you feel that fiscal '23 will be the true inflection point leading to continued accelerated growth in absolute terms, if not percentage-wise? We are still very, very, very bullish. I mean, we believe we have the best non-antibiotic natural solution to gut health for animals. And I guess, Wade, I'd love to have you embellish on my sort of 50,000-foot comments. But when we look around our key markets and outreach products and what they can do, I don’t think that we are a great fit. So Wade, why don’t you handle some of that?

Wade Robey, VP of Agriculture & Amlin Marketing

Yes, absolutely. Thank you, Dan. And thank you for the question. Absolutely. As we look around the world, as Dan said, you see in spite of the pandemic and other things that have been going on over the last year, we see continued growth in the consumption of protein. That means that the animal production industries need to keep pace. Our products are very well positioned for those markets. We not only pursue the poultry industry and swine industry, but we also sell into dairy and into aqua as well. So we have a broad spectrum portfolio that can serve all of those industries. This year will be very important for us as we roll our products out internationally. As you know, we've also launched a portfolio in the U.S., which is one of the largest markets in the world, obviously in a number of those species. We're seeing great receptivity from our customers and great uptake as they see positive trial results. So we're excited about the growth prospects; the market is a very large opportunity for Amlin, not only in the traditional markets of grain preservation or preventing microtoxicosis but also as an antibiotic replacement as more regions of the world remove drugs and seek to pursue natural solutions. So we're very bullish about the opportunity for Amlin and for the industry itself as a whole.

Dan Jaffee, CEO

Hey Wade, great. We’ve got some specific questions that I'm going to read so stay on the line. From John Bear, geographically widespread Avian Flu outbreaks in the U.S. this year have resulted in the culling of large numbers of poultry flocks, but has not been widely publicized. Has this situation had a slowing or negative impact on the uptake of Amlin products within the U.S. market as flocks are re-established, or conversely, has this situation helped Amlin sales as those flocks are re-established?

Wade Robey, VP of Agriculture & Amlin Marketing

Yes, thank you. Thank you, John. Yes, the part of the reason it's not as widely publicized is that this is not an infrequent thing that happens. Every few years, we tend to have outbreaks of Avian influenza, and specifically H5N1, which is the common one we have here. It's been very severe this past year or two. As you know, we've had about a little over 47 million birds impacted and with Avian influenza, when that happens, depopulation is really the only option and then repopulation, as you know. It's not directly impacted our sales here in the United States, but it does cause some difficulty in travel. When these sorts of situations occur, there are quarantines that exist. We limit travel to farms to customers. And that has made it a little bit more challenging, but I don't believe it has significantly impeded our ability to penetrate the market. It doesn't increase our opportunity, either. Our products are really not designed around the treatment or mitigation for Avian influenza. But the repopulation is very rapid; the United States and frankly, other regions of the world have a very strong ability to repopulate their flocks and herds. We're seeing that happen as the depopulation occurs. So the market is pretty stable; we're actually going to see hopefully some growth in the U.S. in the coming year. So no, it really hasn't impacted our business in a negative way.

Dan Jaffee, CEO

Great, thank you, Wade. We've got a couple of questions all sort of aiming at the same thing. So I'll just synthesize them, what impact would a recession, if and when it comes in the United States, have on your business? As you know, we're very domestically focused; 90% of our business occurs in the United States. Maybe I'm a little high on that, but it's definitely in the high 80s. The good news is that our products are primarily focused on pets, food, and renewables, all of which are fairly recession-proof, as they have been in the past. We've navigated past recessions very well. If you zero in on the pet segment, which is our largest business, the market divides; you get the people who are going to trade down to try and save money. Then you actually get individuals who go for super premiumization because they're just afraid to make a mistake. On the value side, our brands are popularly priced; a lot of them are the opening price point. We are definitely weighted heavily towards retailers who focus on value like Walmart and the dollar stores and so forth. We have been leaning heavily into private label throughout our existence and in cat litter. But lately, with the advent of lightweight litters, we have a large share of the lightweight private label business in the United States and Canada. As people trade down, that will only accrue to our benefit. So not to say that we are unmindful of a possible recession, but we don't feel it would have a real negative impact on our business and could possibly even create additional opportunities. So good questions. And that covers that. Let's see; I'm just looking at the questions because we've got a bunch of them. Let's go with can you give me a number for the total addressable market, TAM and in a more narrow, realistic manner than the broad numbers that have been spoken about? What might be a market share figure you are looking for to capture of that TAM in the next few years? Wade, do you feel comfortable covering that one?

Wade Robey, VP of Agriculture & Amlin Marketing

Yes, absolutely. So when we talk about the market opportunity in the animal nutrition and health business, we've tried to be clear that it's very broad; the opportunities are very large across the world. There are different levels of market opportunity in various areas. But as we look at a market like grain preservation, which is the core technology that Amlin has pursued with our clay-based minerals, that's well over a billion dollar opportunity. Now we don't focus on the front end crops in the field or in storage. Our products are utilized in animal feeds to preserve the quality and flow ability of that feed. But there is a fairly significant segment there we can target when we look at the replacement of antibiotics or the removal of other pharmaceuticals, whether they be antibiotics or even in cereals. That's a very large market around the world. It's been mentioned that that's closer to $5 billion to $6 billion now. Are we pursuing all of that? No, we're focusing in areas like the United States, Latin America, Asia. Right now, we're not in Europe, so some of that is not available to us, but it's still a multibillion-dollar opportunity. As we look at market share, there are a lot of players in this space. So if we conservatively look at an 8% to 10% market share over time, obviously that would be a substantial business for Amlin and for Oil-Dri. We hope we can grow larger than that, but that will take additions to our portfolio and broader participation in some of these other markets we're not focusing on today. But there is a lot of headspace and a huge opportunity for the company as we grow our portfolio and demonstrate the efficacy of our products.

Dan Jaffee, CEO

Great, thank you, Wade. I'm going to ask you one more, and then I have one for Chris Lamson. The second part of Ethan's question we already covered. The first part is primarily, but how has Amlin’s participation in recent industry conventions and trade shows helped drive interest in and awareness of its products?

Wade Robey, VP of Agriculture & Amlin Marketing

Yes, thank you for that, Dan, and I appreciate the question, Ethan. We've had tremendous receptivity to this point. You all are familiar with what we did at the International Poultry Exposition last year; we had a great showing and great interest in our products and our portfolio coming out of that. Recently, we were part of the World Dairy Expo last week in Madison, Wisconsin; it’s another industry sector we're targeting. On the dairy side, again, tremendous interest. We did, I think, a dozen interviews with the media and a lot of engagement with customers. We're seeing our dairy market opportunity grow much faster than even we expected. So it's just demonstrating the support across species for our portfolio. As we look out into the future, we'll be again having a prominent exposition at the International Poultry Show in January in Atlanta. That's a worldwide show for us. And then again, VIV in Asia in Bangkok in March, which will really supplement what we do at IPPE and really give us a global impact in the coming year. So great job by our marketing team in raising the brand awareness of Amlin.

Dan Jaffee, CEO

Great, thank you. Here's a consumer question. Jessica, maybe you'll take it first. And Chris, you can add some color to it. A couple of questions around the same thing, which is basically what can we do to grow the private label lightweight share in the United States? And I'll add, using Canada as a beta site, we kind of know how high it’s up there. So just to maybe talk a little bit about what's going on in Canada, and then what the share is in the U.S., and then what things we can do to help close the gap.

Jessica Moskowitz, VP and General Manager of Consumer Products Division

Thanks, Dan. Yes, we've seen a great case study in Canada where lightweight has significantly taken over the market and continues to gain share of the overall Canadian market. We view that as a significant opportunity where our share within the U.S. is closer to 18% to 20%. The lightweight overall share of the market, and we do a couple of things in terms of being able to really close that gap. To Dan's point, who wouldn't switch to lightweight if price were equal and quality were equal? What consumer wouldn't want to switch to lightweight cat litter just given that key pain point of having to lift a heavy jug of cat litter to and from the store as well as in your home and upstairs? We view the key opportunity here as really being able to lessen that quality gap, which we continue to work on and continue to improve the quality of our lightweight cat litters, as well as to continue to offer our lightweight litter at a value which being vertically integrated allows us to do. So we see a huge opportunity not only to increase the overall penetration of lightweight cat litter but also to continue to improve quality and improve that price-value relationship so that we can continue to bring even more consumers into the franchise.

Chris Lamson, Group VP of Retail and Wholesale

I think it’s a great answer Jess. And Jess, part of the only thing I'd add maybe a little bit more tactically and near-in, and I won't name names. We have a case study recently where we had a retailer that, from a per-use perspective, was pricing their private label lightweight higher than their private label heavyweight. Our sales team did a fantastic job analytically showing the customer that the economic lightweight were so much stronger when you take into account the fact that you can get significantly more product on a truck. We showed them that story kind of crawled into their financials as best we could. And lo and behold, they've now aligned pricing on a per-use basis, and the lightweight business there as private label has grown faster than ever. I think Jessica referred to value; it all comes down to value, right? She talked about product; there's a price-value on the shelf. We're looking to what we don't control that influences. And that case study is a good example.

Dan Jaffee, CEO

Yes, great. I would add, sometimes it's better to be lucky than good. And we're both on this one because the global trend, and then the specific trend in the United States towards ESG is only growing, and that genie is not going back in the bottle. If the entire United States converted to lightweight, you could reduce the carbon footprint by about 40%, which is huge. Using the liquid detergent switch to concentrate, as I've referenced before in the past, that's what gave us the idea for lightweight. They took water out of the formula so they weren't shipping water all over the place when consumers have plenty of water in their homes. They were able to reduce the carbon footprint by about two-thirds. Once Walmart saw that it was here to stay and working, they actually forced the retailers to convert; they basically just said we're going concentrated, and you either have 12 months to reformulate, or you're going to be off our shelves. I would love it if Walmart or somebody else jumped in and said the same thing with lightweight. Look, it's clearly here to stay. There's no excuse for shipping all this weight. By the way, the heavyweight all comes out of the Northwest, so you're talking about the primary markets for cat litter, the Northeast, the Southeast, and there's no sodium bentonite east of Wyoming pretty much. Our plants are strategically located, and I think if you factored in the freight, you would probably even get a greater than 40% carbon footprint reduction. So anyway, we're very bullish on lightweight. We believe it's a perfect alignment of what's good for Oil-Dri, it's also good for the retailer, it's also good for the consumer, and it's also good for the environment. So everybody wins. We're out of time. I want to thank everybody. I do like this format; we're able to answer more questions and stay more focused. We will be back at you for the first quarter of fiscal '23. Let's all keep our fingers and toes crossed that the momentum we showed you in the fourth quarter carries over into the New Year. Thank you very much. Be safe. Take care.